On August 2, 2016, 119,756 Bitcoin, or about $65 million, was stolen from the Bitfinex exchange by hackers. More so than most $65 million highway robberies, this one comes at an inopportune time. The cryptocurrency world has been having a stressful summer:
Can we have a boring day in crypto space soon? I need some rest!
— Charlie Lee (@SatoshiLite) August 2, 2016
Why does Charlie, Director of Engineering at Coinbase, deserve a boring day?
Security breaches. Price volatility. These tremors have induced a lot of panic in the cryptocurrency community. But many of those doing the most interesting work in the space remain calm. There’s more at stake here than a coin.
Underneath the turmoil lies an opportunity to stress-test the real promise of blockchain technology. It goes without saying that some part of a cryptocurrency’s success relies on the strength of its exchangeability. But there’s a sense that we might be over-indexing on six-month objectives like price, at the expense of developments taking place on a longer time horizon.
To blockchain enthusiasts who are thinking past day trading, there’s an eerie calm. Hacks and spirals in value—they’re small potatoes compared to what the blockchain could ultimately become.
Best of tines, worst of tines
It started with The DAO, a “smart contract” built on top of the Ethereum blockchain. (Ether is the cryptocurrency supported on the Ethereum blockchain.) Smart contracts are programs which live on the blockchain that, after being published, autoresolve in an if/then capacity.
The DAO’s smart contract was written up like a mutual or venture fund. Except there was no centralized authority—those who bought in would decide its investments. Over the course of a 28-day investing period, Ethereum adopters stockpiled $150 million, denominated in Ether, into the DAO. After the investing period, the smart contract went into effect; users would vote by 51% majority on how to invest.
It didn’t get very far. On June 17th, 2016, u/ledgerwatch posted to Reddit’s r/ethereum: “I think TheDAO is getting drained right now.” u/ledgerwatch couldn’t check just then because they were (somewhat anticlimactically) on the train to work, but the comments below confirmed it: We’re being hacked.
The hacker (0x304a554a310C7e546dfe434669C62820b7D83490, to be exact) had found a vulnerability in The DAO’s contract and was able to transfer its fund into a child DAO account. Ultimately, the money was returned (sort of) in a decision known as the hard fork. But the community was split about this decision. Some thought the hack was foul play, some thought it was smart contracts acting as they ought to.
With the hard fork, the majority of Ethereum’s users voted to spin off a blockchain that null-and-voided The DAO’s formation and, therefore, the hack. (For those who feel ideologically cheated, there still exists a non-forked blockchain.)
So ensued an existential crisis: If users can repeal an irreversible smart contract, it’s not really that irreversible. But the drama behind the fork reveals a disappointing pedantry in the community. There’s too much focus on the worth of Ether. There’s too much focus on a principle for principle’s sake.
Isn’t it time to get back to what blockchains could do really well?
It was never about the money—kind of
Olaf Carlson-Wee, the first employee at Coinbase and manager of Polychain Capital, the first cryptocurrency hedge fund, isn’t discouraged by hacks like the one on The DAO. He has a vested interest in these vehicles doing well, but he doesn’t lose confidence over a hack.
“Just like the Mt Gox collapse, it’s more a setback in the perception of these technologies than it is a setback of the actual development of these technologies,” he says. “I still think we’ll see decentralized communities, voting, crowdfunding, IPOs, and companies, all operating through smart contracts on the blockchain.”
The developers behind Ethereum seem to agree: This changes nothing. To some extent, the Ethereum Foundation is beholden to the concerns of the community. But they’ve moved beyond June’s drama.
When I reached out to Alex van de Sande, developer and lead designer for the Ethereum project, he was happy to talk, but he had grown tired with The DAO debates. He’s thinking beyond brief scares.
“We are focused on the technology first, and the coin second,” he says. “In essence, Ethereum is software that manages resources. Not software that reflects information about resources being managed elsewhere, but software that is actually managing money and distributing resources directly and saying who owns what and why.”
Ether is just a resource that gives the management system a plaything. It’s a small, if necessary, component of the Ethereum blockchain. Alex doesn’t encourage high-frequency trading, nor does he think it’s productive to sit around watching the GDAX fluctuate. Ether’s promise was never really to compete with Bitcoin or the U.S. Dollar.
“What really matters are applications and what kind of applications people are building,” Alex says. “I’m looking forward to having a lot of running applications on the Ethereum blockchain.”
If anything, these hacks haven’t broken the blockchain; they’ve stress-tested it.
“We need to understand that right now Ethereum is in an early, radical, exploratory phase, and there will be massive successes and failures as it is played out,” Olaf says. “To me the whole ecosystem is like a massive public laboratory on the internet. The whole blockchain ecosystem is an evolving attempt to understand a cross-section of game theory, cryptography, and economics in a real-time experiment worth billions of dollars.”
By the time Ethereum, or a blockchain like it, touches the mainstream, it needs to be well-tested against these threats. Hacks like The DAO’s may very well be the tuition it pays to get there.
Grandma on the blockchain
“Right now Ethereum is a geeky thing,” Alex says. “It’s kind of hard to use. At some point, I want Ethereum to be as dull and boring as databases.”
Alex’s reasoning is that as long as Ethereum is the site of heists and sexy CoinDesk headlines, it’s far from the concerns of product people. Decentralized applications, or dapps, are apps that adopt the blockchain as a back-end. Dapps could become widespread, but only if Ethereum is viewed as integral and mundane, instead of fringe and volatile.
In the world of dapps, a lot of server-side overhead is eliminated. The blockchain takes cares of those processes itself. What’s required now is some abstraction.
There’s a prevailing opinion that there are already efficiency gains to be realized in existent or familiar apps with the power of cryptocurrency. In a previous article on The Signal, Olaf proposed that payment apps could adopt cryptocurrency as a way to process payments faster, with fewer borders.
Alex imagines a similar world, where your grandmother trades an in-game reward on one app for in-game reward on another. Underneath, there’s essentially a conversation happening between the two apps through microtransactions of Ether. Grandma has no idea how this is happening, but she can appreciate its effects. This is how Ethereum becomes dull and boring, and begins to touch the mainstream.
Startup 21 Inc imagines a similar fate for Bitcoin. The company’s mandate is to build the machine payable web. Such an infrastructure would enable payments between software and APIs through Bitcoin, circumventing machine-blind incentives like ads and paywalls and opening up the web to evermore services and uses.
For Alex, the adoption of smart contracts by developers in their own apps will be a surer sign of Ethereum’s value than the price of Ether. Ether’s value in USD is too small an aperture for what blockchains can really do.
Dollars and sense
There is some mind share across the divides, continental and industrial, of where the blockchain is going. The leading developers, investors, and practitioners have read many of the same papers on the subject, even if one reader is in Brazil and the other is in Palo Alto. But, obvious though it may be, blockchains are a technology. Their uses will vary, as all significant technologies’ do.
Still, the coin is a distraction.
“Blockchains are a technology that should be integrated into several areas,” Alex says. “Not just a coin you buy and sell.”
Alex sees two primary uses today for the Ethereum blockchain: Financial games (which he’s not particularly interested in) and crowdsales. A decentralized investment vehicle, like The DAO, counts as a crowdsale.
“Crowdsales allow you to be transparent with how much money you raise, how that money will be used, what the limits are, and what are the freedoms that each project has,” Alex says. “I’m excited for crowdsales to expand into more generic governance tools.”
By generic governance, Alex means blockchains will go beyond mirroring financial markets and begin to reorganize the way we handle fundamental decision-making, with a payment layer included.
“Do you know about prediction markets?” he asks.
No, I say. I don’t really.
Martin Köppelmann does. He’s building a decentralized app called Gnosis, which operates as a prediction market on top of the Ethereum blockchain.
Prediction markets are exchange markets where probabilities are invested in. It’s not just a way to get rich off the news. It often can find patterns (game-theoretically) that the news would miss. For Martin, it’s often about getting better data. By having an aggregate group of people stake themselves on a certain outcome, the prediction market can produce more accurate information.
“It removes a lot of noise and deals with the best available forecasts,” Martin says.
For example, a prediction market around the Brexit vote could’ve depicted a more accurate spread than the polls did. By betting on a certain outcome, investors would be taking on risk for being wrong. Adversely, the media doesn’t assume all that much risk for representing one side or the other as winning; it goes where the story is liveliest. The media doesn’t necessarily have a financial stake in one outcome, and therefore, can produce a murkier forecast than rationally acting investors.
The reason Martin’s bullish on Ethereum is because it can power prediction markets, and do so especially well as a decentralized network. Originally, he built a prediction market denominated in Bitcoin. But without smart contracts, his organization had to act as a centralized hub for the trader.
“In the Ethereum world, it is possible to use the blockchain not only as a method for payment, but also to implement the logic of those markets,” Martin says. “The money is not held by us, but by a contract.”
In this way, Martin and his team are building a product that reflects the values of Ethereum’s mission: Resources become secondary to the intelligent management of resources. Game theory supercedes speculation.
Deeper into the web forums, one soon discovers a possible end game for Ethereum and prediction markets: Futarchy.
Futarchy is a form of governance that makes decisions using the logic of prediction markets. Or as Alex puts it: “An organization that self-governs not by vote, but by changing itself based on how the market predicts it will be most valuable in the future.”
While it may sound somewhat fringe, Gnosis’s daring to experiment is much more in line with Ethereum’s core philosophy than with pure speculative vehicles. He’s more interested in disrupting governance than cash: “It’s ultimately a tool to make better decisions for society.“
For developers and product builders who want to capitalize on these opportunities, but are more risk-averse, interest is tacking to private or proprietary blockchains. However reasonable that decision, it eliminates a lot of the opportunity.
“The reason private blockchains are being done is because of technical limits on the current blockchain — because there isn’t enough privacy and there’s too much transparency for some institutions,” Alex says. “That can be solved, and will be solved, in the future.”
Despite how their Twitter presences come across, the Ethereum developers haven’t been slacking off. Currently, they’re scoping out ways to make the blockchain more accessible without compromising its integrity.
Olaf concurs that private blockchains are a needless diversion.
“I see a big analogy between proprietary blockchains and early intranets,” he says. “As we know, the internet ended up winning the networking war, and we all use this open network that anyone can participate in. The open network is where the developers go and that’s where the cool stuff happens. Much in the same way, these open blockchains will win and we’ll look back at proprietary blockchains and laugh like we laugh at the intranet.”
In the face of something like the DAO hack, what can inspire blockchain enthusiasts to stay out in the open?
Last week, Olaf prophesied that the fix to these sorts of hacks would be small, modular, bulletproof contracts that, when constellated, would make up complex but indestructible contracts. Martin corroborates this theory without a prompt: “We should have very small, but very well-tested components, and reuse components we know work, and plug them together. “
The operative word is well-tested. Open networks promise large advancements because of high-functioning collaboration. Without developers who are willing to get out in the open on the blockchain and fail, the technology stalls. It’s not like these people are talking about a cookie delivery app; they’re trying to reinvent governance. And so the time is now to stress-test the blockchain to a point of invulnerability.
No, Charlie Lee, you can’t have a boring day in the crypto space. Neither can anyone else.