Electronics

Cryptographically bound peer-to-peer networks (henceforth called “crypto” for short) are going to be one of the defining technologies of our lifetimes. They enable fundamentally new forms of social organization.

These are bold claims. Once you “get” crypto, you’ll understand how crypto enables a new kind of social structure. I’ve tried to - and failed - to explain this concept to many people. Understanding the deepest and most profound implications of crypto can be difficult as crypto challenges many basic tenets of modern social structures and capitalism.
Background

Many of the best businesses in the world claim to be peer-to-peer (P2P) networks. These networks connect supply and demand in ways that was never possible before.Obvious examples include eBay, Uber, AirBnB, the New York Stock Exchange, and Facebook.

But there many others: Apple connects developers to consumers, Amazon connects merchants with consumers, Google connects website owners to searchers, insurance companies and banks connect their customers through pooled capital.

Networks that connect latent supply and demand are the foundation of the economy. These networks have created tens of trillions of dollars of economic value. These networks grow to be very large because of network effects. Once a network achieves critical mass, it becomes nearly unstoppable.

But there’s a problem.These networks aren’t really peer-to-peer, even though they claim to be. Rather, they are mediated by network operators, who levy a tax on network participants. Some of this tax is absolutely necessary. Someone has to pay for eBay’s servers, for AirBnb’s insurance offerings, for Amazon’s customer support, etc.

But one part of the tax isn’t necessary: profits (queue Uber jokes).In time, all network operators become rent seekers. Most are from day one.When crypto libertarians talk about “trustless” commerce, they’re talking about cutting out the middlemen and rent seekers: the network operators. They’re talking about connecting network participants to one another - both businesses and consumers - without middlemen extracting rents.

This can be hard to imagine. Without a network operator, whose going to build the app? Who's going to run the servers? How are consumers going to connect together? Who defines the rules of the transaction? How do you ensure equitable payment?

Who manages refunds, reviews, and customer service?

The short answer: trustless, cryptographically bound network protocols. Huh?

Let’s walk through four increasingly abstract examples to illustrate this.


Decentralized Cloud

A significant majority of the world’s computing resources (compute, storage, bandwidth) are unutilized at a given point in time. Consumer and business hard drives lay mostly empty, and CPUs hum along at 3% utilization. Despite this, Amazon, Google, Microsoft, IBM, etc. continue to build new data centers.

This is bonkers. Filecoin, STORJ, Sia, Swam, and SAFE are protocols that allow anyone to securely store files on other people’s hard drives.

File owners can always retrieve files, and the people storing the files have no idea what they’re storing. At a high level, this is accomplished this in a remarkably simple way: using standard file encryption, Shamir sharding, and distributed hash tables for content-based addressing.

Each protocol creates a market in which people with unused storage space and bandwidth can compete to store other people’s files and generate income.

Because these protocols leverage people’s excess storage capacity that would otherwise sit unutilized and generate $0 revenue, these protocols will offer storage that’s much less expensive than that offered by large data centers who buy storage with the intent to rent it out.

I won’t dive into things like enterprise-grade support in this post, but it’s worth noting that these protocols are designed to allow organizations to compete on value-added layers such as support.

Each of these protocols is truly peer-to-peer. You store your content on other people’s hard drives. You don’t have to care about who stores them. No one stands between you and your files. There is no middle man, no rent-seeker. You store your files on the network and you pay the network.

Golem and Elastic do basically the same thing but for compute rather than storage.For decentralized storage and compute, the mega opportunity is not “decentralized Dropbox.” Most people are on the free tier of Dropbox! The real opportunity for these protocols is in powering Internet applications.

In time, most (maybe all?) apps – to do lists, note taking apps, chat apps, finance apps, etc. – won’t have to run in a private data center; rather, apps will run on the global mesh network of everyone’s computers.
Decentralized Prediction Markets

Augur is a decentralized prediction market. What does that mean? Let’s contrast it with a famous centralized prediction market: Las Vegas sports betting. Vegas casinos take about 10% of total bet volume as a fee, called the take rate. They justify this fee by saying it’s necessary to arbitrate the outcome.

You’re paying the casino 10% for three things:

1) to act as an escrow,

2) report who won the game,

3) and to distribute proceeds to the winner.

This should not cost 10%. This is insanity. The problem with a decentralized prediction market is that if no one is in a room somewhere flipping a switch to say who won the game, how do you resolve the bet?

You can’t just leave it up to a vote of market participants. If the odds on a bet are 9:1 and the 1 ends up winning, you don’t want the 9s to just outvote the 1s.

What Vegas does for 10%, the Augur protocol will do for about 1%. Network participants in the Augur network, $REP holders, will be paid by the network to truthfully report event outcomes.

How?
The Augur network runs on smart contracts. In simple terms, smart contracts act as trustless escrow services that are bound by code (no human intervention) and release money based on some predetermined criteria. You will not stake bets in the Augur network using Augur’s native’s REP token.

Rather, you’ll stake bets in other cryptocurrencies such as Bitcoin and Ether. Services such as Oraclize will automatically relay the outcome of the basketball game from nba.com to the Augur smart contract. With the score of the game, the smart contract will resolve the bet and distribute the funds to the winner.

If anyone who was on the losing side of the bet believes that nba.com was incorrect (e.g. it was hacked) or that Oraclize manipulated the data, they can challenge the outcome by staking more money.

At this point, the Augur smart contract asks REP holders to vote on the outcome of the basketball game. If REP holders vote in a way that overrules the challenger, the challenger loses the bond she put up to initiate the challenge.

Additionally, REP holders who vote “incorrectly” - defined as those who vote against the majority of REP holders - also lose some REP. Thus, bet-losers are only incentivized to challenge the outcome reported by Oraclize if they believe a majority of REP holders will report a different outcome than that reported by Oraclize.

The same is true of REP holders: they’re incentivized to vote in a way they believe all other REP holders will vote.This system works because REP holders are independent of market participants and because REP holders are global and pseudo-anonymous, making large-scale collusion nearly impossible.

Bet-losers and REP holders cannot easily identify and try to coerce REP holders to collude to report a false event outcome. Even if REP holders did collude and intentionally misreported an event outcome, people would lose faith in the Augur network and the value of REP tokens would plummet, harming the colluders.

All of this logic is handled by the Augur protocol, which lives on the Ethereum blockchain. No one in the world, including governments, can remove this smart contract or change the rules of the protocol. The protocol is like chemistry. You can’t break the laws of chemistry.

I'm a prolific writer in the crypto space. Follow me on Twitter @kylesamani and subscribe to Multicoin's free research for some of the best insights in crypto.

Continue to page 2 of this Forbes report here: https://www.forbes.com/sites/ksamani/2017/10/04/blockchains-a-new-social-order/#3ae1931a6a29