Mark Anderson, founder of A16z: The potential of the positive feedback loop of the Bitcoin network

The excerpts of this article are compiled from 2014, when Mark Anderson’s venture capital firm Andreessen Horowitz (A16z) has invested nearly $50 million in Bitcoin-related start-ups. The company is actively looking for more investment opportunities based on Bitcoin. The number of bitcoins he personally holds does not exceed the minimum. 

A mysterious new technology has appeared, which seems to have come out of nowhere, but is actually the result of 20 years of intensive research and development by nearly anonymous researchers. Political idealists projected visions of liberation and revolution on it; establishment elites sneered at it.

On the other hand, technologists and nerds were stunned by this technology. They saw great potential in it, and they were tinkering with it in the evenings and weekends.

Eventually mainstream products, companies and industries appear, commercialize them, and its impact becomes far-reaching.

What technology am I talking about? The personal computer in 1975, the Internet in 1993, and Bitcoin in 2009.

It is hard to blame Bitcoin as an undiscovered topic, but the gap between the opinions of the media and many ordinary people on Bitcoin and the opinions of more and more technical experts on Bitcoin is still huge. In this article, I will explain why Bitcoin has so many Silicon Valley programmers and entrepreneurs here, and what I think is the future potential of Bitcoin.

First of all, Bitcoin is a breakthrough in computer science at the most basic level-it is built on 20 years of cryptocurrency research and 40 years of cryptography research by thousands of researchers around the world.

Bitcoin is the first practical solution to the long-standing Byzantine Generals problem in computer science. To quote the original paper that defines BGP: “[Imagine] a group of Byzantine army generals and their troops camping around enemy cities. The generals can only communicate through messengers and must agree on a common battle plan. However, one of them Or many may be traitors, and they will try to confuse others. The problem is to find an algorithm to ensure that loyal generals will agree.”

More generally, BGP raises the question of how to establish trust between unrelated parties through an untrusted network (such as the Internet).

The practical consequence of solving this problem is that for the first time, Bitcoin provides us with a way for an Internet user to transfer a unique digital asset to another Internet user, thereby ensuring that the transfer is safe and everyone knows the transfer. It has happened, and no one can question the legality of the transfer. This technological breakthrough cannot be overemphasized.

What kind of digital assets can be transferred in this way? Think of digital signatures, digital contracts, digital keys (physical locks or online lockers), digital ownership of physical assets such as cars and houses, digital stocks and bonds… and digital currencies.

All of these are exchanged through a distributed trust network that does not require or relies on central intermediaries such as banks or brokers. Moreover, in all methods, only the owner of the asset can send it, and only the intended recipient can receive it. The asset can only exist in one place at a time, and everyone can verify the transaction and ownership of all assets at any time.

How does Bitcoin work?

Bitcoin is an Internet-wide distributed ledger. Anyone in the world can buy or sell this distributed ledger at any time—no approval required, and very low fees. Bitcoin “coins” themselves are just rewards in a distributed ledger, similar to the seat of a stock exchange in some respects, but are more widely applicable to real-world transactions.

Bitcoin ledger is a new type of payment system. Anyone in the world can pay any value of Bitcoin to anyone in the world by simply transferring the ownership of the corresponding slot/block in the ledger. Put in value, transfer it, and the receiver takes out the value without authorization, and in many cases, only a low transfer fee is charged.

The last part is very important. Bitcoin is the first full Internet payment system, and transactions are either free or very low (as low as a few cents). Existing payment systems charge approximately 2% to 3% of fees-this is in developed countries. In many other places, there are either no modern payment systems or significantly higher rates.

Bitcoin is a privacy tool. This is a way of exchanging money or assets between parties without pre-existing trust: in the simplest case, sending a string of numbers via email or text message. The sender does not need to know or trust the receiver, and vice versa. Relatedly, there is no chargeback—this part is actually like cash—if you have money or assets, you can use it to pay; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Bitcoin is a digital currency whose value is directly based on two things: the use of the payment system today—the number and speed of payments made through the ledger—and the guesswork about the future use of the payment system. This is a part that confuses people. It is not that Bitcoin currency has some arbitrary value, and then people use it for transactions; people can use Bitcoin for transactions (anywhere, anywhere, no fraud, no or very low fees), so it has value.

At this moment, the value of Bitcoin currency is more based on speculation rather than actual payment. This may be correct, but it is also true that this speculation is establishing a high enough price for the currency, and payment has become a reality. Bitcoin currency must have a certain value in order to withstand any amount of real-world payments. This is the classic “chicken and egg” problem of new technologies: new technologies are only worth a lot of money. Therefore, part of the reason for the rise in the value of Bitcoin is speculation, and this fact makes its usefulness come sooner than otherwise.

Critics of Bitcoin point to the limited use of ordinary consumers and businesses, but the same criticism is also directed at personal computers and the Internet. Every day, more and more consumers and merchants buy, use and sell Bitcoin all over the world. The overall numbers are still small, but they are growing rapidly. As Bitcoin tools and technology improve, the ease of use for all participants is rapidly increasing. Remember that in the past even going online was technically challenging. Not anymore.

Due to the volatility of Bitcoin, it is also incorrect that merchants will not accept Bitcoin’s criticism. Bitcoin can be fully used as a payment system; merchants do not need to hold any Bitcoin currency or face the risk of Bitcoin fluctuations at any time. Any consumer or merchant can buy and sell Bitcoin and other currencies at any time.

Given that the current number of consumers who want to pay with Bitcoin is very small, why is any merchant (online or in the real world) willing to accept Bitcoin as a payment method? My partner Chris Dixon recently gave this example:

“Suppose you sell electronic products online. The profit margin of these businesses is usually less than 5%, which means that the traditional 2.5% payment fee consumes half of the profit margin. This money can be reinvested in businesses, returned to consumers, or by The government levies taxes. Of all these options, giving 2.5% to the bank to move bits on the Internet is the worst option. Another challenge that merchants face in payment is accepting international payments. If you want to know why your country Your favorite product or service is not available in /area, and the answer is usually payment.”

In addition, merchants are very attractive to Bitcoin because it eliminates the risk of credit card fraud. This form of fraud has prompted many criminals to devote a lot of energy to stealing personal customer information and credit card numbers.

Since Bitcoin is a digital and non-registered tool, the recipient of the payment will not obtain any information from the sender that can be used to steal funds from the sender in the future, whether it is the merchant or the one who stole the information from the merchant. Criminals.

Credit card fraud is a major event for merchants, credit card processors, and banks, so much so that online fraud detection systems are triggered to stop seeming or even suspicious transactions, regardless of whether they are actually fraudulent or not. As a result, if customers use Bitcoin to pay, many online merchants are forced to reject the 5% to 10% of incoming orders they can accept, and in this case, such fraud is impossible. Since these are orders that have come in, they are essentially the highest profit orders that merchants can get, so being able to accept them will greatly increase the profit margins of many merchants.

Bitcoin’s anti-fraud features even extend to the physical world of retail stores and shoppers.

For example, using Bitcoin, the recent large-scale hacking attack to steal credit card information of 70 million consumers from the Target department store chain is impossible. This is how it works:

You fill up your shopping cart as you do now and go to checkout. However, instead of handing over your credit card to pay, you take out your smartphone and take a snapshot of the QR code displayed on the cash register. The QR code contains all the information you need to send Bitcoin to Target, including the amount. You click “Confirm” on your mobile phone, and the transaction is complete (including converting the USD in your account to Bitcoin, if you don’t have any Bitcoin).

Target is very happy because it received the money in the form of Bitcoins, if needed, it can be turned into U.S. dollars immediately, and it does not pay or pay very low payment processing fees; you are very happy because hackers cannot steal any of your personal information; Organized crime is very unhappy. (Well, maybe criminals are still happy: they can try to steal funds directly from poorly secured merchant computer systems. But even if they succeed, consumers will not bear the risk of loss, fraud, or identity theft.)

Finally, I want to address some critics’ claims that Bitcoin is a safe haven for bad behavior and criminals and terrorists can transfer money anonymously with impunity. This is a myth, mainly caused by sensational news reports and incomplete understanding of technology. Just like emails are very traceable, Bitcoin is anonymous, not anonymous. In addition, every transaction in the Bitcoin network is tracked forever and recorded in the Bitcoin blockchain or permanent record, and everyone can see it. Therefore, it is much easier for law enforcement agencies to track Bitcoin than cash, gold or diamonds.

What is the future of Bitcoin?

Bitcoin is a classic network effect, a positive feedback loop. The more people who use Bitcoin, the more valuable Bitcoin is to everyone who uses it, and the more motivated the next user to start using the technology. Bitcoin shares this network effect property with phone systems, the Internet, and popular Internet services such as eBay and Facebook.

In fact, Bitcoin is a four-sided network effect. Due to the participation of self-interest, there are four constituencies involved in expanding the value of Bitcoin. These supporters are (1) consumers who use Bitcoin to pay, (2) merchants who accept Bitcoin, (3) “miners” who run computers to process and verify all transactions and enable a distributed trust network to exist, and (4) ) Developers and entrepreneurs who are using Bitcoin and building new products and services on top of Bitcoin.

The four aspects of network effects all play a valuable role in expanding the value of the entire system, but the fourth aspect is particularly important.

In Silicon Valley and around the world, thousands of programmers are using Bitcoin as the cornerstone of building a kaleidoscope of ideas for new products and services, which was impossible before. At our venture capital firm Andreessen Horowitz, we are seeing more and more outstanding entrepreneurs-many with respected track records in the financial industry-building companies on top of Bitcoin.

For this reason alone, Bitcoin’s new challenger is facing an uphill battle. If something is to replace Bitcoin now, it must be improved considerably, and it must happen quickly. Otherwise, this network effect will make Bitcoin dominate.

An obvious and huge area of ​​Bitcoin-based innovation is international remittances. According to data from the World Bank, hundreds of millions of low-income people go to foreign countries to do hard work every day to make money and send them back to their families in their home countries—a total of more than 400 billion U.S. dollars each year. Every day, banks and payment companies charge incredible fees, up to 10%, and sometimes even higher, to send this money.

Therefore, switching these remittances to Bitcoin, which has no or very low fees, will significantly improve the quality of life of farmers, workers and their families. In fact, it’s hard to think of anything that will have a faster and more positive impact on so many people in the world’s poorest countries.

In addition, Bitcoin can often be a powerful force to bring more people from all over the world into the modern economic system. Only about 20 countries in the world have banking and payment systems that we consider to be fully modern; the other about 175 have a long way to go. As a result, many people in many countries are excluded from the products and services that we take for granted in the West. Even the completely virtual service Netflix is ​​only available in about 40 countries. Bitcoin, as a global payment system, can be used by anyone anytime, anywhere, and can be a powerful catalyst for extending the benefits of the modern economic system to almost everyone on the planet.

Even in the United States, a long-recognized problem is that “people without bank accounts”-people without traditional bank accounts-even pay extremely high fees for basic financial services. Bitcoin can directly solve this problem because it can easily provide extremely low-cost services to people outside the traditional financial system.

The third fascinating use case of Bitcoin is micropayments or ultra-micropayments. Despite 20 years of experimentation, micropayments have never been feasible, because micropayments are made through existing credit/debit cards and banking systems (think about $1 and below, as small as a penny or a penny) Fraction) is not cost-effective. The cost structure of these systems makes them infeasible.

Suddenly, with Bitcoin, this became a breeze. Bitcoin has the wonderful feature of infinite divisibility: currently there are eight places after the decimal point, but there will be more in the future. Therefore, you can specify any small amount of money, such as one thousandth of a penny, and then send it to anyone in the world for free or almost free.

For example, consider content monetization. One of the reasons why it is difficult for media companies such as newspapers to charge for content is that they need to charge all (to pay the full subscription fee for all content) or not to charge (which leads to bad banner ads everywhere on the Internet). Suddenly, with Bitcoin, there is an economically viable way to charge any small amount of fees for each article, section, hour, video play, archive access, or news alert. .

Another potential use of Bitcoin micropayments is to combat spam. Future email systems and social networks may refuse to receive incoming messages unless they are accompanied by a small amount of Bitcoin-small enough to be irrelevant to the sender, but large enough to stop spammers, they are today Hundreds of millions of spam can be sent for free with impunity.

Finally, the fourth interesting use case is public payments. This idea first caught my attention in a news article a few months ago. In a sports event broadcast on TV, a random viewer held up a placard with a QR code and the text “Send me Bitcoin!” He received $25,000 in Bitcoin in the first 24 hours, all from people he had never met. This is the first time in history to see someone holding a sign, whether on the spot, on TV or in a photo, and then you can send money to them with two clicks on your smartphone: take a photo of the QR code on the sign , And then click Send money.

Think about the impact on the protest movement. Today, the protesters want to be on TV to let people know about their cause. Tomorrow they will want to be on TV because this is how they raise money. They hold up signs and ask people who sympathize with them anywhere in the world to send them money on the spot. Even the most stubborn anti-capitalist political organizer, Bitcoin is a financial technology dream come true.

The next few years will be dramatic and exciting times surrounding this new technology.

For example, some prominent economists are deeply skeptical of Bitcoin, even though former Federal Reserve Chairman Ben S. Bernanke recently wrote that digital currencies like Bitcoin “may have long-term prospects, especially If they promote faster, safer, and more efficient payment systems.” In 1999, legendary economist Milton Friedman (Milton Friedman) said: “One thing that is missing but will soon be developed is Reliable electronic cash, a method on the Internet where you can transfer funds from A to B without A knowing B or B knowing A. – I can take a 20-dollar bill and give it to you, you May get it without knowing who I am.”

The economists who attacked Bitcoin today may be correct, but I support Ben and Milton.

In addition, there is no shortage of regulatory themes and issues that must be addressed, because almost no country’s banking and payment regulatory framework expects a technology like Bitcoin to emerge.

But I hope I have made you aware of the great prospects of Bitcoin. Bitcoin is not only a liberal fairy tale, nor a simple Silicon Valley hype. It provides a broad opportunity to reimagine how the financial system can and should function in the Internet age, and is a catalyst in a more effective way. Reshape the system. It has a strong influence on individuals and businesses.


Posted by:CoinYuppie,Reprinted with attribution to:
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