a16z crypto partner: The Charm and Challenges of Blockchain

This article was published on July 7, 2019, on the Chain Catcher WeChat public account, by author Hu Tao.

Chris Dixon is one of the most influential investors in the blockchain field today. He graduated with a master's degree in philosophy from Columbia University in 1999 and joined the investment firm a16z in 2013 after years of experience in traditional finance. He currently serves as a general partner at a16z crypto. In Chris Dixon's view, blockchain is like the pirate flag rising again in Silicon Valley, leading everyone to engage in interesting, slightly dangerous, and disruptive activities.

Chris Dixon's first investment at a16z was in Ripple, and he has since invested in star projects like Coinbase and OpenBazaar, achieving remarkable results and helping a16z become one of the most influential investment firms in the blockchain industry.

In the six years since entering the cryptocurrency industry, Chris Dixon has developed a rich and exciting system of blockchain thought. Chain Catcher has organized and compiled a large amount of information on Chris Dixon's relevant statements, which we believe will greatly benefit our readers.

1. Discussing the Background of Cryptocurrency Development

Today's internet is more like Disneyland. If I opened a restaurant in Disneyland, and the park thought I was making too much money, it might raise the rent or change the rules. This is how things are with what Facebook, Google, and Apple create.

We live in this Disneyland-like internet, and I don't think it's a good thing. I feel it is not as diverse, exciting, or creative as it used to be. It has destroyed those creative business models. If we don't do something to change this situation, we will pay a huge price in the entrepreneurial field and miss many opportunities. The next Mark Zuckerberg or Larry Page will find it very difficult to start and grow their businesses.

Looking back over the past twenty years, there are currently two main models for creating new things on the internet: one is to develop underlying protocols through non-profit and public welfare methods, which was also the approach taken in the early days of the internet, with the core protocols designed by government and academic institutions, including HTTP, TCP/IP, HTML, and SMTP (email protocol). These have all worked very well. But what good protocols have emerged in the twenty years since these protocols were created?

For example, everyone who accesses a website now relies on an encryption library called OpenSSL to communicate with SSL, which helps encrypt sensitive data like bank passwords and user passwords entered online to prevent them from being stolen.

However, when a major security vulnerability—the Heartbleed bug—emerged, everyone realized that such an important encryption library as OpenSSL was maintained by only one and a half developers, and you could say it had effectively stopped being developed. The reason is quite simple: the protocol itself has no commercial value, so no one is willing to pay attention to it anymore.

The other development model is to establish companies that make money to support development, such as Facebook and Google, which earn advertising revenue, or Amazon, which earns transaction fees, and then reinvest in technology development. Almost all investment and the energy of smart developers around the world are absorbed by centralized companies.

If you look again, there is actually a group of developers who are not employed by these platform companies, who can essentially be said to have been exploited by these "platforms" for many years. The applications they painstakingly develop may ultimately be blocked by these platforms, or they may have to accept paying a 30% toll (the App Store/Google Play fee ratio) to survive on the platform.

This group is now very frustrated and hopes to find a new model to support the cost of developing applications, and the new economic model of selling underlying resources through cryptocurrency actually aligns very well with this desire and need.

At the same time, from the 1980s to the early 2000s, mainstream internet services were built on publicly controlled protocols by the internet community. For example, the Domain Name System (DNS), known as the "phone book" of the internet, is controlled by a distributed network of individuals and organizations, using publicly created and managed rules that allow any individual or organization that follows community standards to own a domain name and have a place in the internet world.

This also means that the services for operating networks and sending and receiving emails are subject to oversight; if they behave improperly, users can transfer their domain services to other service providers.

However, from the mid-2000s to now, internet users' trust in public protocols has been replaced by trust in corporate management teams. Companies like Google, Twitter, and Facebook have created software and services that surpass the capabilities of public protocols, and users have gathered on these more elegantly designed platforms.

But the code of these platforms belongs to these companies as private property, and the regulatory rules for these platforms can change in an instant.

How do social networks decide to approve or blacklist a user? How do search engines determine website rankings? Social media might support media organizations and small businesses one minute, and the next minute could ban their content or change the revenue-sharing model. At the same time, millions of users have experienced the pain of having their private data misused or stolen, and those creative workers and businesses that rely on internet platforms have also faced sudden changes in platform rules that have wiped out their audience and profits overnight.

The immense power of these platform giants has caused widespread social tensions, sparking intense debates over issues like fake news, online trolls, privacy laws, and algorithmic bias.

This is why social thought has begun to turn back to embracing internet services governed by public rules and community control. These ideas have finally become possible recently, thanks in particular to the technological innovations driven by the rise of blockchain and cryptocurrencies, which attempt to create entirely new internet services through growing social actions.

2. Discussing the Practical Value and Prospects of Blockchain

Blockchain is a network built on the underlying layer of the internet, which uses consensus mechanisms like blockchain to maintain and update states. Users or developers can trust that a piece of code running on a blockchain computer will consistently operate according to its design, even if individual participants in the network have ulterior motives and attempt to disrupt the network, they will not succeed.

On the other hand, it uses cryptographic tokens to incentivize consensus participants (miners/validators) and other network participants. The incentive mechanism is one of the most exciting aspects of the cryptocurrency movement; it ensures that all participants in this blockchain network platform have aligned interests, and being in the same boat prevents them from harming each other.

The most remarkable aspect of this incentive mechanism is not only that it encourages startups or developers to create new applications on the platform but also that it motivates people to be willing to serve this platform from the very beginning, allowing new platforms to grow at an unprecedented speed, with Bitcoin and Ethereum being prime examples.

In the internet era, when you start a business that requires network effects, the good news is that once you have a certain user base, it becomes much easier to succeed; but the bad news is that until you have a certain user base, your business model appears muddled to outsiders. A dating site with only one user is the worst idea in the world, but a dating site with a million users sounds much more convincing. However, the founder faces the problem of how to achieve that.

Chris Dixon

I used to be an entrepreneur, and now I am an investor. From personal experience, about 99% of businesses that require network effects fail in the startup phase. But when you ask Airbnb founder Brian Chesky or eBay's founder how they overcame the "chicken or egg" dilemma, they always have some heroic stories about how they broke through numerous challenges through sheer willpower, tricks, or money. However, there are only about 15 platforms on the internet that have achieved scale effects. You can imagine that perhaps another million startups have lost the opportunity to advance the world and improve existing services because they never made it past the startup phase.

Therefore, cryptocurrency provides a universal solution to the typical "chicken or egg" dilemma that all startups encounter. When there are not enough users to create platform value, it allows you to incentivize early users with financial value, but gradually you provide less and less financial value to later users, as the platform takes shape and later users can already enjoy the value brought by the platform.

At the specific level of incentive mechanisms, Proof of Stake (PoS) is being increasingly adopted, with the most obvious example being Ethereum's transition from Proof of Work (PoW) to Proof of Stake, which allows for greater design space in the consensus mechanism, such as the addition of penalty mechanisms that were not present in previous mechanisms.

Email is a great example; because it has no penalty mechanism, it leads to a very bad causal loop. When people find that sending emails costs nothing, they send billions of emails, which is a big problem. Just think, if every time someone created a new email account and sent spam, it cost them something, people would naturally consider the cost before doing so. This penalty mechanism would greatly improve the current email problem.

Blockchain networks will also use various mechanisms to ensure they remain neutral as they grow, preventing centralization. First, the contracts between blockchain networks and participants are executed in open-source code. In large internet platforms, irresponsible employees decide how to rank and filter information, which users get promoted, and which are banned. In the blockchain industry, these decisions are made by the community and are done using open and transparent mechanisms. As we know from the real world, democratic systems are not perfect, but they are far better than the alternatives.

Secondly, blockchain network participants supervise through "voice" and "exit" mechanisms. Participants "voice" their opinions through community governance, both "on-chain" (via protocols) and "off-chain" (through the social structures surrounding the protocols). If participants are dissatisfied with the current state of the blockchain network, they can exit by selling their tokens or, in extreme cases, implement a fork.

In short, blockchain networks bring together network participants to work together towards a common goal—the growth of the network and the appreciation of tokens. This unified alliance is one of the main reasons cryptocurrencies like Bitcoin continue to defy skeptics and maintain prosperity.

Today, the biggest challenge facing the cryptocurrency industry is how to prevent itself from becoming centralized, with even more serious limitations being performance and scalability. In the coming years, the focus of industry development will be on addressing these limitations while strengthening the infrastructure of cryptographic networks. After that, most resources will shift towards building decentralized applications on top of this infrastructure.

Centralized application systems often start off very well, as internet giants like GAFA have many advantages, including large cash reserves, user bases, and operational infrastructures. Decentralized systems, on the other hand, may not be perfect at the start, but under the right conditions, the new contributors they attract can grow exponentially.

For developers and entrepreneurs, blockchain networks offer a more attractive value proposition. If a blockchain network can gain full recognition from these developers, it can mobilize more resources than GAFA and rapidly develop products that surpass theirs.

Moreover, there are millions of highly skilled developers in the world, with only a small portion working for large tech companies, and an even smaller number involved in new product development. Historically, many of the most important software projects have been created by more startups or independent developer communities. The question of whether centralized or decentralized systems will win the next era of the internet boils down to who will build the most attractive products and who can win the support of more high-quality developers and entrepreneurs.

Ultimately, people no longer need to place their trust in a single company; we can entrust our trust to software owned and operated by the community, ultimately transforming the principles of internet governance from "don't be evil" to "can't be evil."