Connecting the Internet, Blockchain, and Money

Two weeks ago I was asked by the Belgian Chamber of Commerce in Barcelona to give a talk on Blockchain and Cryptocurrencies during one of their events. This made me reflect deeply on the topic and do some in-depth research on how blockchain, the internet and money as we all know it relate and connect to each other.

Blockchain and cryptocurrencies are definitely a hot and trending topic. Everybody has heard about, read about it, and everybody has a defining opinion on it. It is also a bit of a controversial topic as it leads to polarization between believers and non-believers (I have switched from a non-believer to a firm believer in the beginning of 2021 after studying blockchain and cryptocurrencies in detail).

With this writing I just wanted to share some thoughts - not on the current price levels or market sentiment or movements of cryptocurrencies - but more so on the fundamental value drivers of blockchain and cryptocurrencies, as well as providing a few key points that explain the larger context about blockchain and crypto, and how it came along.

In order to explain blockchain and crypto, we need to place it in a larger context by analyzing three 'stories' that at first hand seem not to connect to each other, but these three stories are very interrelated and have a lot of touching points. The first story is about the internet. The second story is about money and macro-economics. Finally, the third story is about connecting the internet with the economy and money through blockchain and cryptocurrencies.

So in the third story I am going to explain what a blockchain is and what a cryptocurrency is, but I want to explain the first two stories first so you get some context about blockchain and crypto and how it came along.

The internet started roughly speaking in 1995 and was met with a lot scepticisim in the beginning, especially when the first dotcom crash came around. There's this famous video of Bill Gates on Youtube explaining the internet in 1995 on the David Letterman Show where they basically make fun of the internet (by the way, the exact same thing is happening to Crypto right now). However, by 2005 16% of the world was connected to the internet and today that's up to approximately 55% worldwide, and in the developed world around 90% of the population is connected to the internet. The internet is probably the best and greatest invention of the last century.

The internet of course did not evolve from its beginnings to where it is now overnight, and has made a drastic evolution going from Web1 in the beginning phase, through to Web2 (which is the fase we are largely in now) and we are and will probably continue to transition into Web3 during this decade (2020-2030). So what is Web 1 – 2 – 3?

Web1 are static websites, just information. The user cannot engage with the website, only consume it, like a book. Ads on the website are not targeted to the personal preferences of the user. Content is served from centralized servers through a content delivery network (CDN) and monetization happens through counting the eyeballs of the users – called CPM (cost per mille).?The user has no control, no input, and no participation in revenue generation from the ads. E-commerce is virtually non-existent. Its the stone ages of the internet, and not a lot of people are making money of the internet. Keywords of Web1: Decentralized Internet, Centralized Content, Centralized Data Storage.

Then came Web2. Web2 is all about Twitter, Facebook, Instagram, Airbnb, Ebay, Uber, Tinder, Amazon, Google, LinkedIn, etc. The focus is on user-generated content. The user can actively participate in the content of the website, so the content is very dynamic. The internet becomes addictive. The service is “free” for the user in the sense that the user does not pay for it with money, but pays for it with their (user) data. Companies accumulate all that data and group it into "interest-clusters" through cookies, APIs and server-to-server callbacks, sell that data on to advertisers, who then personalize ads to the user's preferences, which in turn results in higher revenues for the website/publishers, advertisers and middlemen (agencies). Web2 is therefore when we see massive adoption and growth of e-commerce, social media platforms, and market places. Web2 is where the internet really takes off. For all the good Web2 has brought us, Web2 also has big issues that are hidden for most users: 1/ Users give up their privacy to be “social” and cool. 2/ There is a lot of hacking and data breaches as all the (user) data is stored on centralized servers. 3/ Another disadvantage of Web2 is the disproportionate 'market power' a handful of beforementioned big firms amass through the 'network effects' of their services and products, which they'll use, misuse and abuse just to generate more profits for their shareholders. 4/ Last but not least, the internet in Web2 has a big impact on politics – for example, one could ask the question if Brexit would have been possible without the huge social media influencing campaigns by Cambridge Analytica? Keywords of Web2: Decentralized Internet, Decentralized Content, Centralized Data Storage.

Now we come to Web3 - which is happening right now although we are only at the entrance gates yet of Web3 - so it will be an interesting few years ahead before this (r)evolution really kicks in and takes its well-deserved place. One step at a time. Web3 is about artificial intelligence (in Web2 searching is on keywords, the computer understands words but not context, like a human being). Web3 is also about protecting user data and privacy through the decentralization of?data storage – the data is not owned by a few big companies but stored on a decentralized network of blockchains. Finally, Web3 is about holding the property of digital assets and about giving full control to the user over their identity, their finances, their digital assets. Keywords of Web3: Decentralized Internet, Decentralized Content, Decentralized Data Storage.

Now you have to hold this thought of Web3 in your mind while we go to the second story on macro-economics and money.

Well, this topic is huge so I just want to give a few interesting facts about macroeconomics and money in general that we can use to build our case to defend the existence and inherent value of cryptocurrencies.

So, in general when people have some money, they are always thinking about how that money can make them more money in order to improve their standard of living (this is pure human nature). There are a few “assets classes” you can invest in. Stocks, real estate, bonds, and gold are the more known assets classes. Stocks and real estate have approximately an annualized return of 6-7%, bonds of 3% and gold of 0.7%. Alternatively, if you decide not to invest your money, you could just keep your money in cash and that has a negative annualized return of minus -1.4% (i.e. the average inflation rate across a longer time period). That would mean that, 1$ invested in the year 1802 and passed on across generations would now be worth approximately 109,000$ if you had put that 1 dollar into stocks or real estate. If you simply would have kept that same dollar in cash, you would now have 0.05$ (in inflation-adjusted terms). Simply said, that same dollar could buy you 20 times more things in 1802 compared to now. The conclusion is that cash is a notoriously bad store of value, it only loses value over time. Hence the saying: cash is trash, but cash flow is king.

Now governments know that cash loses value all the time, and their job is to make sure that it does not lose value fast enough because that would create panic and big social problems. So governments - through their central banks - try to control money, money supply, and the economy at large through various mechanisms and tools at their disposal.?They can basically give the economy a push or slow it down by: spending/saving money (i.e. running a surplus or deficit), increasing or lowering taxes, increasing or cutting interest rates,?buying/selling bonds on the market (i.e. quantitative easing / tightening) or adjusting cash reserves for banks (e.g. Basel 1-2-3 agreements). Now without going to much in the boring details here, a lot of economists say our current monetary system is completely broken. ?Just to give you one fact: the United States has printed more money in 2020 than in the first 200 years since its existence. And now we are surprised there's this sudden inflation? ?A lot of people say that things get more expensive (inflation), a lot of economists argue that things are not getting more expensive, just your money is losing its value faster. On top of that, in the current context, with a combination of negative economic growth in Q1-22 in the US, high inflation (7-8%) and historically low interest rates, the central bank in a game of chess is in a proverbial checkmate position against the strongest of all opponents, the market.

Another interesting macro-economic / social trend is that in the world roughly 1.7 billion people don't have access to the financial system (i.e. they don't have a bank account) and out of that group approx 1 billion people do have a mobile phone that is connected to the internet. This plays into the hand of blockchain and cryptocurrencies as crypto could provide a payment means to this group of people.

Let's now try to connect the first story about the internet and its evolution, with the second story on money and macro-economics and get to the third story on the context, value and origination of blockchain and cryptocurrencies. We are not going to go into the current market price of cryptocurrencies as price does not reflect value in the short term, especially in a bear market with a lot of fear in the market. This article only aims to explain the inherent value of blockchain and cryptocurrencies, it has no speculative purpose.

In 2009 Satoshi Nakamoto "created" Bitcoin and the Bitcoin blockchain. A first must-read is the whitepaper written by Satoshi, you can find it here.

Bitcoin is the first decentralized digital currency, working without a central bank. It has value because it is scarce (i.e. total supply is limited at 21 million units), its portable, durable, divisible, interchangeable, and cannot be counterfeited. As with real money it only works because we as a society give it value. The value of something/anything is determined by the simple yet all-defining law of demand and supply. Bitcoin is currently going through a phase of mass adoption, just like money has done in its beginnings (before we bartered things as a means of payment, then money was tied to gold, now money is already mostly virtual).

On a side note: I see cryptocurrencies not as currencies such as USD or EUR, but rather as a whole new asset class, whereby one could compare Bitcoin to gold (although Bitcoin is a lot better than gold at many things) as gold and Bitcoin serve as both a payment means and a store of value (only 10% of all above-ground gold is used in industrial applications). Above-ground gold has a market cap of approx 10$ trillion, which would mean that, applying that same valuation model to Bitcoin, Bitcoin is 18-20X undervalued in relationship to its current price in June 2022. More info about this "valuation model" can be found here.

The bitcoin blockchain is the decentralized ledger storing all bitcoin transactions in blocks. Every block has a number of transactions in it and when the block is full, a new block is made and added to the chain of blocks, hence the name blockchain. A new block is made every 10 minutes on the Bitcoin blockchain network. The blockchain cannot be seized, hacked or censored as it is stored in a decentralized way. Once a block is “closed” it's there forever and cannot be altered.

People often say they believe in blockchain but they don't believe in cryptocurrencies. Thats like saying I believe in cars, but not in wheels. You need one to have the other. Why? In a centralized network (e.g. a bank, amazon, google, etc) you pay a fee to the provider to store your money or data. You pay that fee either with money, or with your user data (on the internet data is synomym for money). In an open (i.e. permissionless) blockchain you also pay this fee to the miners of the blocks and the nodes in the form of cryptocurrency - nobody works for free. In the case of bitcoin a miner gets a 6.25 BTC reward for mining a block, as well as the transaction fees for all the transactions stored in the block the miner mined. So, the more open permissionless blockchains like Bitcoin and Ethereum get used, the higher the value of their native cryptocurrencies. You cannot have a car without wheels.

Apart from bitcoin there are a lot of other cryptocurrencies, one that is also worth mentioning is Ethereum, which is a smart contract platform used mostly today for financial applications. Note that today there are already 4 times more transactions on Ethereum than on the VISA payment system. And again, it's just getting started in my opinion. These smart contract networks such as Ethereum allow developers to build "digital banks" on them, structure business deals (i.e. smart contracts) or you can also use them as a payment mechanism / payment means. Other famous smart contract platforms are Avalanche, Solana, Cardano, and Polkadot, amongst others. But Ethereum is the biggest of what is called “layer 1" smart contract platforms. ?A smart contract is a contract made of a set of programmable "if-then" conditions, and its key characteristic is that it is “trustless” meaning the contract executes automatically when all conditions are met by the counterparties. No trust is needed like in traditional contracts where you have to have trust and faith in the counterparty to comply with all the conditions of the contract.

On these layer 1 platforms, companies can build projects with their own native cryptocurrencies and then sell them on the market. An example is Chiliz (build on Ethereum) which manages the platform socios.com. On the Chiliz platform you will find a lot of sports related cryptos such as the FC Barcelona token, Manchester City Token, or the Paris Saint Germain Token. With these tokens fans can buy entrance tickets, merchandise in the fan shop, or digital collectibles such as fan cards. This is just one of the many real-world applications that blockchains and cryptocurrencies have, and that create real and intrinsic value for users and for the economy at large.

Of course there is a lot of speculation with cryptocurrencies and there is a lot of volatility and fear in the market (not only in the crypto markets, but in all markets) which leads to big price jumps and fluctations. But the underlying value drivers, and the underlying fundamentals of Web3, Blockchain and Cryptocurrencies will have a huge and growing positive impact on the economy and society. As with all new and upcoming technologies, change goes slow and happens in a gradual fashion, until it reaches a tipping point and leads to a huge (r)evolution and mass adoption. This will eventually also happen with Blockchain and Cryptocurrencies. It's just a matter of time.