This installment of CryptoConscious is overdue. Sorry! This post took me more than one hour and partial publishing didn’t make sense imho.
Some of you might know that I’m a big proponent of clarity, precision, and nuance. Especially in a newly emerging space like the blockchain/crypto/web3/DLT ecosystem, however, all of them are often lacking. Whenever new concepts and disciplines emerge, there isn’t a shared language in place yet. We have no commonly accepted definitions and no broadly agreed upon taxonomies. Case in point: token, (alt)coin, cryptocurrency – all these terms refer to digital assets that are accounted on a blockchain (or a different form of distributed ledger system). All three terms might trigger slightly different associations in your mind. But those are very likely to be based on your personal interpretations or definitions – simply due to the fact that there is not yet a standard terminology. It was one of the key motivations behind creating the Token Classification Framework.
For the same reasons, I think it is about time to untangle the different streams of innovations which have their origin in Bitcoin and which are keeping the blockchain/crypto/web3/DLT ecosystem busy these days. Why untangle? Over time, the community grew and more and more people from all kinds of backgrounds became attracted to the crypto world. As a result, the ideas, philosophies, and goals floating around in the community expanded as well. Yet at the same time we still simply talk about blockchain or crypto when, in fact, it is no longer a homogenous field but a variety of innovative concepts.
By untangling these different streams of innovation, we can apply a higher degree of precision to our design efforts and analysis (e.g. of a new project), we make the different domains and respective ideas more accessible (e.g. to people who just joined the party), and we ourselves can develop a more nuanced understanding of what’s going on. Moreover, I think that some of the innovation streams will prove more impactful than others. While they all go back to Bitcoin and the early crypto community, it’s about time to regard them as separate (though related) fields.
The Crypto Innovation Streams
Here’s a quick first attempt of mine at clustering the different innovation streams that I currently observe.
- Cryptoassets/Tokenized Assets
- Cryptonetworks/Tokenized Networks/Decentralized Web
- Blockchain/Distributed Ledger Technology
- Distributed (Autonomous) Organizations
- Cryptoeconomics/Incentive Design
I didn’t include technical, foundational R&D fields so you won’t find scaling solutions, alternative consensus algorithms, or zk-STARKS. These are all fascinating but matter mostly from an implementation perspective. Even though they are hard problems to solve, my general assumption is that they will be solved at some point if we keep investing brainpower and resources on them. What I’m more interested in here is what people want to achieve, not how they build it.
Cryptocurrency: This stream summarizes the idea to create a purely digital money which isn’t issued by a central bank or state but by a distributed network. While that was the big idea behind Bitcoin, I just made the case that Bitcoin won’t become the web’s money. There’s an opening and other projects are trying to come up with differently designed cryptocurrencies to build the next generation of money.
Cryptoassets/Tokenized Assets: Meanwhile, there is now also an entire innovation stream which is focused on tokenizing existing assets and putting them on a distributed (at least for now) ledger. You find early concepts for everything from security and equity tokens to tokenized real estate, commodities and even art. These ideas are often less interesting from a technical and decentralized-system-design perspective than from a legal, regulatory and financial view. Yet, that’s not to say they are not interesting. Programmable assets that could bring fractional ownership to new asset classes while also increasing liquidity in currently rather illiquid markets could certainly be interesting. While it doesn’t necessarily take blockchain/distributed ledgers to create new digital asset classes (read my Untitled INC fellow Andrea Bianconi’s excellent piece on the subject), it is an innovation stream that rose to popularity thanks to the buzz around blockchain, cryptocurrency, tokens, and ICOs.
Cryptonetworks/Tokenized Networks/Decentralized Web: Another issue which several projects in the crypto space try to address is the distribution of value in networks. While the internet has taught us the power of networks, today’s most relevant networks are all organized around powerful single entities – companies – with platform or aggregation business models. While nobody disputes that these networks are highly useful and create a lot of value (financial and otherwise), there are legitimate concerns as well. Successful networks often come with strong winner-takes-all tendencies, leading to monopolies. Aggregators which manage to scale hold a lot of power about suppliers. Thus, people are searching for alternative approaches to building networks in a less centralized way and with a “fairer” value distribution*. Tokenized networks represent one potential solution. Tokenized networks or cryptonetworks use tokens and incentive schemes to ensure that relevant ecosystem participants benefit from the value created by the network.
Blockchain/Distributed Ledger Technology: Bitcoin pioneered an architecture which is now commonly known as blockchain. For the first time, blockchains enabled us to build systems that ensure trust in an otherwise trustless, p2p environment. When building solutions under conditions where trust is more important than efficiency, blockchain or DLT architectures present an interesting tool in a developer’s kit. Also important: with the advent of blockchains, scarcity came to the digital world as well. And once smart contracts arrived at the scene – a concept popularized by Ethereum – it became evident that blockchain/DLT architectures can be used for more than just operating a cryptocurrency. Thus, this innovation stream is concerned with two issues: building robust, scalable and reliable infrastructure and building solutions to real-world problems (currently mostly in a b2b context).
Distributed (Autonomous) Organizations: This innovation stream is concerned with new organizational models which are non-hierarchical and decentralized/distributed. In more general terms, I sometimes call them network organizations but in the fka crypto world people talk and think about decentralized and sometimes even autonomous organizations. The question which people working on this stream try to answer is basically: how can we re-envision the firm – i.e. people and/or machines collaborating in order to create value – in the age of global networks, connectivity, and automation. It’s a subject that might sound a bit like sci-fi but self-governing networks (sometimes including AI) open up a very interesting design space.
Cryptoeconomics/Incentive Design: This innovation stream – one of the hippest topics in the space – essentially describes the fusion of network design and mechanism design, the latter a field in game theory. On a basic level, the idea is to design smart incentive systems which lead the actors in decentralized, p2p networks to behave according to the goals of the network. While some people claim that there is nothing fundamentally new about cryptoeconomics (I agree). I still opted to include the stream here because many smart people are currently active in the field. They come up with interesting new mechanism designs, which are all aiming to build and govern successful networks. While I don’t believe that we can successfully program human behavior ex-ante in general, several of the tools that are currently being created will influence how we approach network design and governance in the future.
(I’ll continue tomorrow)
* You can also make the following argument if you don’t like the notion of fairness: monopoly-like networks tend to leverage their power and begin to show strong rent-seeking behavior. While that might be the right short-term action, it comes with negative long-term consequences (laws & regulation, public/stakeholder disdain etc.). Cryptonetworks try to align incentives differently, potentially creating long-term healthier ecosystems.