Humankind 2.0

a book in progress...
Meditations on the future of technology and society... be published in China in 2016

These are raw notes taken during and after conversations between piero scaruffi and Jinxia Niu of Shezhang Magazine (Hangzhou, China). Jinxia will publish the full interviews in Chinese in her magazine. I thought of posting on my website the English notes that, while incomplete, contain most of the ideas that we discussed.
(Copyright © 2016 Piero Scaruffi | Terms of use )

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Fin-tech and Blockchain: History, Trends and Future

(See also the slide presentation)

Narnia: Bitcoin has been the biggest success of financial technology on the Internet, but it didn't come out of the financial industry. How do you explain its rise?


Like many other innovations that changed the history of modern technology, Bitcoin came out of the exact opposite of Wall Street. That's always been the secret of Silicon Valley. I have given my presentation "The Best Kept Secret in Silicon Valley" many times in all continents, and people just don't listen carefully. That is really the secret of Silicon Valley: take the mindset of the "counterculture" that wanted "to change the world" (and which was actually opposed to the technology owned by the rich corporations and of the government) and apply it to the latest technologies: the result is the Silicon Valley startup, using the technology for completely new purposes, and typically "to change the world". You cannot explain why Silicon Valley became the most creative place in the world (instead of New York, Boston or London that had a lot more money and technology) if you don't study the creativity of the Bay Area, a very weird kind of creativity. Bitcoin comes out of a similar contradiction. Bitcoin had its roots in three unorthodox alternative movements, that at some point converged on California: P2P networking, the extropian movement and the cyberpunk movement.

In the 1950s the Bay Area was mostly famous for the "beat poets" and in the 1960s for the "hippies". Collectively, the intellectuals of these movements were sometimes called "human-potential movement" because they aimed to rediscover the potential of humanity, not the potential of machines. They did not like the greed of the capitalist system and viewed the computer technology as harmful to the individual. In the 1970s another famous movement came out of California, the descendant of those previous movements: the "new age" movement. It was, again, a movement that valued spirituality against technology and science. The world became more and more technological and scientific, but California instead became more and more spiritual.

Narnia: And those were the days when the Santa Clara county started being called "Silicon Valley" and Apple was started...


Yes, at the same time this anti-technological, spiritual "revolution" was proceeding in parallel with the boom of the high-tech industry. That's really the origin of Silicon Valley: it was a strange interaction among universities (Stanford, Berkeley and others), the military industrial establishment (particularly Lockheed and projects founded by the government like the Internet), the "human-potential movement" and the computer technology (especially after computers became networks). Towards the end of the 1980s, just before the invention of the World-wide Web, this "counterculture" was spreading in all sorts of directions. I will mention just three that will sound really funny to a foreign observer like you. In august 1987 psychedelic painter Jose Arguelles organized the Harmonic Convergence (1987) in Sedona (Arizona). He and the other followers of his movement believed that there was some profound truth in the calendar of the ancient Mayas of Central America. In that month the planets were aligning in a special way and these folks believed that some magical power would emanate from the planets if you were in the right place. In particular, i remember hundreds of people camping on Mount Shasta, 400 kilometers north of San Francisco. Another quasi-religious movement was born in California, the "extropian" movement. They believed in the power of science and technology to give us immortality. Its members practiced cryogenics to preserve their brain after death. Science has a concept of "entropy" that is very popular when studying order, information, organization. Entropy destroys order, information and organization. Ultimately, entropy is the reason that all things must die. Tom Bell coined the term "extropy" as the opposite of "entropy". When Max More, an Oxford philosopher who had co-founded the first cryonic service in Europe (today it is called Alcor) moved to Los Angeles, he founded the magazine "Extropy - the journal of transhumanist thought" and then founded the "Extropy Institute". These two were among the leaders of the movement. The extropian movement spread thanks to an online forum, another example of the "counterculture" using technology for its own purposes. The extropian people held strong anti-government views. They were modern anarchics, people who don't believe in a state. They wanted to create a society based on technology in which the power would shift to the people. Technology would allow people to run their state without any need for politicians and police. In 1994 the influential high-tech magazine Wired published an article titled "Meet The Extropians". The people who gravitated around the extropian movement included Hans Moravec (who would become famous for the "Singularity" movement), Ralph Merkle (a cryptography expert from UC Berkeley who would become famous in the age of nanotech), Perry Metzger (the founder of the cryptography mailing list on the Internet), and Nick Szabo and Hal Finney. We'll get to Szabo and Finney later, but let me put things in context, because i think it is really important to understand that technology does not exist in a vacuum, that technology is always part of a much bigger ecosystem.

These are also the years when Burning Man became the craziest festival in the world. There used to be something called the Suicide Club in San Francisco. It was a group of crazy kids doing crazy things, like climbing the Golden Gate Bridge. Several of them went one to create other crazy events around the Bay Area. One of them, Mary Grauberger, was organizing one of those "human-potential" events: once a year, during the summer solstice in june, she was inviting her friends to a beach party in San Francisco. During her beach part of 1986 two of her friends, Larry Harvey and Jerry James, burned the effigy of a man. It became a tradition for that beach party. At the same time the Suicide Club had evolved into the Cacophony Society, another semi-legal organization that was organizing strange events for young people. People like Dan Kottke, who had been Steve Jobs' best friend during his college years and helped him start Apple, remember fondly the Cacophony Society. In 1990 Kevin Evans and John Law of the Cacophony Society invited Harvey to transplant the burning ritual to the Black Rock Desert in northern Nevada. Kevin Evans was an artist, one of the several artists who had joined the Cacophony Society. Burning Man became a festival, a festival of artistic sculptures in the desert that are burned at the end of the festival. Today, Burning Man is the most famous festival in the USA. It was started by a carpenter and two jobless Cacophony members. Originally it was famous for sex and drugs, but now it is famous for the way it self-organizes in the middle of the desert and for the colossal artistic sculptures, some of which move (a legacy of the Survival Research Laboratories, another unique movement of the 1980s in San Francisco that focused on shows of machines destroying each other).

The history of P2P begins outside the Bay Area in Boston. In june 1999 Shawn Fanning invented a system to distribute mp3 files over the Web, Napster. This system allowed people all over the world to share music files. But this was illegale and the music industry eventually forced Napster to stop doing it. Nonetheless, Napster had invented a new technology, Peer-to-Peer (P2P); and proved its potential. Napster inspired a new generation of P2P services, most of them used to share music illegally, like Kazaa in Estonia and BitTorrent in San Francisco. These hackers, like Bram Cohen of BitTorrent, became heroes of the counterculture for defying the giant corporations of the music industry.

We are getting closer to Bitcoin. Let me backtrack to explain where Cohen came from. In 2000 a former Yahoo scientist Jim McCoy started EGBT (Evil Geniuses for a Better Tomorrow) to work on MojoNation, a different kind of P2P platform. He was inspired by videogames to solve the problem of "Agoric computing", which was a serious topic of computer science for the purpose of improving large-scale computation. The "mojo" was a cybercurrency, but it was not used to buy and sell things: it was used to provide balanced and secure computation for a network. MojoNation was a fascinating application of concepts of economics applied to optimization of computers. In 2001 SUN, that at the time was a major power in the Internet world (SUN originated Java, that still today powers the Web), introduced a similar open-source project, XTA (Juxtapose). Bram Cohen worked with Jim McCoy. That's where he learned the technology that he used to create BitTorrent, that became the most popular P2P platform. Another EGBT alumnus, Zooko Wilcox-O'Hearn, turned MojoNation into Mnet. So the concepts of cybercurrecy and P2P had been joined.

Narnia: this sounds a Hollywood movie about some gangster activities...


Most of this was illegal, yes. But not secret: you can't have an illegal success on the Internet, because your success depends on millions of people using your illegal service. So your success lasts only a few months before the authorities take action. Most of these services still exist, but now they are absolutely legal because the authorities "reminded" the owners of the law. For every service that is forced to become legal, you see a new one being created that defies the law again. That seems to be the story of P2P. And every time it gets better. Napster and BitTorrent relied on a central server. That was actually not real P2P. Gnutella, designed by Justin Frankel and Tom Pepper in Arizona, was truly P2P, totally decentralized. Ditto for Freenet, launched in London a few months later. The lawyers who sued these pioneers helped create the phenomenon of the "dark nets". This phenomenon became famous when four employees of Microsoft published "The Darknet and the Future of Content Distribution" (2002), that revealed the existence of invisible password-protected networks within the Internet. These peer-to-peer networks, where you remain anonymous, loved the Onion Router (TOR), another crazy marriage of counterculture and military project. A technology that had been invented to protect the military world was now used for "dark nets" within the Internet. The dark nets were and are a problem because they are used to sell drugs or pornography, and now by Islamic terrorists, but they also became popular with political dissidents in places where the Internet was massively censored, e.g. in Syria before the civil war.

In 2009 this mysterious Satoshi Nakamoto introduced the digital currency Bitcoin, based on a P2P model, the first successful currency not to be printed by a government. Bitcoin was implemented as a "dark net". The extropian Hal Finney became the first person to ever receive a bitcoin. Just like the previous P2P systems, Bitcoin was based on very sophisticated technology, and in this case on very sophisticated mathematics. From an engineering point of view, Bitcoin's main achievement was that the system was capable of creating copies that could not be copied.

In 1992 Cynthia Dwork (IBM's Almaden labs in San Jose) published "Pricing via Processing or Combatting Junk Mail" in which she conceived computational processing as a "cost" to make "spam" email very expensive, and therefore discourage spammers. In 1997 Adam Back in Britain published "hashcash", a method to use cryptographic hash functions on a network to achieve that "cost" for spammers. Again, the intent was to discourage abuse of email, but Back de facto invented a method to control processes a network with no need for a central authority. Also in 1997 Nick Szabo published the paper "Formalizing and Securing Relationships on Public Networks" that described a distributed trust model.

A mathematical model for "cryptocurrencies" was first described in 1998 by the mysterious Chinese mathematician Wei Dai on the "cypherpunks" forum. His idea was simple: let everybody have a record of every transaction, so that noone can cheat the others. This idea creates an anonymous and distributed system in which the community guarantees "trust", not the central government. Bitcoin shifts the power from the central government to a P2P network. Wei Dai says that he was inspired by "The Crypto Anarchist Manifesto" written in 1992 by Tim May, an early employee at Intel. At the same time, the extropian Nick Szabo proposed a cybercurrency called "bit gold". He conceived a sophisticated way to prevent people from spending twice a cybercurrency, a way to avoid that people can make copies. When we were rehearsing a presentation, the Chinese interpreter Wang Yang, who is usually hired to translate my talks in China, said that the system invented by Szabo sounds like something from a videogame. She was right. Szabo's model is indeed reminiscent of videogames and fantasy movies: there are masters assigning "difficult tasks" to novices; if the novices succeed, they become masters. In 1997 Szabo realized the value of his idea: he described how cryptocurrencies could be used to implement "smart contracts" on the Internet. The "difficult tasks" were a variation on the "proof of work" method employed by anti-spam software since the 1992 to fight email spammers. The "proof of work" method has a long mathematical tradition. It has yielded Hashcash and the family of "secure hash algorithms", which are recognized by the US government.

That's it. Now you have the complete recipe for creating Bitcoin: you need some crazy religious cult, some quasi-gangsters on the Internet, mathematicians who borrow ideas from economics and from videogames, some military software, and a group of individuals who are willing to risk jail.

In 2016 Craig Wright, a computer security expert based in Australia with a PhD in theology, confessed to be the real Satoshi Nakamoto but not everybody is convinced. I don╬Ú╬¸t believe it. First of all, the cypherpunk forum was born in Santa Cruz, south of Silicon Valley (founded by Tim May, a former Intel employee) and everything about bitcoin has happened on that forum. Second, Wright worked with Dave Kleiman, based in Florida, a paraplegic and a computer security expert who died a horrible death, alone and poor, in 2013. Maybe Satoshi Nakamoto is dead, and Wright knows that he is dead╬Ý╬§

Narnia can write a note here: Craig Wright announced that he is Satoshi while the Consensus 2016 conference was being held in New York, but doubts persist.

piero: In my opinion, Blockchain was not designed by software engineers. Software engineers tend to design systems that work very well if everybody follows the rules but they don't think of all the people who will break the rules. For example, the Internet works well for you, but works even better for all the hackers and spammers. Blockchain is an exception: it doesn't work at all for those who break the rules. The way it was conceived doesn't seem to be the way software engineers think. It reflects the thinking of a lawyer or an economist.

Narnia: These "dark nets" are too dark. Don't they help criminals?

piero: P2P can easily be used by criminals, especially when it is combined to a "dark net", a network that protects your identity. In fact, the first major P2P service, Napster, was illegal: it helped users share music, violating the copyrights of the music labels. It lasted only 2 years, during which the music labels lost a lot of money. However, it is still debatable what constitutes a "copyright infringement": if i let you listen to one of my CDs, i am not committing a crime, right? what if i lend you the CD? what if you make a copy of the CD only for your personal use? The lawsuit against Napster scared a lot of people because it went too far: if i take a picture of the cover page of your magazine and post that picture on my Facebook account, i am technically committing the same crime of "copyright infringement". So that was a crime but it probably created more outrage for the punishment than for the crime. Then in 2005 someone was arrested in Hong Kong for "copyright violation" using the P2P software BitTorrent: he uploaded Hollywood films that others were free to download. This man, Nai-ming Chan, was not very smart because he called himself "Big Crook"! Anyway, this was another strange case: he committed a crime, but he didn't make any money. If i steal your wallet, it is obvious that i gained something. If i simply distribute a film for free, i don't gain anything (especially if the receivers are complete strangers like in the case of BitTorrent), so what kind of criminal am i? Yes, Hollywood has lost money, but nobody has gained money, so it is a new kind of "theft" in which there is not transfer of money from the robbed to the robber. In 2013 things got much more serious: the FBI arrested Ross Ulbricht in San Francisco, who had created the "dark net" Silk Road, used by one million people to purchase guns and drugs all over the world using bitcoins. It was embarrassing for the bitcoin community because that dark net contained almost one third of all the bitcoins in the world: almost one third of bitcoins were used by criminals and terrorists! One year later 17 countries collaborated to shut down more than 100 dark nets used by criminals. It was called "Operation Onymous". A dark net that was spared by this operation, Evolution, became the new big online market for drug dealers. Evolution was not closed by the police because the police didn't have the time: in 2016 the founder of Evolution took all the bitcoins of its users and disappeared.

Narnia: The problem is that people are anonymous on Bitcoin...


Actually, no. Each Bitcoin transaction is associated with the digital addresses of the sender and of the receiver. Someone who really wants to find out who you are will find out. That's why in 2014 a Johns Hopkins University professor, Matthew Green, proposed Zerocoin. This is an extension to the blockchain protocol that adds true anonymity to the transactions. In 2016 a "zerocoin" called Zcash was in fact introduced by Zooko Wilcox-O'Hearn. It was a collaboration among Green's group, some people at the MIT and some people in Israel.

My guess is that governments will learn to love the blockchain and smart contracts. Ironically, they may use the blockchain for the exact opposite reason that it was created: every transaction gets recorded, and every contract is self-executed, which means that governments can keep track of all transactions and can tax all transactions and don't even need tax collectors because the tax is collected automatically on the blockchain. Governments will learn to twist blockchain technology so that it becomes a technology of absolute and incorruptible transparency. And, talking of corruption, blockchain can also be used to fight corruption because it contains a record of everything that has happened and a simple algorithm can detect suspicious transactions.

Narnia: What is life in the world of bitcoin?


First you buy bitcoins, and best is probably to buy them at one of the reputable exchange services, like Coinbase in San Francisco and Gemini in New York. Then you should store your bitcoins on a personal wallet. There are software ones, also called "hot wallets" (like Mycelium, Breadwallet, and, and hardware ones. The latter are specialized devices that look like iPods or flash drives: Keepkey, Trezor, Ledger, etc. Then you can spend your bitcoins on websites like that allows you to buy Amazon goods. Transactions are not really anonymous. The owner is anonymous but the transactions are public. You can go to to track transactions. For example, we know exactly which bitcoin users paid for the "Wanna Cry" ransomware of 2017 (those hackers requested payment in bitcoins), and we know that the total was about $48,000. We don't know "who" those people are.

Narnia: You are more interested in the social implications than in the business


To me, Bitcoin proved again the importance that the independents and the military have on new revolutionary ideas in technology. No major corporation and no major venture capitalist thought of it. The universities developed the math but did not see the potential. This kind of ideas can only come from individuals who work outside the "system" or from the military that are fighting a war (a physical war or a cyber-war).

Even before Bitcoin became famous, the success of peer-to-peer models had generated a lot of enthusiasm in the counterculture. Ori Brafman's "Starfish And The Spider" (2007) and Yochai Benkler's "The Wealth of Networks" (2007) publicized the notion of "decentralized autonomous organizations" (DAOs) and Michel Bauwens published the "Peer-to-peer Manifesto" (2008). Bitcoin realized their dreams. Bitcoin is not just a cybercurrency: it is a method to reinvent government bureaucracy without the bureaucrats.

Bitcoin's "blockchain" mechanism is the real revolution. The blockchain technology allows a network of computers to make changes to a global record without the need for a central authority. The blockchain is a ledger shared by all the computers of the network, and its technology makes it impossible to spend the same money twice (no counterfeits). You can use it for the "smart contracts" that Szabo envisioned. In theory, you can create a society in which there is no need for central authorities of trust. Today, trust is guaranteed by something like the national bank (run by the government) or the title company (the agency that certifies who owns a house). Blockchain creates trust through an algorithm. Any form of peer-to-peer contract (whether selling a house or renting a car) can be made safer through blockchain. Smart contracts (which, ultimately, are mathematical formulas) represent patterns of interaction in society. Philosophically speaking, this is a major revolution: every contract in human societies can be reduced to a math problem. Computers had reduced contracts to data stored in a database, but "smart contracts" are more than just the record of an agreement: they include an algorithm that needs to be calculated in order to verify the validity of the contract and that then automatically executes the contract. The smart contract is more than data: it consists of data AND a math problem.

Politically speaking, it is an even bigger revolution. If blockchain is adopted for "smart contracts", what is the function of governments? Today we use police, trials and prisons not only for violent crimes but also for people who violated contracts. If computer algorithms can maintain "order", what is the function of police, justice and prisons? Decentralization had historically meant chaos, but blockchain is a system based on decentralization that actually guarantees order. It sounds like a contradiction, but its technology is basically order enforced through chaos. It is also much more secure than government databased and corporate databases, because the security of a transaction is guaranteed by all the computers in the network. The blockchain technology is much more than a method to manage a virtual currency: it is a digital record keeper that does not require intermediaries/middlemen and cannot be distorted/hijacked.

In 2014 the first wedding via blockchain was celebrated in the USA. I am not sure how if they can ever divorce!

Narnia: Is it really so disruptive or just a five-minute fad?


It is the missing disruption. The world runs on three processes: storage, which is the most ancient; computation, which allows each organization to do something with the data that it has stored; and communication, which allows an organization to carry out transactions with other organizations. The personal computer disrupted computation. The Internet disrupted communications. But nobody had disrupted storage before the blockchain was invented.

Narnia: business related to bitcoin?


Bitcoin mining has become a lucrative activity in its own. The blockchain process basically consists in adding records to a shared public ledger. This process has the fundamental property of being easy to verify but designed to be extremely difficult to execute. This is done on purpose, to deter counterfeiting. Its usefulness and safety come at a price: it is computionally very demanding. If you want to mint bitcoins, you basically need a custom-built computer, capable of solving very complex math problems, linked to Bitcoin's network via high-speed Internet connections. Each "miner" is rewarded with some bitcoins. The computers of miners are ordinary high-performance servers improved with ASICs (application-specific integrated circuits) for bitcoins, known as "bitcoin hash chips".

Avalon (China, 2012, later renamed Canaan Creative) was the first company to manufacture ASIC mining chips. 21 Inc (San Francisco, 2013) introduced an embeddable bitcoin mining chip in 2013 and then the first computer with native hardware and software support for Bitcoin in 2015. In 2015 BitFury (San Francisco, 2011) introduced a "green" ASIC chip capable of delivering a minimum computing power of 100 gigahash per second. Bitcoin mining hardware started popping up all over the world.

Bitcoin is neither the first nor the only cryptocurrency. In 2016 Cryptsy, the largest "altcoin" exchange, listed dozens of them. Some, like Omni/Mastercoin, introduced by JR Willett in 2013, use the same blockchain as bitcoin. Others, like Litecoin (created by former Google engineer Charles Lee in 2011, second for market capitalization in 2015) and Primecoin/PPCoin/Peercoin (all created by an anonymous "Sunny King" in 2012) employed different "proof of work" algorithms. Primecoin was also an example of a cryptocurrency that worked with a proof of work less demanding in computational power, more "green". Another popular cryptocurrency is Ripple, introduced by Vancouver-based Ryan Fugger in 2012: it is unusual because it is based on a trust graph, not a blockchain.

Then there is the usual avalanche of startups. Andrew Cook founded his Cook Investment Firm in Chile in 2011, when he was 20 years old, and today it is the world's largest bitcoin investment fund. CoinBase, founded in San Francisco in 2012, offers a bitcoin marketplace and a platform for bitcoin payments. Epiphyte (2013) offers banking for crypto-currencies. Circle (2013) allows users to send bitcoins to friends and family. NextBank (2015) aims to become the first all-bitcoin institution. Quickcoin (2014) integrates a bitcoin wallet with Facebook to send bitcoins as messages. BitShares (2013) offers financial services (including exchange and banking) on a blockchain. In 2016 CoinCloud, a trader of bitcoin for cash, installed a "bitcoin machine teller" in Menlo Park.

SolarCoin, a nonprofit organization founded in 2014 by Nick Gogerty, is a digital currency that rewards solar electricity generation.

And the blockchain is already being used for applications outside fintech. For example, Gems, launched in 2014 by Daniel Peled in Israel, uses the bitcoin blockchain to implement a social messenger (therefore a "decentralized" social messenger). Skuchain, founded in 2014 in Mountain View by Srinivasan Sriram, has applied the blockchain to the supply chain of manufacturing. Proof of Existence (2014), Factom (Texas, 2014) and Empowered Law (Chicago, 2015) offer notary Service to register documents. MedVault wants to record medical information on the bitcoin blockchain, and Factom partnered with medical-services provider HealthNautica to do the same thing.

The blockchain can also be used for "Initial Coin Offerings" (ICOs) to invest in new projects. When you buy the digital currency of an ICO, It is not the same as buying a startup's share after an IPO because the digital currency does not give you voting power on the project: it only gives you a share of the profit. You can use this system to create a venture capital firm, like Blockchain Capital did; or to fund an incubator for blockchain projects, like Adel did; but it can really be any project. Storj, for example, allows computer users to buy and sell storage: when you offer storage on your computer to others, you earn storj coins, and when you need storage on other people's computer you have to pay them storj coins.

Monegraph and Ascribe deal with intellectual property. The blockchain can help artists and writers protect their work from copyright infringement.

Narnia: Can blockchain solve the problem of music piracy?


Yes, but it can do even more. There are startups like PeerTracks that removes the music industry from the loop: artists can sell directly to consumers, and consumers pay directly the artists. You pay with "tokens" whose value depends on "supply and demand". If the artist is unknown, you can buy tokens for her music very cheap. Some day those tokens might be worth a fortune. Bittunes is a platform to to share and trade music, also based on blockchain, so nobody can cheat and the price is determined algorithmically. Ujo Music wants to make it easy for anyone to license music. Today it is very difficult for ordinary people like us to find out who "owns" the rights on some song or composition. If you are, for example, a filmmaker, it is up to you to find out who is the music publisher who owns the rights on a song that you want to use for your documentary. Sometimes we "cheat" the system simply because we don't know whom we should pay. The artist could have made some money, but it is just too difficult to find out how to pay. Imagine a store where you can grab a good and take it home but it is difficult to find the cashier in the store. That is the way the music publishing industry is (dis)organized today. At one point the music publishers the Global Repertoire Database (GRD), but it failed. Blockchain can assign a unique id to each song, and that id is eternal. It will make it easy to deliver royalties to artists whenever their music is used.

Narnia: what is next in smart contracts?


The blockchain technology is much more than a method to manage a virtual currency: it is a digital record keeper that does not require intermediaries/middlemen and cannot be distorted/hijacked. A smart contract is a program stored on the blockchain that can automatically execute the terms of a contract. With smart contracts, auto-executing code replaces the legal process of enforcing a contract. Smart contracts make the legal system redundant. In 2013 a Russian who lives in Toronto, Vitalik Buterin, launched Ethereum, which superficially looks like a platform to develop Bitcoin-like cybercurrencies but in reality offers a broader interpretation of what a digital currency is. Ethereum is a platform that, in theory, allows its users to execute any kind of secure service as a digital contract. Ethereum is an "app coin". Codius, invented in 2014 by Stefan Thomas and Evan Schwartz in San Francisco, is another general platform for smart contracts. Blockchain technology can be used to track the history of all sorts of information and securely: nobody can tamper with information encoded in the blockchain. Any kind of peer-to-peer contract can be implemented as a (secure and unbreakable) blockchain application. And removing the middleman (the notary public, the home-ownership registration company, the car registration office, etc) can save money and time in almost every sector.

You completely change society when you reduce every contract in human society to a math problem. Today it takes a specialist to verify a contract and usually the proof is some kind of official (and expensive) certificate. In a future driven by blockchain, we will simply perform a search operation, just like today we search with Google or Baidu for some information, and we will simply email the "certificate" that we found with that search. Sorry for the attorneys, but there will be no need for filing patents or wills. And note that the technology is almost entirely open-source: anybody can contribute to progress in blockchain technology, and no company owns the rights on blockchain.

The future of bitcoin is smart contracts, the future of smart contracts is... almost infinite. Here is why. Ethereum doesn't store massive data within the blockchain itself. It uses an additional component (originally Swarm, later cancelled, now IPFS). Ethereum consists of three main blocks: contracts (the "decentralized logic"), IPFS (the "decentralized storage") and Whisper (a "decentralized" messaging system, still under development). IPFS stands for InterPlanetary File System, invented by Juan Benet in 2015. All data on IPFS are perpetually recorded online via P2P distribution. IPFS provides an encrypted address for each piece of information. The level of security if very high: a piece of information in IPFS cannot be manipulated. So far it sounds just like boring database management but in practice... the IPFS protocol can replace HTTP, the protocol that carries the entire Internet! It doesn't end here. Ethereum is "Turing-complete", a technical term that means: it can implement any program. Ethereum can become the "world computer" of the future...

Narnia: are there drawbacks to the adoption of the blockchain technology?


First of all, you have to trust the network, and i don't think that big financial institutions are willing to entrust their billions of dollars to a network of anonymous users. The biggest drawback is technical though: because of the complexity of the math, today the blockchain can only perform about seven transactions per second, and bitcoin transactions take an average of ten minutes to be confirmed. Mastercard and Visa perform thousands of transactions per second. In 2014 former Google engineer Mike Hearn and Gavin Andresen, a Silicon Graphics veteran and one of the original founders of the Bitcoin Foundation in 2012, proposed an alternative platform for Bitcoin, Bitcoin XT, to fix limitations of the Bitcoin transactional system. At the 2015 conference this became an official schism: there are now two main Bitcoin movements, one is the traditional one and one is the Bitcoin XT movement.

In August 2017, when Bitcoin was collectively valued at $47 billion, a new split took place. The original blockchain can only have one megabyte of data added to it every 10 minutes. Bitcoin Cash, mainly implemented by Amaury Sechet, uses blocks that can be as large as eight megabytes. Bitcoin Cash was officially born when block number 478559 was mined. The opponents of the split argued that a larger block made mining even more problematic, requiring more powerful hardware, and therefore helping usher in monopolies. There was already a huge environmental cost in mining bitcoins: in 2017 bitcoin mining consumed about one billion dollars a year in electricity.

There are two fundamental solution to the limitations of the blockchain . The first one is to increase the block size, and that was the Bitcoin XT fork; but this means that all the computers on the bitcoin network must install a new version at the same time! The other solution is to keep the same block size (1 megabyte) but to increase the volume of transactions fitting into a block: that was the so-called "segregated witness" (SegWit) optimization invented by Pieter Wuille in 2015 and adopted in 2016. In 2017 Jeff Garzik proposed another solution, the "Segwit2x fork": increase the block size to two megabytes in addition to SegWit optimization.

There are also concerns about the independence of Bitcoin. Sure: Bitcoin is run by the crowd. But some factors can make it very vulnerable to government decisions. For example, in 2017 Bitcoin de facto depends on China because the majority of bitcoin miners are located in China. The bitcoin miners in China are basically laundering money: they spend Chinese currency to pay for cheap Chinese electricity that allows them to make bitcoins that can be turned into dollars abroad. In September 2017 the Chinese government banned "initial coin offerings". What if the Chinese government decides to crack down on bitcoin mining? What happens to Bitcoin if overnight most of the miners of the world go out of business?

Narnia: Is this confusion coming towards a stabilizing situation?


The opposite: new blockchain technologies emerge every year.

Dash, which in 2014 was originally named XCoin by his creator Evan Duffield, is faster than Bitcoin and has lower fees than Bitcoin. Dash was innovative in many ways. First of all, it introduced a second-tier network ("masternodes"): only 45% of the block rewards go to "miners", 45% go to the masternodes, and 10% is taken as a sort of tax to fund the budget. That budget is the second and major innovation. Dash was born out of frustration that no decision was easy within the Bitcoin community. Dash was designed to have built-in governance: masternodes can vote and take decisions quickly. Therefore in August 2015 Dash introduced the first decentralized governance system, the Dash Budget System. In January 2016 the masternodes voted quickly to extend the size of the block to 2 megabytes, something that the Bitcoin community never agreed to do. (There are even plans to increase the Dash blocksize to 400 megabytes). In 2017 Dash started a collaboration with Arizona State University, the "Blockchain Research Lab".

In November 2013 a person known only as BCNext launched NXT, another innovative currency: it uses a "proof of stake" method instead of the "proof of work" method employed by Bitcoin. NXT has no mining, and this makes it easier to build financial applications.

In March 2015 Japanese hackers launched NEM, which is almost a fork of NXT. NEM, whose currency is XEM, uses a "proof of importance" method: it assigns an importance score to every account on its blockchain, and it rewards accounts proportionally to how actively participate. Instead of "mining", NEM has "harvesting": it still results in adding transactions to the blockchain in exchange for a financial reward, but this time the "importance" of the participant makes a difference. Other innovations include: multisignature accounts, encrypted messaging, and especially the Eigentrust reputation system. The EigenTrust algorithm was developed in 2015 at Stanford by Sep Kamvar, Mario Schlosser and Hector Garcia-Molina. What NEM loses in de-centralisation it gains in other dimensions. Since the "proof of importance" method was the PhD thesis of Makoto Takemiya, we thought that Takemiya was the founder, and he behaved like he was, but then the other founders expelled Takemiya, who went on to found the startup Soramitsu in 2016 that then won a contract with a central bank in Asia.

Governance is also the reason that Tezos was launched in 2017 by Arthur and Kathleen Breitman (who collectively used the pseudonym LM Goodman when they wrote the white paper in 2014). Texos introduces democracy in the blockchain: your voting power power is proportional to the tokens that you hold. It launched with a delegated proof-of-stake algorithm but even that can be submitted to a democratic vote.

Managing a blockchain is not trivial so now some companies are beginning to offer "blockchain-as-a-service": Azure by Microsoft, Ardor by Jelurida, founded by Petko Petkov (a core developer of NXT) and Lior Yaffe, and Stratis, founded in 2016 in Philadelphia.

None of these coins is well suited for micro-transactions. A Bitcoin transaction doesn't make sense if the amount involved is very small. Therefore a group of hackers created Iota, which is basically a lightweight version of Bitcoin designed for micro-transactions. However, Iota is significantly different from Bitcoin and all the blockchain technologies because it uses a "directed acyclic graph" (or DAG), known as a "tangle", instead of a blockchain. The white paper of the tangle was written by Serguei Popov but Iota's founders are probably many.

The DAG was also used in Ethereum for its "proof of work" algorithm: a DAG is generated for each "epoch" (every 30,000 blocks) according to a complex algorithm that combines Vitalik Buterin's Dagger algorithm and Thaddeus Dryja's Hashimoto algorithm.

In 2015 Sergio Demian Lerner launched DagCoin, another cryptocurrency that replaces blocks with DAGs. Its main innovation is that each user that transacts becomes automatically a miner because each transaction confirms one or more previous transactions.

There are so many variations, all of them introduced in less than five years, that the expression "blockchain technology" has already become obsolete. Now it is better to talk about "distributed ledger technology" or DLT. The only thing that they have in common is that all DLT systems provide an immutable record of all transactions.

Narnia: do you think interest in blockchain technology will fade soon?


In just the first four months of 2016 there are Blockchain conferences scheduled in Hong Kong, Miami, India, London, Copenhagen, New York, Amsterdam, Washington, South Africa, Belgium, Moscow, Australia and the big one in San Francisco,... I suspect that we have just seen the beginning of it.

We really have to separate bitcoin and blockchain. Bitcoin is a virtual currency that has no owner. It is struggling to become a mainstream form of money because we contradict ourselves: we like the fact that there is no "central bank" but at the same time we don't believe in its future because... there is no central bank. Governments obviously don't like bitcoin (and virtual currencies in general) because transactions in bitcoins avoid taxes (and can easily be used for criminal activities). My guess is that eventually the governments of developed countries will find a use for bitcoin (or some variation of bitcoin) when they find a way to tax bitcoin transactions. There is also a general feeling that bitcoin could be useful in unstable countries where the government is weak or the local currency is not trusted by the people. If a country with these problems has a population equipped with smartphones, it would make sense that people trust bitcoin better than their country's currency.

Bitcoin may rise or decline, but, regardless, the blockchain industry is vibrant. This phenomenon is no longer about a virtual currency. This is potentially a revolution in the way society works. I am confident that the technical limitations of blockchain will be solved. In fact, there are already multiple proposals. And i am confident that governments will eventually appreciate the benefits of using a blockchain (or some modified version of blockchain technology) to record transactions and getting rid of unnecessary bureaucracy (that often translates into corruption and bribes). The resistance to adopting blockchain for recording transactions will be more conceptual than technical. Ultimately, the blockchain is a database, and it sounds weird that the entire world will work on just one database. We will probably end up with different blockchains, and then a way to make them communicate.

In 2016 the Linux Foundation started the Hyperledger Project to advance blockchain technology. Read the list of the companies that have joined this project: IBM, Accenture, Intel, Fujitsu, Hitachi, ...

Within the blockchain industry, there is a lot of interest for Ethereum, which is rapidly becoming the most interesting blockchain platform. The critics say that Ethereum, is not designed for distributed computing. Ethereum is designed for consensus. The blockchain was designed to avoid cheating: it was not designed to be the backend of a distributed system. This is all true, but Ethereum was born just a few years ago. The open-source Ethereum community has time to fix these problems. Meanwhile, Consensus Systems (ConsenSys), founded by Martin Koeppelmann and Joseph Lubin in New York in 2014, provides a platform to build Custom "decentralized applications" ("dapps") for blockchain ecosystems on top of Ethereum. There are already "dapps" that people can use, like Spritzle/HitFin, an Ethereum-based app for trading financial derivatives.

Ethereum is one of the so-called "Bitcoin 2.0 technologies" for developing decentralized applications ("dapps"): Ethereum, Counterparty, Maidsafe, Rootstock, Tauchain... The Counterparty platform (created in 2014 by Chris DeRose) is like Ethereum but it uses the Bitcoin blockchain. The platform includes a protocol that allowes Counterparty nodes to communicate with each other via the Bitcoin blockchain and a native currency (XCP). Swarm, formed by Joel Dietz in 2014 in Palo Alto, is an incubator of Counterparty projects. Storj, formed in 2014 by Shawn Wilkinson in Georgia, is a distributed peer-to-peer encrypted cloud storage (similar to Dropbox but distributed, like Swarm/IPFS but running on Counterparty instead of Ethereum)

There has been much criticism of Ethereum (after its DAO was hacked) but also some success stories. For example, in 2017 a branch of United Nations used Ethereum to help the Syrian refugees in Jordan.

There are other platforms for easy decentralization of applications: Eris was founded in 2014 in New York by two lawyers, and markets itself as a "universal blockchain platform" because it can clone Ethereum, Bitcoin and many other blockchains. They think that the blockchain is just like a database, and each user should have its own. Etherparty, founded in 2015 in Los Angeles, and based on Ethereum, is cloud-based: no programming required for developing dapps.

Each "coin" is an economy of scale. For example, Filecoin, a blockchain project created by Protocol Labs in San Francisco (founded in 2014, by Juan Benet, inventor of IPFS), allows one to earn filecoins for hosting files: many of our devices have unused storage, and you can become a Filecoin miner (rewarded with filecoins) if you offer that storage to others.

The smart contract is the simplest form of decentralized automation. A decentralized application is a smart contract with an unlimited number of participants. By definition, these are applications that have no server: the blockchain (which is distributed all over the network) serves as the "backend". There is no centralized intermediary like in the business applications that run on Oracle or SAP backends.

One important precursor of the decentralized world was MaidSafe, invented in 2006 in Britain by David Irvine. It used concepts of volunteer-computing to decentralize the Internet: the storage came from disk space "donated" by volunteers on the Internet (most of the hard-disk space that exists on all the personal computers of the world is not used) connected via peer-to-peer protocols. No central servers, no central databases, and lots of encryption to protect the data. The goal was to build "a safe Internet". The name means: MAID (Massive Array of Independent Disks) SAFE (Secure Access For Everyone). When you store data on MaidSafe, the data are broken down into tiny chunks, heavily encrypted, and then randomly distributed around the world. Only the owner can reassemble and decrypt these chunks MaidSafe does not use blockchain, it uses a different way to provide security, but the general concept is very similar. The difference is that transactions are not stored in a blockchain: there are literally no traces left of a transaction, except at the two parties involved. MaidSafe's network is based on SafeNet: a super-secure platform that decentralizes all the services currently available on the Internet (messaging, email, social networks, data storage, video conferencing, etc). SafeNet makes the Internet work without any need for servers and databases. The beauty of the SafeNet is that a user can log into any computer of the network and the computer becomes "her" computer: her data, her applications, her profile. When she logs out, no trace of her work is left behind. The fans of MaidSafe see it as the final solution to the problems of identity theft and surveillance. Governments probably see it as a nightmare, because it would also protect criminals and terrorists.

Narnia: Smart contracts can really lead to a new kind of organization, the "DAO", "decentralized autonomous organizations", that exists outside a nation?


DAOs already exist. In 2016 a German startup,, created a DAO that can act as a venture capitalist, funding startups (like Slock itself). Within a few months it collected the equivalent of $150 million on Ethereum, thereby becoming the largest crowdfunded project ever. The investors will have the power to vote on each startup that wants money.

Since the invention of the state, society can be defined by one property: contracts are legally binding. This actually means all sorts of imperfection in the system. The interpretation of the law is flexible. A judge in California and a judge in Arizona can read the same law in two different ways. A trial is often decided by the rhetorical power of the defense attorney, regardless of whether the defendant is guilty or innocent. A contract based on the blockchain is not legally binding, it is technologically-binding. Software inexorably executes the contract. The auto-executing software replaces lawyers, courtrooms, judges and prisons. There is no need for a legal system if the world moves to smart contracts. So you can use smart contracts to build DAOs, "decentralized autonomous organizations". A DAO is an unmanned organization (no office, no staff) that runs under the control of an incorruptible algorithm. The algorithm is, in turn, implemented in an open-source software that can be "audited" (verified, controlled) publicly. DAOs are autonomous; DAOs are self-enforcing; DAOs have no central control.

Bitnation, started in 2014 by Susanne Tarkowski Tempelhof, is a platform to create DAOs. Her motto is "Create Your Own Nation In 140 Lines Of Code". A DAO provides the same services that traditional governments provide, but in a decentralized way: there is nobody in control of those services. After "Do It Yourself" software and "Do It Yourself" biotech, now we have D.I.Y. governments.

Decentralization has historically meant chaos, but blockchain is a system based on decentralization that actually guarantees order. It sounds like a contradiction, but its technology is basically order enforced through chaos. It is also much more secure than government databased and corporate databases, becuse the security of a transaction is guaranteed by all the computers in the network.

Things are happening so fast that there is a new term and a new concept every month. Now the world of DAOs is also talking about the "Distributed Collaborative Organization". The term was introduced in 2014 by Primavera De Filippi (Harvard University) and Houman Shadab (New York Law of School): they proposed a way to integrate blockchain-based distributed organizations (DAOs) with the existing legal system.

Narnia: What is the status of online fintech in general?


Its success depends on how much we save by investing online instead of investing by phone or at physical branches. In the USA this is a huge market: every year the investors in the USA pay $600 billion of fees to banks and financial institutions. That's twice the GDP of Israel.

One reason for the success of online fintech was the Great Recession of 2008-11. Small businesses were not able to get loans from traditional banks, and this created an opportunity for alternative banks and for crowd-based (P2P) financing. The first beneficiaries were non-bank lenders such as OnDeck (New York, 2007), Kabbage (Atlanta, 2009) and Funding Circle (London, 2010).

P2P is again the protagonist here. Two companies founded in 2006 in San Francisco pioneered peer-to-peer (social) lending: Prosper and LendingClub, both providing marketplaces for lending that match those who want to borrow money with people who want to lend money. They represent the marriage of fintech, P2P and the sharing economy.

Automated financial advisory has been legitimized by the success of Betterment, founded in 2008 in New York, and Personal Capital, founded in 2009 in Redwood City. It is not surprising that financial advisors have been replaced by machines because they were already using machines. The financial investments are largely based on algorithms. It was just a matter of making those algorithms available to the public directly. Now they are competiting on algorithms.

Fintech is also attacking the venture capitalists. There are platforms that collect money from individuals to fund startups. This was pioneered by EquityNet (founded in Arizona in 2005), that offered a social network for investors and entrepreneurs, and in 2011 two startups for equity crowdfunding opened in San Francisco: CircleU and Wefunder. but investment by random individuals in private businesses was not legal in the USA until very recently, so it has not taken off. England, instead, has success stories like Crowdcube (2011) and Seedrs (2012), Israel became a major center of fintech in the 2010s thanks to its strong credentials in cybersecurity, big data and artificial intelligence. Israel lives in a dangerous place, surrounded by hostile neighbors and two civil wars. By coincidence, the military technology that Israel has developed to defend itself, i.e. for "security", is almost exactly what you need in fintech. In fact, several of Israel's fintech startups had their roots in 8200, the elite agency of the Israeli army that spies the world and makes sure nobody spies Israel. TechCrunch estimates that in 2015 there were more than 300 cybersecurity companies operating in Israel, accounting for about 10% of the global market, and more than 400 fintech startups on the Internet offering services for payments, crowdfunding, lending, insurance, wealth management, fraud detection, etc. and many were already experimenting with blockchain technology. Major Western banks established research labs in Israel. For example, in 2013 Citibank opened its Citi Innovation Lab in Tel Aviv, not in Silicon Valley.

Same story for peer-to-peer insurance platforms: Berlin-based Friendsurance (2010) and London-based Guevara (2014) came before New York-based Lemonade (2015). If you want to meet the innovators of fintech, you have to travel somewhere else.

The USA is not the best place for financial experiments. Britain is far ahead of the USA in fintech because of the different laws. When the stock market crashed in 1929, a lot of ordinary families lost money, so the USA came up with specific rules and regulations to protect ordinary investors. In those days there were no startups. When the world of startups exploded in the 1990s, the USA was unprepared: it had rules that made it illegal for ordinary people to invest in startups. In Britain, instead, there were just ethical principles. In the 1990s it was easier for Britain to introduce laws specifically designed for the age of the Internet. For example, equity crowdfunding has been fully legalized in the USA only in 2015. To this day, the USA is not a friendly country for financial innovation because so many laws protect the individual, i.e. the government intentionally discourages individuals from speculation. The USA doesn't want another crisis like 1929 or 2008 when millions of citizens lose their money. Any financial innovation is carefully scrutinized by the US government. Only biotech is more scrutinized than fintech. So it is not surprising that Britain and Israel are ahead of the USA.

Narnia: is Wall Street losing its power?


No, many of the startups in this field are coming from New York. Wall Street has the most important know-how. London too. Hong Kong too. The traditional centers of investment have the brains that are needed to come up with the algorithms of fintech. The new place is perhaps Israel.

In 2017 not only Bitcoin passed the landmark of $10,000 but Wall Street entered the picture. Australian Stock Exchange became the first global market to use the blockchain technology. The contractor was Digital Asset Holdings, founded in 2014 in New York by Sunil Hirani and Don Wilson. Hirani had previously founded the financial firms Creditex (1999), sold to InterContinentalExchange in 2008 for more than half a billion dollars, and TrueEX (2010). In 2015 Digital Asset hired as CEO another veteran of Wall Street, Blythe Masters, who was at J.P.Morgan Chase for 27 years. That's when the spree of acquisitions began: in 2015 they acquired Hyper, founded in 2014 by Daniel Feichtinger and Dan O'Prey in San Francisco, and Bits of Proof, founded in Hungary by Tamas Blummer, and in 2016 they acquired another San Francisco startup,, founded in 2015 by Peter Shiau and others, and Elevance Digital Finance, founded in Switzerland by Vincent Peiker in 2014.

Narnia: which technology will be important for the future of fintech?


Economies depend too much on natural and human factors that are impossible to predict. Imagine the impact of the Iran nuclear deal on the price of oil. If you want to invest in South Korea, you have to remember that it has a crazy neighbor in the north with nuclear weapons. Peace in Congo would trigger an economic boom in one of the richest countries of the world ("rich" in minerals). A major earthquake can turn California into a disaster area. Etc. Which technology can predict these events? Even if you can predict them, it is difficult to calculate the effects. That's why people (both rich people and ordinary people) lose money in the financial world: There is always something unpredictable in the news that has a very powerful effect on the markets.

It is also unpredictable which technology succeeds. Billpoint started two years before PayPal, offering the same kind of person-to-person service and it was backed by eBay, Wells Fargo and Visa (what else do you want in order to succeed? the biggest online marketplace, one of the biggest banks and one of the biggest credit-card companies), but nobody remembers them. In 2002 Pay By Touch had a technology that allowed users to pay with a swipe of their finger on a biometric sensor. Pay By Touch went out of business in 2007. You will not find an easy explanation for why it failed. Today we have fingerprint scanning on Apple and Samsung smartphones. Fujitsu and ZTE are about to introduce retina scanning. Why did Pay By Touch fail? When it comes to financial applications, there are just too many human factors involved, and it is really difficult to predict what will succeed.

Fintech has to continue tapping into the power of the "crowd". The financial world used to be a fortress open only to very rich people. Ordinary people were only allowed to give their money or borrow money, both actions that make the financial institutions rich. Ordinary people had no way to benefit from the process itself, from the investment that the bank makes with your money. Things have changed in the age of the "crowd". The three big crowdfunding platforms (Kickstarter, Indiegogo, and GoFundMe) are already funding more innovation than all venture capitalists combined. I don't think that the same will happen any time soon to lending and insurance, because of all the regulations that are involved, but, thanks to P2P technology, for the first time there is a chance for the "crowd" to dispossess the big financial institutions. Capitalism's future is not the capitalist but the common person. P2P is the most important revolution in fintech since the invention of the credit card.

This interview was complemented with these interviews:
  • Melanie Swan, founder of the Institute for Blockchain Studies and of DIYgenomics

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  • Piero Scaruffi | Contact