First Rule of Blockchain: Do Not Use the Word Blockchain
I’ve used the word “blockchain” a lot lately.
Social Capital is a venture capital firm that seeks to “advance humanity by solving the world’s hardest problems”. They partner with entrepreneurs at all stages of the company lifecycle, from promising early stage startups to public companies.
Alex works on Social Capital’s Discover Team, which analyzes more distant problems to be solved and technologies that might solve them in the future. He’s been a listener of the “Future of Agriculture” podcast, and we connected over the phone to clarify some key components to understanding blockchain.
But why is it that those who seem to be the most deep into blockchain use the word “blockchain” the least often?
Alex thinks it’s because the actual blockchain component, meaning a distributed ledger, is the least interesting and nuanced part of using the technology. What’s most interesting is what this technology allows us to do. Especially, the way it incentivizes work to get done.
The way that assets and transactions get stored on the blockchain takes a lot of work, mostly in the form of computing power. Real world blockchain applications create value to the “outside world” (see 5 potential agricultural applications here).
Part of that value is given to those miners that are doing the work of securing the assets and transactions cryptographically on the blockchain. This is what incentivizes those miners to continue to power the blockchain for us to use it for interesting use cases like helping smallholder farmers or supply chain transparency.
So, there is this cycle of an application creating value to the world because it solves a problem which blockchain is uniquely suited to solve. This value that is created gets represented in the form of a token which miners earn and convert back into real world value (currency).
Everyone is happy AS LONG AS that blockchain application is creating real world utility.
The one exception to this “real world utility” point above is bitcoin itself. Similar to gold, it’s value depends heavily on it’s universally agreed upon value rather than a specific function that it serves.
“Bitcoin is a little bit like gold that you can send through wires.” — Alex Danco, Social Capital
However, these other blockchain applications have to provide real world utility in order for the incentives to work.
This real world utility hinges on the blockchain being able to create trust when a universal source of truth is required.
We have mentioned often the fact that blockchain helps us create trust. But where does that trust come from? Alex outlines three components of forming that trust:
The belief that everyone will act in their own self interest. Similar to capitalism in general, those acting in their own self-interest is what powers this entire process.
The belief that over time, a large group is more likely find answers faster than any one bad actor. Securing assets and transactions on the blockchain is like solving a math problem. If you have a massive group trying to solve the problem, the chances that someone will intentionally arrive at the WRONG answer and convince everyone else that they are right and the group is wrong is not very likely. Alex explains that this becomes a challenge if one bad actor was able to assume 51% of the entire network of computing power, but this becomes less and less likely as the blockchain grows because it incentivizes new miners. Essentially becoming just as difficult as cornering a commodity market like gold.
The belief that the tokens will continue to produce real world utility, giving them value worth mining for by the blockchain miners. This powers the entire ecosystem. With the exception of bitcoin (mentioned above), the tokens maintain or grow in value as the real world utility for the blockchain applications grows.
This is how the trust comes about, and why it’s exciting to consider the possibilities of incentivizing work to get done in this way.