The a16z Show - Crypto, an Oral Essay

Episode Date: June 2, 2022

In this special “innovation overview” episode from April 2021, the a16z crypto team and other experts take you from the ground up of crypto and web3 — from the basics, to more recent developments, and beyond – through the lens of an oral essay with brief segments on what crypto is, how it really works, and where it’s going.We chose this particular archive episode this week in honor of a new show that just launched: web3 with a16z. Hosted by Sonal Choksi, the previous showrunner of the a16z podcast network and longtime host of this show, and featuring the team at a16z crypto as well as leading scientists and makers in the space, this show is about the next generation of the internet, how builders and users now have the ability to "own" (web3) pieces of the internet, unlocking a new wave of creativity and entrepreneurship. The first two episodes are out this week, so check out and subscribe to “web3 with a16z” wherever you get your podcasts. Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

In this special innovation overview episode from April 2021, the A16Z Crypto team and other experts take you from the ground up of crypto and Web3, through the basics to more recent developments and beyond, all through the lens of an oral essay with brief segments on what crypto is, how it really works, and where it's going. We chose this particular archive episode this week in honor of a new show that just launched, Web 3 with A16Z, hosted by Sonal Choxy, the previous, showrunner of the A16C podcast network and longtime host of this show, and featuring the team

at A16C Crypto, as well as leading scientists and makers in the space. This show is about the next generation of the internet, how builders and users now have the ability to own pieces of the internet, unlocking a new wave of creativity and entrepreneurship. The first two episodes are out this week, so check out and subscribe to Web3 with A16C wherever you get your podcasts. Welcome to the A16Z podcast. I'm Zorin. Today we have a special episode all about crypto that we present as a resource for people wanting to better understand what it is, how it really works, and why it matters. This is an audio essay featuring hallway-style conversations with the A16Crypto team, as well as outside experts. In these brief segments, we'll take you from the ground up, from the basics to the most current developments, and beyond that to a look at what we might see in the future. This audio essay is broken down into four parts. We started the beginning. That means the origins of Bitcoin, which is the first major cryptocurrency. And in this section, we'll answer all of the basic questions like how and why did Bitcoin start, how is it created, what is mining, and how do we know it's secure? The next section is about expansion and how

Bitcoin's programming concepts started a wave of innovation. We explained the blockchain how it enabled the entire idea of decentralized networks of participants, and we touch upon the significance of the second largest blockchain Ethereum. We also explain tokens and how they're leading to new ownership models for creators and networks. Next, we talk about the right now. That is, what are crypto in the blockchain making possible today, including the concepts of defy or decentralized finance, new protocols to borrow, loan, and leverage cryptocurrencies,

and NFTs or non-fungible tokens? Finally, we'll look to the future. What are some of the implications of all this innovation? How does it compare to previous tech paradigms? And what might we see in the next era as crypto's infrastructure continues to be built out? Please note that none of the following should be taken as investment advice. See a16Z.com slash disclosures for more important information.

But let's start at the beginning. In fact, before the beginning, and let's start with Stanford computer science professor and A16Z advisor, Dan Bonnet, explaining that the desire to create a digital form of money started well before Bitcoin. Cryptographers have been interested in building a digital currency now for quite a while. Actually, from the mid-80s or so, there was quite a strong interest in building. digital coins, basically taking physical coins and making them available in digital form. The difficulty of building a digital coin is that you have to make sure that it cannot be double

spent. So a physical coin is very difficult to double spend, but a digital coin is really easy to replicate. You just copy it and you get two coins. And so the challenge was how do you build a digital object that can only be spent once? And this challenge became even harder when we wanted to add anonymity properties to it, just like physical coins have anonymity properties in that if I spend a coin somewhere, nobody might know that it's actually me. We'd like to do the same thing with the digital coins. I'll be able to spend it somewhere and nobody should know that it's me. And even though nobody knows it's me, I should still not be able to spend the same coin at two different places. That turns out to be a really interesting cryptographic challenge. And basically, throughout the 80s and

90s and even in the early 2000s, there were many, many, many papers and many cryptographers worked on constructing anonymous digital cash systems. So these early attempts at creating digital money didn't quite work. Then in 2009, a nine-page white paper popped up on an obscure cryptography mailing list. It was entitled Bitcoin, a peer-to-peer electronic cash system, and it was published under the pseudonym Satoshi Nakamoto. To this day, we don't know who Satoshi Nakamoto is. It's one of the all-time great tech mysteries.

The white paper got noticed because of the technical solutions it came up with to the problems that had been nagging cryptographers and computer programmers for years. How do you move digital money in a wide open, decentralized ledger called a blockchain, and we'll talk more about what a blockchain is later, without someone behaving badly? Satoshi published the Bitcoin paper, which actually had a number of amazing innovations in it. But maybe one of the core innovations that really sticks out is the ability to do what's called open consensus. with an honest majority. So open consensus means that it's not a fixed set of participants who are writing blocks to the blockchain. It's actually anyone who wants to can participate in the consensus protocol

and help with writing blocks to the blockchain. That's open. And the honest majority means that we just need to assume that a majority of the participants are honest. So they're not all trying to destroy the system. Interestingly, there was a lower bound that said, if you just allow anybody to participate in the consensus protocol, then it's not possible to do.

And the reason it cannot be done is because there's a generic attack called a Sibyl attack where basically one participant can masquerade as thousands of participants. So the amazing innovation in Sotoshi's paper is that Sotoshi realized the way we prevent the Sibyl attack is by this mechanism of proof of work where in order to masquerade is a thousand people, you basically have to do the work of a thousand people. But that's going to cost you a thousand times the work of a single person. And so as long as we assume that 51% of the work that goes into a consensus protocol is done by honest parties,

Satoshi basically showed that it is actually possible to implement an open consensus. Before Satoshi's paper, it was kind of believed that this is impossible. And this proof of work idea is what made this all possible. So with proof of work, an unlimited number of people around the world can actively cooperate on a network without knowing each other or having to trust each other and without any third. third-party enforcing anyone's actions because these security mechanisms are encoded in the architecture of the network itself. Here's Alex Pruden, chief strategy officer of crypto privacy company Allo Systems and a former A16C crypto partner explaining how the proof of work system

that underpins Bitcoin actually works. It's kind of like this idea of rolling a dice, right? And like a very simple kind of proof of work algorithm is I could ask you to roll a die until you roll five sixes in a row. Right. And so using some, basic facts about probability, I can tell you how long it's probably, or on average, going to take to roll five, sixes in a row, right? Or to roll 10 or 15 or 100. The only way to do that is to keep rolling the dice until you get the right sequence of numbers. And this is essentially what a computer does for proof of work, except that instead of rolling a dice, they compute what are actually called hash functions. And the additional benefit of a hash function is that it's difficult to

compute, but it's actually very, very easy to check so that for other computers to check that this is correct, they don't have to do the equivalent of rolling that same diet that many times in a row. They can just do a quick, simple check of this hash function and tell whether or not it was done correctly. You might ask yourself why someone out there in the world would choose to essentially volunteer to protect and verify the legitimacy of a decentralized network like Bitcoin. After all, no one works for Bitcoin. There is no Bitcoin, Inc. So why do they do it? The answer is that by doing this work, these proof of work computations, they receive a reward. This is part of the system Satoshi Nakamoto devised.

The reward for these network validators or verifiers or miners is a few Bitcoin, freshly created by the network, cryptographically predictable, according to the schedule that Satoshi set up back in 2009, and that will eventually end with the creation of the 21 millionth Bitcoin in the year 2140. Here's Alex on why this mining activity is all important for Bitcoin. mining incentivizes a large number of individual non-related decentralized actors to all participate in validating blocks to make sure they are valid because if they do that job well they get rewarded by the network and if they don't do it then the other nodes will reject those transactions with overwhelming probability so it's sort of self-policing in that way everyone checks everyone else his work. And so the incentive to try and be the cheater is low because with overwhelming likelihood you'll be discovered and the work that you put into creating that block will go to waste.

And so this incentivizes the miners who are validating blocks to do it right the first time, to not try and include an invalid state transition, to include a double spend of a token or something like that. Because if they do, with overwhelming likelihood, the other nodes on the network will reject it. And they will. will forego the rewards they would have gotten had they behaved according to the rules. So who are these miners who don't work for anyone are basically anonymous and somehow are able to secure this network? When Bitcoin was invented and the network first launched in 2009, actually there was only

one computer mining Bitcoin. It was the inventor, Satoshi Nakamoto, his computer was mining all the Bitcoin in the network for the first almost a year. And then slowly but surely other individuals kind of got involved. And then you started to have a group of people who were mining doing these calculations with their home computers, basically, with basic, you know, general purpose CPUs. And then over time, it evolved. So the evolution was one of from CPUs to something called GPUs, which are graphics processing units used for computer games. And then from there, moving all the way to what are called ASICs, application-specific integrated circuits. So with that evolution in hardware, the way the mining market has gone is it's not even individuals who are running these C-PICs,

or GPUs or even ASICs in their homes, they're actually pooling them collectively across the internet and forming these things called mining pools to actually collectively work to earn these rewards and then be paid out in proportion to the amount they contribute. Okay, so let's take stock of where we are in our introduction. Bitcoin was invented. It solved some technical challenges for digital money, and a system was devised to secure it and create it on an ongoing basis until the supply is capped at 21 million Bitcoin, according to the code.

sometime in the next century. But despite all this, why would Bitcoin actually have any value if it's digital money that you can't actually see your touch and it's not produced by any government? How can it be worth anything? Here's A16Z crypto partner, Ariana Simpson. A lot of monetary systems are really built on a shared belief in the system. And if you think about government issued currencies, fiat currencies, as we call them, typically they're not really backed by anything in particular. even in the United States, obviously, the dollar used to be backed by gold. And then in 71, Nixon announced that the U.S. was going off of the gold standard. And so that kind of fundamentally

shifted how the U.S. dollar is backed. The key question, I think, when you consider a system of money, is really scarcity, because that is what determines its value, really more so than anything else. The fact that I can't print infinite dollars means that that allows it to maintain its value. And the fact that the supply of Bitcoin, for example, is capped, basically takes the digital concept of something that in theory could be produced in large quantities and makes it such that it does remain scarce. So the longer the system has been around, the more people use it, the more this shared belief in it. And the more the more... more useful it is for all the participants of that system.

Okay, so this brings us to the question of what people can actually do with Bitcoin. Right now, most holders of Bitcoin don't use it to purchase goods, although some merchants and companies do accept it as payment. Most people are holding onto it. This makes Bitcoin what's called a store of value, and it's sometimes referred to as digital gold. More and more of our lives are moving into the digital sphere. And so it makes sense that while gold was often something that people held almost as a hedge against fiat currencies or the policies that their governments might put in place, which could result in inflation, the new form of gold would now become something like Bitcoin, which, you know, it's not controlled by a government and it's capped in supply.

But it also has other properties that make it very useful. For example, it's very easy to transport and it's infinitely divisible. And it just in many ways fits better with the point in time in which we are now. We've talked about some of the advantages of Bitcoin. It's cryptographically sound so you can transact peer to peer. And it's deflationary because only 21 million will ever be created. But what about security? Crypto is secured through private keys or passwords that only the crypto holder or their financial custodian knows

and which gives them the ability to access their holdings. But what if someone loses their password? This has actually happened to some early Bitcoin holders who will never be able to access holdings now worth, in some cases, hundreds of millions of dollars. Here's Alex Pruden. The traditional financial system is, you know, we trust banks and our banks trust commercial banks and commercial banks,

trust the Fed, and it's kind of a hierarchy. And if, for whatever reason, a fraudulent transaction happens, there's like a legal mechanism by which those things can actually kind of be reversed. And that doesn't exist in crypto necessarily because the whole point of it is to be decentralized and kind of prevent any one party from having that power. And so what ends up happening is a lot of people will we trust third parties to custody these private keys for them. So this most commonly happens with cryptocurrency exchanges.

The exchange keeps an internal balance of how much crypto that I own, but they are the one that maintains this private key. So the best exchanges and the best wallet products, out there, use the most cutting edge cryptographic and computer security techniques. What you're getting there is best in class security like you would see at a bank in terms of their level of digital protection. So we've talked about Bitcoin's underlying properties. Now in section two of this podcast on the expansion of crypto, let's quickly explain the

blockchain and talk about how it enabled crypto to move beyond Bitcoin. First, here's A16Z data scientist Eddie Lazarin explaining why it's called the blockchain. When transactions are submitted to a blockchain, they go into a large queue that miners who are continuously verifying the state of the network, they grab these transactions and they bundle the new transactions into these blocks that are committed to the end of the chain of blocks. This block is inextricably tied to the previous block using cryptography, specifically. hash function is connecting your transactions to the most previous recognized status of the blockchain. Everything that's in the new blocks state can't disagree with the previous block. And in fact, any of the blocks before that. So that's how the blockchain works. But that basic concept opens up many new possibilities for computing. So let's go up a level to the big picture.

A16Z general partner Chris Dixon has talked about crypto in the blockchain being. a new computing paradigm, similar to mainframes in the 50s, the internet in the 90s, and mobile in the 2000s. Here's Chris on how he sees the blockchain and what you can do with it. The way I think of what a blockchain is, it's a virtual computer that sits on top of a network of physical computers, sometimes called miners or validators, that can make strong game theoretic guarantees that the code it runs will continue to operate as designed. In other words, it's a computer that can make commitments. It can make commitments to users. It can make commitments to developers and make commitments to anyone that's accessing it.

And you can rely on those commitments by simply reading the code and looking at the architecture of the computer without knowing anything about the people that created the computer or the people that are running the computer. You just have to look at the code and you can trust in the code. Why would you want a blockchain? Because a blockchain can do new things that prior computers couldn't do. Specifically, a blockchain allows you to create new computing primitives such as digital money smart contracts, digital goods, decentralized organizations.

These are computing primitives that could not have credibly existed on non-blockchain architectures. Bitcoin is a form of digital money that exists on a blockchain. And one of the reasons Bitcoin's can have value is that Bitcoin makes the commitment that there will only ever be 21 million Bitcoins. And because it's built on a blockchain, that commitment to the scarcity of Bitcoins is baked into the code itself, into the network architecture itself. as opposed to having to rely on the promises of a person or a company. If Google or if Chris Dixon said tomorrow, I'm going to have Google Coin or Chris Coin,

and there's only ever going to be 21 million of them, why would you ever believe that? I could change my mind. Google could change its mind. The special thing about a blockchain is the commitments are baked into the code and they can ever change. Soon after the advent of Bitcoin, programmers started seeing the possibilities to build on top of it and begin building their own applications that interact with other applications. that interact with other applications on the blockchain, Eddie Lazarin. So Bitcoin was the first effort to create a system that accounts for value, a system of

accounting. Just being able to send basically quantities around is great, but it's kind of the base layer for all these other kinds of interesting projects. Other projects are taking that idea of writing computer applications that don't need to rely on a central trusted entity, and generalizing it to all kinds of computing, any kind of computing, and any kind of applications. The most prominent new blockchain built after the advent of Bitcoin is called Ethereum. It's the logical extension of open source software. Open source software is just code that everyone can read, anyone can share, anyone can run it themselves on their own machine.

But it hasn't been true until recently with Ethereum and others that you can not just see the code, but you can actually interact with a computer guaranteed to be running exactly that code, which means you can make all kinds of interesting assumptions. You can write your own program that interacts predictably with their program, and then other people can write code that runs against that program. And before you know it, you have something that looks like a central bank, or a loan platform, or a voting system, or a new social network. It's not just that we're writing on our own computers that communicate with each other.

now we can write code that works on a giant shared computer and those giant shared computers can interact with other giant shared computers. Okay, we've talked about Bitcoin, how it started everything, how the blockchain is the underpinning of it all, and how the idea set out in Satoshi's white paper back in 2009 have now been built upon to create not just a peer-to-peer digital money system, but open up all kinds of possibilities for how computers can interact and lead to innovation. At the heart of what people imagine the future of crypto to be

is the idea that sharing value will become as easy and painless as the internet made sharing information. And the way crypto is doing that is through a hugely important concept in crypto called tokens. Tokens are not physical tokens. A token is a representation of ownership of something on the blockchain. That's it.

People can make tokens. Protocols can make tokens. But there's only a small number of tokens that represent real value. What makes a token valuable is that it is an indelible, record of ownership of a thing and that it can be exchanged. They can be traded. So the key thing about tokens is that when you exchange them, you're not just exchanging information. You're exchanging

actual value. This is not like online payments or debit card payments where you are sending money from your bank account to some third party and it's going through several other verification steps and clearinghouses and often taking several days to clear. This is instant transfer of value from peer to peer. Tokens are at the heart of the crypto economy. Here's A16Z managing partner, Scott Cooper. Think of the token really as performing a number of functions. Number one, it can be a medium of exchange for that network. In other words, if you have a network where you're trying to offer storage options to people, for example, to be able to store their files, the rules of that network might be that in order to procure storage, then you might need to use a token. So, in other words, take your U.S. dollars, purchase the token that is specific to that network, and be able to use that as the medium of exchange to be able to access the services on that network.

The other way to think about the token is it's really a economic incentive structure for the various participants who are managing and governing the network. They are people really who are responsible for the day-to-day governance and maintenance and activity of the network. And these are not necessarily employees of the company that might have started the network. They might just be developers out there or individuals who decide they want to be part of the governance structure. And oftentimes the token in that case is used as a form of remuneration for their activities. So they will help verify that the system is working, that the transactions are working in the way that we expect. And oftentimes the crypto network will use tokens as a way to compensate them effectively for that activity. But here's why tokens are really interesting and potentially transformative.

They allow for the possibility of far-flunk participants to not only build a network, but also to profit from the growth of that network. Here's former A16D partner and now the founder of the Variant Fund, Jesse Walden. tokens are an innovation that are kind of akin to data packets in that they're a standard way of moving bits of value just like we move bits of information. And that is very granularly, instantly to anyone, anywhere in the world. And so what that means is it's now possible to distribute value to users of internet platforms at scale. And what I mean by that is, you know, at the scale of platforms like Facebook or Reddit. If you imagine trying to put a few cents in the bank account of every user of Facebook, many of whom don't even have bank accounts, it gets pretty unwieldy very quickly.

But that's exactly what's possible thanks to crypto tokens. So one of the exciting things on the horizon that's just starting to be explored now is ownership of internet products and services by the users that actually contribute the value to those networks. This has all kinds of implications for how networks will be built in the future. Here's A16Z general partner, Ali Yahya. Think of, for example, YouTube video creators or writers who write on substack or who write on medium. And traditionally, all of those people have relied either on advertising or on the patronage model through Patreon or through direct payments from their fans and from their viewers.

Crypto stands to provide that whole category with new business models and new ways of monetizing. creative content online. And the way that it might do that is by allowing a creator to also build a kind of crypto economy to directly engage with their fans and with their readers and viewers in a way that's more creative than just a simple payment, like a direct payment from the fans themselves. The design space is truly infinite and unbounded as a creator to engage your fan base in a way that's more creative and provides a new mechanism for monetizing your creative. activity online. That is just truly inconceivable with the traditional financial system,

with kind of a bank in the middle if you were to try to do it that way, and with like payment rails on and off as a way of trying to engage each of your users. Like the level of overhead that exists and that kind of system makes it so much harder. And the friction is so much higher than it is if you really are just leveraging a blockchain instead. Now we're going to turn our attention to how crypto is being used in the world right now. The first use case to explore is a phrase you might have heard. It's decentralized finance or defy, and it's where a lot of the energy is in crypto right now, with all kinds of new protocols, networks, exchanges, and markets being developed, and a growing number of users deploying real money. Here's Eddie Lazarin.

Defi stands for decentralized finance, but it's really more like open finance. Until now, the history of finance has been centralized or closed. You go up to a bank or some other kind of financial service provider, and you engage in a relationship with them where they promise they'll do certain things. Often they do do those things. But ultimately, you're putting your money into a black box, and you're hoping and trusting that they're going to do it exactly like they said. Decentralized finance, defy, is an effort to deconstruct that and make all those pieces open and transparent. In defy, you can examine the exact code. that's governing what happens to your money

and what determines the interest rate that you're receiving. It operates without the control of any central authority. It operates in a totally transparent and open way, and it relies on cryptographic primitives to make sure that it's not interfered with. One way defy has been used in recent months is through something called yield farming, in which users of various crypto-based financial networks

or protocols, as they are often called, can seek healthy returns on the tokens they possess and use within these networks. Eel farming is rewarding those who provide those assets for others to borrow with an additional yield. You can think of it like a subsidy for borrowing and a subsidy for lending that's paid by the protocol in ownership of the protocol itself. In other words, if you provide some asset to the protocol, The protocol will give you ownership of itself, a small percentage of it, to thank you for doing so. And the thing is, is that ownership of those protocols has value because it's represented in a token that can also be sold.

So what's interesting is you could be in a scenario where lending some of your assets to the protocol would normally be somewhat lucrative. But in addition to interest, you are also receiving a little trickling faucet of ownership. of the protocol, it becomes even more lucrative. You can think of different strategies here. As you receive ownership of the protocol, you can either accumulate that and hold it because you think that protocol is going to become more valuable, or you can immediately sell it in exchange for the thing that you're originally lending and start compounding your lending by just pushing it back into the protocol, increasing your yield. And that's what makes it yield farming. Recently, another new crypto-enabled innovation has caught on and spread quickly,

leading to multi-million dollar auction sales and headlines worldwide. It's the biggest right-now real-world use case in crypto, and recently a digital artwork sold for $69 million at auction, and everyone from artists to musicians and celebrities starting to explore the possibilities. We're talking about NFTs, a type of token that opens up new opportunities for creators, consumers, and developers to interact and create new marketplaces. Here are Linda Shea, co-founder of Scalar Capital and former product manager at Coinbase, and Jesse Walden, on a recent podcast on NFTs with our editor-in-chiefsonal. So, NFT stands for a non-fungible token, which is just the term used to describe a unique digital asset whose ownership is tracked on a blockchain.

This can be a really broad set of assets from digital goods like virtual lands and artwork to a claim on physical assets like real estate or clothing items. A metaphor that I would offer as a definition is NFTs are a way to make digital files ownable. Instead of a financial asset, you can now own a digital media asset on the internet. And that's why the file metaphor is apt. You can now own a JPEG, own an MP3. And what you're essentially doing when you create an NFT, it's sort of like metaphorically uploading that file to the blockchain, such that anyone can track its provenance and attribution.

What's really powerful with crypto is you have all these open protocols that you can kind of plug into each other. And so when you have NFTs, you can plug them into decentralized systems and be able to trade these NFTs with anyone in the world and have that be instantaneous. And so NFTs on the blockchain allow anyone to permissionlessly own issue, trade them.

That NFT lives on the blockchain alongside all other transactions and everyone can see it. And so if that NFT changes hands and say Linda buys my NFT, everyone can see I transferred ownership to Linda. And as a result, we start to build this very rich history of the interactions people have with media on the internet. But you may ask, how are NFTs different from just sharing JPEGs or gifts on existing social media sites?

Part of the answer to that has to do with the decentralized nature of crypto and how it changes the dynamic between users and platforms. With social media today, when you share a file or share a piece of media, you upload the file to the platform. And what's actually happening under the hood is your copy-pacing ownership of the file to the platform. What I mean is that somewhere along the way you signed a terms of service that allows for the platform to monetize that piece of content as they see fit. And maybe they give you a cut of the revenue, maybe not. But the platform gets to make that call. And they also get to make the call on how that content is consumed. And there's not a whole lot of innovation going on there because any developer who plugs in to try to innovate has been shut down in the past.

Now, contrast that to NFTs, if you're uploading files to the blockchain and then those files become NFTs and they behave in the way that, other crypto assets behave, that means that they're permissionlessly accessible to anyone, anywhere with an internet connection. The implications are that any third-party developer can then innovate on the way that media is consumed, like how the audience sees it, how people can interact with it or program it. So NFTs are an early use case that has gotten a lot of attention because of what it says about consumer marketplaces and the relationship between creation of digital goods and ownership of digital goods. But as Jesse mentions, they also highlight the potential of crypto more broadly for developers. This is because crypto, apart from

just NFTs, creates new kinds of incentives for the developer ecosystem. Those incentives stand in contrast to the relationship between developers and platforms in the Web 2 era, which featured asymmetrical power dynamics. In order to talk about the developer ecosystems in crypto, I think it's really helpful to look at recent history. And in particular, the sort of early days of platforms like Twitter, Facebook, Spotify, and others, each of which at one point had, had, a very rich developer ecosystem built on top of their API. And that ecosystem was rich with third-party applications that benefited users in the form of more optionality,

more ways to interact with these platforms, and benefited developers in that it was a way to gain access to a user-based gain distribution. And so it was a pretty exciting way to build a startup. But as these platforms grew, the sort of same pattern started to reoccur, on each of them. And that was that many of the big internet giants, they killed their developer ecosystems by turning off APIs or severely limiting them or changing the rules. And as a result,

all the developers building these innovative third-party startups on top of these platforms got burned. And users got burned too because they lost optionality. For developers, crypto is seen as being a more friendly space in some ways since the whole idea of crypto and blockchains is that they are not controlled by a centralized entity. Not only are crypto networks open source, there are open source code that's run on machines that are distributed all over the world. And so there's no one person or one company

that can change the rules specified in that code. The result of this, the open source and decentralized nature of crypto networks, is that developers can trust that the platform that they're building on top of won't change the rules against their will, or yank out the rug from underneath the project that they're building. And what's more is that each application deployed to a crypto network can become a permissionless building block that any other developer can build on top of or extend for this same reason, because they know that the rules won't change and the building block won't get yanked.

And so this is a concept that in the crypto space is called composability. What it essentially means is that developers can, can build more with less resources because they get to stand on the shoulders of all the other developers who've built stuff before them. And so if we're right about that, there's good reason to believe that crypto can be one of the fastest growing waves of software innovation ever because of this idea of composability and the fact that developers can build more with less. This raises a question though. Why would developers agree to give up some of the value of the networks they create in this wide open, decentralized space where there are no

owners and tokens are distributed to users of the networks. Wouldn't the developers who created the networks want to keep all that value for themselves? Here's Ali Yahya. Decentralization doesn't mean that you don't get to benefit from what you're building. It's the core value proposition of crypto. And so as a creator, if you're building a project in the space and you're building a protocol and you're facing this question, should I do the right thing and decentralize as part of the ethos of the movement? or should I try to keep control somehow, maintain access through some backdoor,

have the private key that controls everything, and capture most of the value myself? The logic that follows is that if you were to take the latter path, then you will most likely not really create anything that is of true long-term value in the space because you will just be creating something that looks very much like traditional software that just runs on servers and databases that a single company or an individual, controls. And if you're going to do that, then you might as well just do that and not bother building on top of a blockchain or not bother with the whole crypto aspect. And of course, even

though you are working toward decentralizing the protocol that you're building, that is not to say that you're not going to benefit from it becoming an enormously valuable protocol. If you build it in the right way and you continue to own some subset of the tokens in the network that you build, you are still able to continue to be part of the community that you build, continue to own and benefit from the value that you create, and continue to participate in governance and the kind of the community's evolution over time. And even though you are giving some piece of it away as a way of enabling the community and as a way of decentralizing, the overall effect is that the pie is just that much larger for everyone. So we've covered a lot of ground from the

beginnings of cryptocurrencies with Bitcoin to new blockchains and the the ways they've enabled rich marketplaces of digital assets and new ways for developers to innovate. There's plenty more to talk about, including the question of regulation and how crypto might continue to enter the mainstream. We'll have more of that in upcoming episodes. But let's end with a look at what the future holds. One way to look at the future of crypto is through the prism of the idea maze, this vast space where technologists can try new things, learn what works and what doesn't, and adapt their innovations to other parallel innovations going on. This has happened in the development of the web and it figures to happen times 1,000 in crypto, because of the way

ideas can build on top of each other and interact on blockchains. So let's give the last word to Chris Dixon, who provides context on where crypto fits in the history of computing and talks about the Web 3 era that is beginning to emerge. So the history of computing, every 10 to 15 years, there's a new computing cycle. So that's going back to the advent of computing in World War II, to then after that mainframes, to mini computers, to PCs, the internet in the 90s, and then mobile phones. phones in the 2000s. With each computing cycle, there's a new kind of computer invented, and then that kicks

off a wave of applications that are built on top, and you end up with a virtuous flywheel where the new applications help reinforce the new type of computer and the new type of computer, as it gets better, helps reinforce the new kinds of applications. So we view crypto or blockchains as a new type of computer, putting all those other primitives together, kind of think of them as Lego bricks. You can make bigger Lego bricks, and one really exciting Lego brick, people are designing a called decentralized autonomous organizations. Why would you want to decentralize autonomous organization?

Well, one really interesting one is what's called the Web3 movement. The Web 3 movement is a response to sort of the history of the Internet. So the first era of the Internet was a very decentralized era where you sort of governed by protocols like HTTP and SMTP. And those open protocols led to a whole exciting wave of startup creation, everything from Google to Facebook to YouTube, et cetera. The Web 2 movement was also very exciting. these were Facebook, Twitter, and other kinds of large platforms,

but one negative of the Web 2 movement was those were closed platforms that didn't really allow innovation on top of them. The Web 3 movement is trying to kind of take the best of both Web 1 and Web 2. And so have the open access of the first year of the web, while also the advanced functionality of the second era of the web. In order to do that, decentralized organizations are a very powerful idea. And the idea is you can create a social network, You can create a marketplace like Uber or Airbnb.

You can create a messaging app like WhatsApp. But instead of having it be controlled by a corporation, it's controlled by a decentralized organization, by a community of people who come together and are united in this kind of cloud organization. And that means that you can do things like you can make commitments, the organization, the centralized organization, make commitments to users. You can tell users, hey, if you use my social network,

I'm not going to change the rules later and violate. your privacy. I'm not going to try to monetize your data. It can make commitments to developers that say, hey, if you're a developer and you build on top of my social network and you build a business on top of it, I'm not going to decide to change the rules later and take all your money or change the API. And so these DAOs, these decentralized organizations, are very powerful new ways to think about the ownership and control of a next generation of digital services. Thank you for listening to this audio essay. If you'd like to learn more about building in crypto, we have many resources, including our crypto startup school series, featuring more than a

dozen videos and lectures from expert teachers as well as many supporting resources, and our 30-minute documentary on Crypto Startup School that tells the stories of crypto builders. You can find all of this original crypto content and more on A16.com.