About a year ago, just after Mt. Gox had their funds seized by the US government, I set out on a mission to build a decentralized exchange. This lead me down a path that I could never had predicted at the start. What I have learned along the way has completely changed how I view the industry. Today I would like to share my journey.
Like everyone else in this industry I found it extremely hard to communicate the complex ideas behind my exchange. I spent months just trying to explain it to my friends, family, and business partners. I usually started by trying to explain Bitcoin.What is Bitcoin?
How many of you have tried to explain Bitcoin to someone???
It normally goes something like this:
“Bitcoin is the first decentralized digital currency, they are digital coins that are sent across the internet. Anyone can mine them into existence using their computer, but the total supply is mathematically limited…”
If they don’t just nod their head and pretend to understand you, you usually get some combination of the following objections depending upon their background:
“It is no different than fiat”, “It isn’t backed by anything”, “it has no intrinsic value”, “it is too volatile to be money”, “it is a ponzi scheme”, “it waists to much electricity to be practical”… and if you are talking to a professional economist they will claim it can never work because a “deflationary currency will wreck the economy and result in hoarding”. Monetary Theory is a Religion
Having talked with people from all different backgrounds I can assure you that when it comes to monetary policy and the theory of money it is almost a religion. Everyone thinks they understand money and from this builds objections that are insurmountable.
Did you ever stop to think about why there is so much confusion over the nature of money? The entire system depends upon the masses not understanding the nature of money. Henry Ford once said:
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
The general population has been intentionally confused with a million conflicting ideas. If people don’t even agree on what money is, why it has value, or what properties are desirable in a currency, how in the world are we going to get them to understand Bitcoin or the new technologies that go beyond bitcoin?The birth of the DAC
Back in September I was attempting to describe my decentralized exchange to my father and came up with a new metaphor which I called a Decentralized Autonomous Company. I explained the coins can be viewed as shares, the miners as employees or contractors and the transaction fees are revenue. From this starting point I could explain how our decentralized bank and exchange works in every day language. After all banks are just companies that lend dollars into existence based upon collateral and execute margin calls if the collateral loses too much value. While your current bank uses your house as collateral, our decentralized exchange uses shares in the bank itself as collateral. With this explanation everything became crystal clear. My father knew how banks work and could see that almost anything could be used as collateral without breaking the business model.
This insight was just as much a breakthrough for myself as it was for my father. For the first time I had a mental framework and a metaphor that allowed me to intuitively reason about design decisions. I concluded that Bitcoin is not money, but a company that has issued digital bearer shares and which its shareholders were marketing these shares as money. What something is vs how it is used
Anything can be used as money or a currency, but it use as money or a currency does not define what it is. Gold does not cease to be a metal just because someone calls it money. Bank notes don’t cease to be bearer bonds just because they are called legal tender and Bitcoin does not cease to be a digital bearer share just because someone calls them coins and suggests they be used as money.
Once we can separate what something is from what it is being used for we can gain all kinds of clarity that for the first time allowed me to break through the walls of skepticism from almost everyone. I recently visited an old co-worker named Dave. Dave was hugely skeptical of bit coin because he understood it to be deflationary and saw mining as unsustainable. When I last saw him he had no clue what it was I was leaving my job to go build.
I asked him if I could try out my latest explanation on him and so I did. I explained that we build companies that encode their business model in software. These companies issue shares that are tracked in a global transaction ledger that is cryptographically and irreversibly secured by the votes of shareholders. To earn a profit these companies charge fees for their services which can vary from transaction processing, to inactivity fees, lottery tickets, or domain name sales. These fees are then used to perform a stock buyback like Apple recently did. Stock buybacks are like dividends in that they transfer value to the shareholders proportional to their stake.
His initial response was, “Oh, I like that! Now I understand what you are doing, but you still have the problem that it would be extremely deflationary!” At which point I interrupted him so we could avoid going down the monetary theory rathole and reminded him, “these are shares in companies where the shareholders want to increase the equity-per-share”. Immediately his objection was stopped in its tracks because Dave, like most people, understand stocks and what gives them value. After all the powers that be have not spent any effort attempting to confuse the issue of stocks. For the first time, after hours of debates by the water cooler Dave and I were on the same page and all it took was a 3 minute explanation and a different metaphor. What about the Regulators?
Not everyone likes the company metaphor for describing Bitcoin, preferring instead to simply call them decentralized applications. David Johnston, whom I have much respect for, has made the argument that this metaphor should be avoided for two reasons:
In his white paper on Decentralized Applications he claims it carries with it unnecessary preconceptions. For instance, a corporation is established in a jurisdiction, it has shares, a CEO, employees, etc. DAs, like Bitcoin, have none of these characteristics. In addition, the narrative is very important for the way DAs are perceived by various nations and jurisdictions.
If you attempt to describe these things to a lawyer I am sure they are freaking out about all of the regulation surrounding shares, companies, etc. One does not simply avoid regulation by changing the words you use. But who do you think you are fooling attempting to use a jedi-mind-trick with the regulators? After all the IRS just gave guidance that Bitcoin should be treated the same as stock, and for once in my life I agree with the IRS.Bitcoin as a Company
I would like to use this company metaphor to analyze Bitcoin and see what we can learn. At the the highest level we can see that bit coins are shares, that miners are subcontractors which are paid in shares, and that Bitcoin earns revenue from transaction fees. As a company Bitcoin is paying out more in security costs than it is earning in revenue. Using standard accounting the issuance of new shares to pay for services is viewed as an expense. Bitcoin is currently operating at a $500 million / year loss as income is far less than expenses.
What about the claim that Bitcoin doesn’t have a board of directors or CEO? Fist we must understand that Bitcoin has two classes of stock, voting shares, and capital shares. As a capital-shareholder you have no say over the direction the network goes. Hashing power are the voting shares and these voting shares are currently delegated to a hand full of mining pools. The heads of these mining pools are effectively the board of directors of Bitcoin. They have the ability to resolve any hard fork and thus decide the direction the company will go.
As companies go, the articles of incorporation of Bitcoin are very strict and so the board members have relatively little power on the surface of things. On the other hand, the board is self-appointed to be whomever is willing to consume the most resources for the least shares. This self-appointed board has the ability to disrupt any and all hard-forks of Bitcoin that disagree with the direction they take the company. The fact of the matter is that people will follow the hash power or dump their capital-shares if they do not like the direction. Proof-of-work becomes a barrier to entry that keeps everyone else out of the sha256 company space.
Improving upon Bitcoin
So how valuable is this metaphor for understanding Bitcoin? How many of you now see some obvious ways to improve Bitcoin? As a decentralized application, Bitcoin’s design choices appear to work, but as a company it is clearly in the red and controlled by a self-appointed elite.
At bitshares.org we are building many different decentralized companies that improve upon Bitcoin in the only way that really matters to the market: we make Bitcoin profitable. We do this by minimizing expenses, maximizing utility, and returning power to the shareholders. We employ a number of techniques to minimize expenses, for starters we removed mining from the network entirely. Almost all transaction fees are destroyed, this acts like a stock buyback and increases the equity-per-share (and thus value) of the remaining shares. Next we return control to the shareholders which irreversibly ratify the continuously checkpoint the block chain as they make their regular transactions. Finally we replace the hash-power-appointed mining pool operator board, with a shareholder approved board which takes turns producing the next block which is then ratified by all individual shareholders over time.
With these basic changes we now have a frame work where we can build dozens of different businesses based upon proven business models. Everything from banking, to insurance, to domain name registration, lottery, charity, voting, and bingo can now be implemented in far more efficient and trustworthy ways.