The Breakdown - Will Mass Adoption Be More PayPal or Pornhub?

Episode Date: January 23, 2020

There is an ongoing debate in the crypto community about where mainstream adoption. One point of view is that it will be the slow steady acceptance of digital assets. On that front, Bakkt president Adam White said in Davos yesterday that the company is on track to launch their app this year.  Another perspective is that the main use case of crypto is to enable otherwise censored transactions. Lending credence to this perspective is the case of Pornhub, which saw payouts to its more than 100,000 performers blocked unexpectedly by PayPal in November, and which announced cash outs via Tether (USDT) today.  In this episode, @nlw breaks down these two arguments and asks whether they’re mutually exclusive.  Also discussed is the new BCH mining group (cartel?) insisting on a 12.5% block reward dev fund, as well as interesting insights and data from research from CoinDesk and The Block today.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Thursday, January 23rd, and we are today going to kick off looking at the ye old question of mass adoption and where it comes from and whether it's about consumers picking up new habits around digital assets or whether it's something. different indeed and is about censored transactions. Second, we're going to be looking at a new proposal out of the BCH, the Bitcoin Cash World, that would divert 12.5% of all block rewards to a new developer fund. And as you might expect, this is causing a bit of controversy. And third and finally, we'll be looking at research that has just dropped, one piece by Kondesk, that's an overview of a lot of what happened last year, and another piece from the

block and the blockchain association about trends in blockchain employment. But let's dive in with this question of mass adoption. Is mass adoption more likely to come from PayPal or from Pornhub? That's the question we're looking at today. So yesterday at an event hosted by the block at Davos, during the World Economic Forum, obviously all these different companies are hosting side events, the COO of BACT, or the president of BACT, Adam White, said that the company was on track to release their consumer-facing app this year in 2020. The plan for this consumer-facing app is to have it be more of a overall financial app experience than just a crypto app. So the way that the block called it is more PayPal than Coinbase. But it sounds to me actually like it's even more

than what PayPal offers. So BACT's app will be able to interact with a variety of digital assets. So not just the cryptocurrencies that you would obviously expect, but an array of virtual goods as well. So that could be digital versions of equities. It could be loyalty and reward points. It could be NFTs, right? So the idea here is that Bact wants to be the place where all of your digital assets live, crypto and otherwise. And so what does this really mean? What is the bet here? The bet here is that there's going to be a behavior shift in the coming years where people get comfortable interacting with digital assets in a new way. One part of that is digital monies, but they're also going to find things like loyalty points, like virtual goods, just more and more a part of the

experiences that are being offered to them. And the idea or the land grab for a company like backed is to be the place that consumers interact with that full array of digital assets. This is, I think, an adoption thesis that lots of folks in crypto feel compelled by, right? That there's an inevitable shift of everything to the digital realm and that the more people interact with digital goods, be it through just wanting to use them for money-like interactions or money-like uses like cryptos or more in the context of gaming and digital assets in gaming, there will be this growing comfort with digital assets and with the way that people interact with digital assets and the companies that are building the infrastructure now stand to win.

So this is one thesis on mass adoption, is basically the slow, deliberate, diligent growth of people interacting with digital assets, probably punctuated by spikes around particular use cases that break out for some period of time. There's another theory of where mass adoption might come from that is a very important. is less to do with mass adoption in some ways. This was articulated by Jill Carlson last year in her end-of-year post for CoinDesk, where she argued that cryptocurrency's most important use case was to enable otherwise censored transactions.

Now, this got a lot of conversation going in the space because of the almost triggering to see something that sounded like it was an argument promoting illegal use cases, which is not what Jill was going for. what she was saying is that there are certain types of transactions that are for not just legal, but often moral reasons, not allowed. And that what cryptocurrencies are good at is allowing people more sovereignty and control over how they spend their own money without having to deal with that local morality or that sort of corporate-determined morality. Well, we had another example of this just today or just over the last couple months. In November, PayPal, out of

blue and unexpectedly and without much announcement, started blocking payouts from Pornhub to its something like 100,000 plus performers, right? So there's 100,000 people who use this site to make money, right, to interact with people. And the payout system was through PayPal. Well, PayPal decided that that was an unpalatable use case to them. They didn't want that as part of their network. They didn't want that type of activity as part of their network. And so they blocked it. Well, there's a lot of people, 100,000 people, in fact, that were counting on this financial service to allow them to get their money, right? This wasn't money that PayPal had any claim to. It was something that had been given by an adult buyer to an adult seller and was now blocked.

And so there were other ways on Pornhub for those performers to get cashed out. But they just as of today announced that they would now be also offering payouts in Tether, USDT, and they in fact suggested that people use the Tronlink wallet as a way to get that tether. So holding aside anything you think about Tether or holding aside anything you think about Tron, the point here is that this is a live inaction example of cryptocurrency's value as a way to overcome otherwise censorable transactions, not because of legality. This is perfectly legal behavior.

this is perfectly legal activity, but because a centralized company, i.e. PayPal, doesn't want, quote unquote, that type of activity on their network. So the question in some ways becomes, are these visions of mass adoption mutually exclusive? And I don't think that they are. I think that there is, in my mind, an inevitable shift to digital. And I think that generations who are coming up now, who are interacting with the world in a more digital, way, who have a huge part of their lives spent inside virtual worlds in the context of games. For them, these sort of digital assets and virtual currencies are not going to be nearly as strange. In fact, it'll be many of the old legacy systems that we have that feel strange

and out of sync and out of time. So I do think that the thesis, that there is an inevitable shift to the digital realm that digital currencies will follow is true. I believe that thesis. However, I don't know that I think that that's exactly where mass adoption will come from. I do think that when it comes to proving the unique utility of a lot of these digital assets, particularly in the realm of cryptocurrencies, it is going to still and continue to be, at least for a little while, these transactions which are censored by the decision of a single centralized force in the form of a company like PayPal. We've seen this before that often, the beginning of new technologies where the use case comes from, getting around is distributing things

that people don't want distributed. Pornhub is effectively a cultural phenomenon as much as it is just a pornography site. You have 100,000 models. This is not some fringe behavior. This is as mainstream as it gets. So the fact that this thing, which counts many, many people from every walk of life, from every economic group, from every demographic background, as users is now actively promoting cryptocurrencies as a mechanism by which they can allow their business to be conducted is a powerful

thing, right? This is an example of where mass adoption and censored transactions actually meet. So what is the future of mass adoption? Is it censored transactions or is it just the slow, inevitable growth of digital assets. The short answer is probably both, but I think we're going to see a lot of spikes like this one around these sensor transactions that are going to really prove a point to people about just what makes these cryptocurrencies so different. But now, let's turn our attention to a very different part of the industry, mining and the cartelization of mining. Yesterday news broke that a group of Bitcoin cash miners, in fact the four largest Bitcoin cash miners, were basically established.

a new norm where they were insisting that 12.5% of block rewards would be diverted to a new developer fund. This developer fund would be housed in a new Hong Kong corporation that has been set up specifically for this purpose and distributed in some way that they say will be open and fair, but they don't make clear. Now, importantly, this group, which again, like I said, includes the four largest mining pools of BCH has said that anyone who doesn't completely, their blocks will be orphaned. Many people recognize this rightly, I think, right away as effectively the establishment of a cartel. Hasu says on Twitter, BCH to openly establish a cartel that directs 12.5% of all block rewards to a developer fund. The cartel will orphan any blocks that don't

donate, signed by the four largest pools, btc.top, antpool via btc and bitcoin.com. So this, as you might imagine, generated a huge amount of discussion, not just in the Bitcoin cash community, but also in the BTC community. So you have Whale Panda who says BCH implementing a 12.5% miners tax is hilarious, and anyone not donating will have their blocks orphaned, literally a centralized totalitarian regime with a 51% attack threat. Charlie Lee from Lightcoin says this mining cartel currently owns only about 28% of the BCH hash rate.

They can't enforce this coercive system. soft fork unless they come up with a lot more hash rate, and it would likely lead to many forks, adding such a centralizing feature in this coercive manner set such a bad precedent. Nick Carter jokes referring to a previous parody that he had written. He said, my Bitcoin Mining Parity wasn't meant to be an instruction manual. This is what's called, quote, dropping the veil of decentralization. It means Sir, meanwhile, kind of had a more diverse perspective on this. He pointed out a couple of things that he thinks might be good about it. or at least makes sense. From a financial perspective, he tweets, there's something clever going on.

The costs are mostly borne by Bitcoin. The cost shifting will continue to work as long as Bitcoin is hash rate dominant. From a security perspective, the tradeoff here is slightly lower hash rate in exchange for developer funding. This is sensible. Empirically, more attacks have been due to underfunded devs than to malicious hash rate. From a practical perspective, it's much better to see devs funded and incentive aligned than to watch them make protocol changes to divert fees and income to layers they control, and much better to fund them than to watch them use sock puppets to steer their community astray. But then there are three unpalatable aspects to this proposal. And basically, he says, first, it's coercive on minors. Second, and substantive problem is the way

the proposal came out of nowhere, springing such a proposal with orphaning built in on a community with no prior discussion was terrible PR and community management. And third, and finally, is that there are many underspecified aspects of the proposal, specifically who will manage the collected funds and how will they be distributed. This is exactly when some much-needed community discussion would have been useful. So overall, what to make of this? It's a clever proposal with good intent. The six-month sunset clause makes it even better, but it needs to be debated and made concrete. Any attempt to foreshorten discussion and debate is a terrible idea and sets a bad precedent. So where are people landing with all of this? Well, one, some people are just never going to be interested in anything

that has to do with Bitcoin cash, and God bless. That's reasonable. However, the people who are engaging with this, I would say come down in sort of broadly speaking two camps. There's disagreement over whether a dev fund like this is a valuable idea at all, right? There's some people who say that based on where Bitcoin Cash is and based on just the need to have developers stay engaged, that something like this could be a good move on that front. There are others who just simply don't support the idea of developer funds at all, right? And would argue that for any protocol, not just this one. So there's kind of two different takes on the concept holding aside the execution. Now, the execution is almost universally being poo-poohed and dismissed for this idea of cartilization, the built-in idea of orphaning, all of this with no discussion and coming out of nowhere, right?

It just really serves to reinforce the fact that minors are in control. So it's very interesting to watch. It's particularly interesting to watch as an outside observer with a little bit lower stake in the outcome. It's an example of live and inaction of a community figuring out where power lies and what they are and aren't going to abide by. And frankly, it also gets at this question, which we talked about earlier this week with Kevin Awaki, about open source funding and how developers are funded for their work. So we'll be really interesting to see if the community accepts this, if they embrace it, and why and what happens. One to watch for sure. Third and finally, I wanted to just briefly touch on two research pieces that both came out today.

The first is CoinDesk is now doing a quarterly research review, which I think is great. I'm a big fan of the more research and research aggregation we have in the space, the better. Often I've said on this show that I'm all about the narratives, but because of that, I really want to see as much data as I can to know where my narratives are off or at least need to be challenged. So I'm glad that CoinDisc is doing this regular recurring bit of research now. So anyways, they released their quarter four 2019 research piece. And really, in some ways, it looked at more than just quarter four. It was throughout the year.

Just a couple highlights that I thought were interesting. First, the number of addresses holding more than 1,000 BTC continued to grow. So large holders in the Bitcoin space, there's been basically a continuous gradual upward trend that continued unabated throughout the markets last year, regardless of price, which is interesting and may suggest something about either just sort of the durability of Bitcoin whales, new entrance to the market who are holding more, but either way, a continuous growth of addresses that hold 1,000 Bitcoin or more. Second, let's talk price action for a second. There were only four assets that outperformed BTC in 2019. There was Chainlink, which was by far the biggest growth asset of last year, up almost

400%. There was Tezos in the number two slot, BNB in the number three slot, ETHLAND in the number four slots. So only four assets that had any sort of real volume that outperformed Bitcoin. And finally, they also looked a lot at defy and how defy had performed over the course of the bear market. This is a number of a stat that some are calling into question. but is really the best that we have, at least right now, around understanding just the total growth of defy, the total amount of ETH locked in DFI, right? So that grew over the course of last year from around 1.7, 1.75% at the beginning of the year to a high of 3% at the end of the year. So that's the total amount of ETH that is actually locked up in these DeFi apps.

Now, the reason that some people don't love that measure, especially when it's denominated in U.S. dollars, is that when the price of ETH goes up, Obviously, that means the amount of U.S. dollar-denominated value that's locked in. Defi goes up too. We saw this just last week when there was a price bump. It was kind of hard to tell what amount of that was from the price of Ethereum going up versus new money coming in. But either way, what's clear is that more money is moving into the defy space and being locked in these defy applications. Now, the second research report that I wanted to look at was about employment trends in this digital.

asset industry. And this was a collaboration between the blockchain association and the block, and they looked at basically how this industry had grown from an employment perspective. And just a couple of top-level stats that I found really interesting. The first was that you see almost nothing in 2016, and now you have something like 20,000 industry employees. So obviously, significant, meaningful growth there. Of those 20,000, something like 85% are concentrated in just three areas. mining exchanges and development firms. So this might not surprise you. The two big economic activities and drivers in this space are speculation and trading on the one hand and mining on the other. So obviously that fits with that. But 85%, obviously a huge, huge concentration.

A second or another interesting number that came out of this was the percentage of these employees who are based outside of the U.S. It's 67 percent, fully two-thirds of the people who work in this industry are not based in the U.S. This isn't surprising in the sense that it's a great big world out there and the U.S. is only one small part of it. It is surprising if you look in the historical context of where new technology movements come from. Historically, it's always been centered around the U.S. And I've often said that one of the things that makes this industry so exciting is that it's the first major tech innovation space that is growing up concurrently, not just in the U.S., but around the world at the same time. and in fact other parts of the world have significant claim to say they are ahead or developing

it even further and faster in different ways. So that seems borne out at least in these employment numbers. Finally, one random number that I thought was remarkable. Now, there aren't a particularly huge number of utility token launches going on anymore. That's kind of a 2017 term. However, 40% of the utility token launches that did happen last year took place in Singapore. So obviously a huge amount of geographic and jurisdictional arbitrage heading in favor of Singapore when it comes to people who are trying to launch utility tokens for token-driven networks. So really interesting stuff. Like I said, I think that this type of research is incredibly valuable and just a great way for us to check ourselves against our own narratives. But let me know what you think.

What other numbers did you see that were interesting or exciting in that CoinDesk report or in the Blockchain Association and Block Report? What do you think about this question? of BCH and the cartilization of mining? Is it just what you would expect or is it something new? Is it actually good for the community? Is it something that other protocol communities should think about? And finally, what do you think about this question of mass adoption? Do you think it's going to be more PayPal or Pornhub? Hit me up at NLW on Twitter. Subscribe on substack, nLW. com. And as always, thanks for listening, guys, and I will catch you tomorrow.