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The Blockchain: What it is & Why It Matters

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Originally posted by the Brookings Institution.  Link is here.

The Blockchain: What it is & Why It Matters

By Mohit Kaushal & Sheel Tyle

Chances are that you’ve heard of bitcoin, the digital currency that many predict will revolutionize payments – or prove to be a massive fraud – depending on what you read. Bitcoin is an application that runs on the Blockchain, which is ultimately a more interesting and profound innovation.

The Blockchain is a secure transaction ledger database that is shared by all parties participating in an established, distributed network of computers. It records and stores every transaction that occurs in the network, essentially eliminating the need for “trusted” third parties such as payment processors. Blockchain proponents often describe the innovation as a “transfer of trust in a trustless world,” referring to the fact that the entities participating in a transaction are not necessarily known to each other yet they exchange value with surety and no third-party validation. For this reason, the Blockchain is a potential game changer.

In 2008, Satoshi Nakamoto, the pseudonymous person or group of people credited with developing bitcoin, released a whitepaper describing the software protocol. Since then, the network has grown and bitcoin
has become a recognized unit of value around the globe. Bitcoin is extremely important because it provides a mechanism for accessing the Blockchain – but it’s not the only application that can leverage the platform.

Bitcoin has also been on the receiving end of some bad press, such as around the collapse of the Mt. Gox bitcoin exchange earlier last year. The Mt. Gox story is not necessarily an indictment of bitcoin. For the purposes of this post, simply remember this: bitcoin is just a mechanism for transacting on the Blockchain and the Blockchain is the key innovation.

The Blockchain: Trustworthy Transactions in a Trustless World

The Blockchain enables the anonymous exchange of digital assets, such as bitcoin, but it is not technically dependent on bitcoin. The elegance of the Blockchain is that it obviates the need for a central authority to verify trust and the transfer of value. It transfers power and control from large entities to the many, enabling safe, fast, cheaper transactions despite the fact that we may not know the entities we are dealing with.

The mechanics of the Blockchain are novel and highly disruptive. As people transact in a Blockchain ecosystem, a public record of all transactions is automatically created. Computers verify each transaction with sophisticated algorithms to confirm the transfer of value and create a historical ledger of all activity. The computers that form the network that are processing the transactions are located throughout the world and importantly are not owned or controlled by any single entity. The process is real-time, and much more secure than relying on a central authority to verify a transaction.

There are many analogous concepts both ancient and modern. Technology has and will continue to transfer power and control from central authorities and distribute them to the masses. For example, time used to be determined and communicated by large clock towers that were expensive to build and maintain. Engineering innovations ultimately decentralized the quantification of time to the individual. Likewise, WhatsApp, a popular cross platform messaging app, cut the transaction cost of sending messages globally – and cut profits for the carriers. The central authority (phone carriers) lost to the application (WhatsApp) built on a decentralized network (i.e. the Internet).

Similarly, third parties that currently verify transactions (the central authority) stand to lose against the Blockchain (the decentralized network). As such, the Blockchain essentially disintermediates these third-party transaction verifiers: auditors, legal services, payment processors, brokerages and other similar organizations.

While you may not be convinced that exchanging bitcoin is an invaluable service, there are many other examples of value transfer that are critical – and currently very slow and expensive. Consider the exchange of property: numerous intermediaries are currently involved in this process, such as a third-party escrow service that works for both parties to ensure a smooth transfer. The escrow service, like other services built solely on trust and verification, collect fees that would be mitigated by performing the transaction on the Blockchain – as would wire transfer fees, third party financial auditing, contract execution, etc.

The use case of the Blockchain enabling a decentralized currency exchange – such as bitcoin – is well defined and will likely be the dominant use case near term, however there are a multitude of innovative and disruptive use cases. Companies are already building their own Blockchains for various applications such as Gridcoin that leverages the Blockchain to crowdsource scientific computing projects. Gridcoin uses its own protocols that require much less computing power and electricity to manage than traditional bitcoin networks.

The Blockchain: and Why it Matters (Let’s Not Mess it Up)

The Blockchain is a foundational technology, like TCP/IP, which enables the Internet. And much like the Internet in the late 1990s, we don’t know exactly how the Blockchain will evolve, but evolve it will.

Similar to the Internet, the Blockchain must also be allowed to grow unencumbered. This will require careful handling that recognizes the difference between the platform and the applications that run on it. TCP/IP empowers numerous financial applications that are regulated, but TCP/IP is not regulated as a financial instrument. The Blockchain should receive similar consideration. While the predominant use case for the Blockchain today is bitcoin currency exchange that may require regulation, this will change over time.

Had we over-regulated the Internet early on, we would have missed out on many innovations that we can’t imagine living without today. The same is true for the Blockchain. Disruptive technologies rarely fit neatly into existing regulatory considerations, but rigid regulatory frameworks have repeatedly stifled innovation. It’s likely that innovations in the Blockchain will outpace policy, let’s not slow it down.

Written by sheeltyle

January 13, 2015 at 8:03 am

2014

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Tragic begging and triumphant benevolence.  Paper gains and palpable losses.  Newfound empathy and noticeable disdain.

I’ll never forget seeing thousands of Syrian refugees – mothers who fled the Assad regime clutching toddlers – on the streets of Istanbul.  They had a small cup or piece of cloth in front of them, asking pedestrians for spare change in Arabic – a language Turks don’t speak.

I’ll never forget the smile on the faces of the BCNA loan officers who had given small business loans to immigrants in all of NYC’s boroughs.  These loans allowed these immigrants to realize their American dream through their corner stores, their laundromats, their beauty salons, and their restaurants.

I’ll never forget the phone call from a fellow investor that my first venture capital deal, Snapdeal.com, was about to announce an investment from Softbank at a $2 billion valuation.  Or, the text message about Hired.com, a deal that I had seeded at NEA, had closed a round at a $200 million valuation.

I’ll never forget the phone call from a portfolio company CEO that he had run out of money.  He was going to have to shut down his business and, in the process, I would lose all my invested capital.  He was in tears.  He had given it his all, sacrificing everything for his business.  He hadn’t even paid himself in the last few months to keep the company afloat – and he was broke.  I was, in the next 5 minutes, defeated and encouraging, confused and consoling.

I’ll never forget meeting General David Petraeus 1:1 in his office, and the many emails, discussions, and meals that continue to follow.  He’s a man who led our armed forces in Afghanistan and also was the Head of the CIA.  He was—and still is—the quintessential American hero: a gentleman, a class act, and a selfless leader.  But one mistake caused him to give up his career in government.  I think the world of him—and if he can make a mistake like the one he did, then I’m pretty sure anyone can.  We’re all just human.

I’ll never forget meeting Lance Armstrong in New York as part of a group dinner.  Because the event was off the record, I am not at liberty to share quotes.  However, I could tell Lance was noticeably frustrated at the doping scandal; not necessarily because he was upset at the backlash and the titles that were vacated, but because he still feels like he was wronged.  He had brought a knife to a gun fight.  And if everyone was doing it, then why was he the villain?

What a year 2014 was.  2015, you’re on the clock.

Written by sheeltyle

December 31, 2014 at 4:41 pm

Entitlement

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This email exchange, where HBS professor Ben Edelman quibbles over $4 of Chinese food in the pursuit of making a broader point, is disturbing.

Here is my email to the Dean of HBS.  Let’s see what happens.

Dean Nohria, 

I hope you’re well.  I’m a JD/MBA student here.

The article about Ben Edelman was disturbing – all the negative stereotypes about HBS up and down social strata ringing true in one exchange.  I hope HBS is looking at disciplinary action related to it.  I know I don’t want to associate myself with someone who, in a petty pursuit of integrity, seems to display none himself.

Warmly

Sheel

Written by sheeltyle

December 10, 2014 at 10:25 am

Cumbre De Negocios Interview

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Here is a Spanish-dubbed interview with Gabriela Frias of CNN Dinero on why I’m excited about Mexico’s future position as a leader in Latin America and in technology.  The interview is from the Cumbre de Negocios (Mexican Business Summit) in Queretaro, where I spoke this past week.

Written by sheeltyle

October 30, 2014 at 11:49 am

Bold predictions for the next 10 years

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Chris Schroeder, author of the book “Startup Rising: The Entrepreneurial Revolution Remaking the Middle East”, asked me the following question at the Abraaj Forum in Istanbul a few weeks ago:

“What are some bold predictions this audience needs to hear?  What will happen in the next 10 years”. 

The audience included heads of state (Mexico, Turkey, and other Presidents/Prime Ministers) and highly influential wealthy business leaders (founder of Aramex, chairman of Airtel Nigeria, etc). What could I possibly say that would cause them to look up from their cell phones?

I decided to make some provocative predictions based on many companies that I have met around the world.  Bold, and slightly crazy, so they would at least listen.  The following 5 predictions are the ones I made, and I strongly believe at least 3 will happen…although I don’t know which three!

Within 10 years…

1) Driverless cars will be on the road and owned by consumers…and within 15 years, you will be able to press a button on your mobile phone to call one to pick you up.  That app could be Uber or a whole new system.  Within 20 years, driverless cars will make up 25% of the cars on the road.

2) A 3D printed organ will be transplanted into a human being.  Likely a liver or skin.

3) Bitcoin will become the official currency of certain countries with high volatility.  Already, in Argentina, companies like Bitpagos are allowing merchants to accept pesos and cash out in bitcoin because some would rather hold BTC due to inflation.

4) A tragedy like the disappearance of MH370 will never happen—because we will have drones in the sky that will be able to take a picture of nearly any spot on earth within seconds of receiving a command, likely administered through a mobile phone, and not subject to orbital revisit time, unlike our satellites.  Regulations are already changing in this space to open up the use of drones commercially.

5) Part of our food supply will come from genetically modified micro-organisms that secrete, as a waste product, various types of amino acids and proteins.  Companies are already doing this at a lab scale and by 2025, this will be at a commercial scale.

Let’s see what happens.  Hopefully I’m not 0/5.

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Written by sheeltyle

October 7, 2014 at 11:16 am

Quotes from the Academy

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I had the privilege of attending the Academy of Achievement thanks to the generosity of Wayne and Cathy Reynolds 2 weekends ago in San Francisco.  There were 150 extraordinary people all staying at the same hotel and interacting, dancing, and eating with one another for a full weekend.  I thought I would share some on-the-record nuggets of wisdom or shocking quotes from the honorees.

Admiral McRaven, former Commander of the US Special Operations best known for leading the operation that killed Bin Laden:

  • “At best, there was a 50/50 chance Bin Laden was in that compound.  In fact, some very intelligent folks thought it was 10%.”
  • “It’s the little things you control…the words of encouragement, the phone calls…that will define you.”

David Boies and Ted Olson, Boies represented Gore and Olson represented Bush in Bush v. Gore, but then they joined hands to fight Proposition 8 together in California:

  • “If two people agree, one of them isn’t needed.”
  • “It’s more credible to work with folks who are known to have different beliefs.  Us coming together drew a lot of attention, simply because we stand for opposite sides on many issues.”

Athol Fugard, South African playwright

  • “Beware of false pride.”

General David Petraeus, former Director of the CIA

  • “Get the big ideas right. Communicate them effectively.  Implement them.  Then repeat.”

Thomas Keller, Creator/Owner of French Laundry, Per Se

  • “My first introduction into the world of cooking was as a dishwasher.  It was critical. It taught me discipline (without it, where will the food go?), organization (knowing where the plates go, where the bowls go, saves critical time), efficiency (have to do it quickly), repetition (which equals perfection), and teamwork (everybody needed everybody, including me)

Francis Collins, Director of the National Institute of Health (NIH)

  • “My mother’s life advice ‘do whatever you want, but whatever you do, don’t become a federal employee.'”

And many, many more.

 

 

Written by sheeltyle

September 24, 2014 at 4:02 pm

The Non-Wealth Optimizing Move

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After a wonderful trip back to San Francisco, the learnings of which will be the subject of my next blog post, I’m officially writing this post from Cambridge, Massachusetts…where I now live.

Wait, what?

Earlier this year, I walked into the offices of few General Partners at NEA and told them I was thinking about doing my JD/MBA at Harvard.  The responses varied from “you’re out of your mind, stay at NEA” and “this isn’t the wealth optimizing move,” to “the JD is a commodity degree today” and “do you know how many MBAs call me and want your job?”  But as I described my rationale—one that had nothing to do with my company-building and investing career—they slowly became enthusiastic.

For years, Silicon Valley has in general responded to government with a signature brand of techno-libertarianism, flourishing alternately condescension, ignorance, and a deliberate apathy. But in the birthplace of innovation, such a response is inimical to everything that this community stands for: knowledge, progress, and collaboration. Indeed, if Silicon Valley is to continue to lead the world in innovation, rather than rebuff government, we must work to reform it.  Allocating capital and reforming policy the way a venture capitalist would—with a high risk tolerance, potentially massive impact, and a long-term orientation—could do wonders in the public sector.  But in order to enable these shifts in the law, one needs to understand where the law came from– hence the JD.  Tack on the MBA, which is only an extra year in the combined program, and it can’t do more harm than good, right?

Of course, I could be completely wrong, and this expensive long-term call option— considering both tuition and opportunity cost– could expire worthless if I never decide to enter public service.  Alternatively, I may find the lure of Silicon Valley and the opportunity to build the next generation of companies too enticing and drop out, which many people are betting on.

But so far, I’m having an intellectually enriching time learning about the law and, more importantly, meeting the people.  My classmates are diverse: a former member of the CIA who did special operations in Yemen, the sons and daughters of Heads of States around the world, the former head of the NFL Players Association, many brave and deeply selfless military personnel.  And I haven’t given up investing: in fact, I am still actively investing and taking board seats/becoming an advisor to a few companies, some which will be announced soon.

Let’s see where this takes me.  At worst, I will have dropped out of Harvard– that can’t be that bad, right? :)

Written by sheeltyle

September 15, 2014 at 1:34 pm

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