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Welcome to The Bloch,
I received some constructive feedback from a friend after my last letter that I should dive deeper on individual topics rather than cover multiple topics on each letter. Do you agree or do you like hearing about multiple topics on each letter? I would love to hear your feedback on this also.
On that note, I will dive deeper today on a topic I have mentioned in my previous letters and one that I’m sure will come up again and again. I’m talking about blockchain technology, which underlies Bitcoin, Ethereum, cryptocurrencies, and Non-Fungible Tokens (NFTs).
For those who are already familiar, this may be a bit of a refresher. For those who are just learning for the first time, I hope that this letter helps you understand the nature of the technology which is bound to change some of the most integral interpersonal processes that we use as humans.
A simple way to think about it is that currently banks like Bank of America, big corporations like Visa and MasterCard, and government institutions like the IRS and State Registrar each have their own internal databases that keep track of bank accounts, money transfers, land ownership, etc. A blockchain, however, is a decentralized ledger of transactions with no central authority. Each transaction is coded into a “block,” which is a group of transactions, and is then verified by the computing nodes on the network. When enough nodes have come to a consensus, the block is confirmed and added to the chain. Once a block is added to the chain, it is immutable which means no one can erase it or change it. This has big implications for the systems we use to transfer value, which currently rely on banks, corporations, and governments in order to function properly.
Many of these systems are antiquated. A big example of this came with the GameStop trading frenzy that happened earlier this year. This was a big issue for Robinhood: as the GameStop trade went viral online, tons of new users signed up for Robinhood and started buying GameStop stock and options. The reason was because hedge funds were betting against GameStop so much that people had borrowed more shares of GameStop to sell than shares of GameStop actually existed. So in the middle of the night, Robinhood was asked to put up $3 Billion dollars in collateral to manage the risk presented by their customers’ trades. In order to satisfy their regulatory requirements, Robinhood and other brokers had to restrict the buying of GameStop shares to their customers for a number of days. Robinhood customers were, understandably, outraged by this.
Much of the discussion in the aftermath of this ultimately centered around the 2-day delay from when you place a trade with your broker and when that trade actually settles with the clearinghouse. Many are calling for that system to be improved to a 1-day delay and ultimately down to real-time-settlement. When you hear “real-time-settlement” what you should really be thinking is “blockchain technology.” Blockchain is currently the only mechanism we have as a society to have this sort of real time settlement. Since everyone using Bitcoin is ultimately using the same decentralized ledger, once the transactions on each block are confirmed, they are final, immutable, and visible to all. This allows final settlement to happen in near real-time with no verifying authority, since each block is final and only takes about 10 minutes to be confirmed.
When Bitcoin was first introduced, it was the first occurrence of a cryptocurrency built on blockchain technology, and hence people flocked to Bitcoin as “digital gold” due to its limited supply. Since then, other blockchains have come online. The most notable is Ethereum which has the most ongoing development hours behind it. The main benefits of Ethereum over Bitcoin are faster transaction times and the ability to code “smart-contracts” on top of the network. This allows developers to build specific scenario based outcomes into the blockchain. For example, using Augur, which is built on the Ethereum blockchain, two people in different countries could place bets against each other on a sports game, and when the game is finished, the funds transfer automatically to the winner based on the outcome of the game. No bookies, no casino, and no governments in between. Other notable blockchains include Cardano, Tezos, VeChain, Stellar and many more. They all offer unique benefits and they all have flaws that some of the others solve. BTC, ETH, ADA, XTZ, VET, XLM are not the blockchains themselves, rather they are the native currencies to each of the blockchains mentioned, respectively. No one knows which will ultimately be the most useful, but everyone seems to agree that the underlying technology is the way forward.
Now I want to quickly cover the hype that has been happening around NFTs. You may have heard recently that after selling NFT art for $69 Million dollars, the artist said “I absolutely believe it’s a bubble.” That seems pretty obvious. Digital collectors art seems like a relatively niche space. I hadn’t even heard of the artist Beeple until their NFT sold for an outrageous sum of money. That said, I believe the current hype and bubble around NFT art is missing the boat.
The real value of NFTs will come in the future when things of value in the real world, not just the digital world, are turned into Non-Fungible-Tokens. Take the process of buying a house or a car or land for example. Think about all the middlemen. The government offices. The paperwork. How long does it take for these processes to actually happen? In the world of DeFi (decentralized finance), developers are building the new and improved financial infrastructure of the world, which will allow coded parameters for financial services like collateral, escrow, and asset ownership.
Now imagine a world where the deed to your land or the title of your car is on the blockchain, where your house’s ownership is listed on an immutable, decentralized ledger, and you hold the digital key to the Non-Fungible-Token which represents the ownership of your house. In the world of the future, you will be able to browse on Zillow, hit the “Buy Now with Crypto" button, and the mortgage, the collateral, the down payment, the credit check, the paperwork, the (reduced) closing costs, and the actual transfer of the deed will all happen digitally, almost instantly, seemingly magically, and with no banks, governments, or middlemen in the way. That is a future I can get on board with.
Until next time.
Bloch
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The Case for Blockchain Technology