Isaac Asimov and great ideas.

There is an article printed in M.I.T.'s Technology Review written by Isaac Asimov about how people get new ideas. I suggest you go read it

"Probably more inhibiting than anything else is a feeling of responsibility. The great ideas of the ages have come from people who weren’t paid to have great ideas, but were paid to be teachers or patent clerks or petty officials, or were not paid at all. The great ideas came as side issues."

Thoughts on Moats and Monopoly

The economics of the technology field is drastically changing from the past. Businesses that are known for selling physical goods still deal with diminishing returns. By virtue of this very fact they run into their own limitations. Yet the very idea of diminishing returns is taught in both business schools and to many economics majors. (I should know, since economics was a major focus of my undergraduate career and we learned quite a bit about this subject). In many aspects, this idea makes sense. Especially in the commodities business. In fact, most all commodities run into diminishing returns. You can only grow and mine so much of your resources. Remember, I am talking about physical commodities here. But the fact still remains that it has been assumed, especially in the past, that most companies will reach a state of diminishing returns selling their products in the markets.

However, this line of reasoning is dramatically changing as more and more companies are now in the business of collecting/selling data and information. So what is the result we are seeing with this change? Now we are starting to see companies that have increasing returns as the processing of resources turns into the processing of information. What makes the concept of increasing returns interesting is what it enables a company to do if it has them. For starters, those companies with finite resources will compete with one another until the price is pushed down to an equilibrium level. Those companies that go below this level will start losing money and may find it harder to stay in business. On the other hand, those companies with increasing returns will move further and further ahead and have a higher probability of locking in their particular market. Not only does this idea go against the grain of your typical competitive analysis, but it also gives these highly competitive businesses the ability to operate differently in their market.

There are only a few companies (but I am sure there will be plenty more in the future) that are able to operate this way and thus are able to push super far ahead in their markets. One such company that I will briefly analyze is BuzzFeed. This company may not be the first that comes to mind and may even seem a bit silly but hear me out. BuzzFeed, along with Vice, are leading a new wave of media companies into the 21st century. They are long term focused with BuzzFeed's main focus being on social advertising. And Vice is busy changing the rules of the media game with video. In fact they reach a young audience in a way that makes most advertisers drool. 

Back to BuzzFeed, You know you have seen their idea of social advertising. How many times have you been super annoyed by some of your Facebook friends taking all those ridiculous quizzes to see which movie character they are. Or what their real career should be? Those are all paid for social advertisements and they work because most everybody takes a break from their work day and takes one or more. After all, I want to know which super hero I really am. Although it is mostly by luck that there is even a social advertising market in the first place, they lead it with focus, efficiency, and fun. By having the right platform, with the right product, at the right time, they have enjoyed a large amount of increasing returns and become one of the highest valued new media companies right behind Vice. They are enjoying increasing returns not because their process can't be repeated, but because they are already so far ahead of their competition. 

Another such newer company that uses increasing returns in an extremely valuable way is Uber. In fact Uber is changing many rules of the game and if the company is analyzed closely, more people might see just how much change it can bring about. Uber has created a loop that will just continue pushing their returns to astronomical levels. Think about it like this, there is an initial demand for available cars, this creates an increasing demand for more drivers, which increases faster pickups, which leads to a greater demand of available cars. Also, an increasing demand for drivers leads to less downtime for drivers, which means lower prices for customers, which again, leads right back to a higher demand for available cars. Uber has this down to a science. Let's not forget that they are also partnering with smartphone vendors, car manufacturers, credit card companies and insurance companies. Slowly but surely, Uber is making itself the undisputed market leader and the competition will not be able to keep up. There are also other variables that I have not even analyzed here such as car ownership going down, the density of their coverage and how it is growing quickly, the dual rating system (the drivers get to rate the users), and trust. Let's also not forget the damage they are doing to the taxi industry

The last company I'm thinking of doesn't need much of an introduction at this point but Google's search functionality enjoys increasing returns by the shear fact of how powerful their market share has gotten. Peter Thiel argues they are a monopoly and how that is good for them. I would argue that they have built a powerful moat around their search and advertising business and it is become incredibly difficult to compete with them in these arenas.  Only time will tell if this thesis is correct or not.

I'm sure there are a few ideas right now that small startups are looking to create a business out of and I'm pretty sure that one or maybe two will enjoy increasing returns to the point of creating a protective moat around their business. In fact, I wouldn't be surprised if it was in the Bitcoin/Altcoin community right now. But as I said earlier, only time will tell.

__________________, Genius.

I just found this piece written by Biz Stone for Wired magazine last year and thought I would share it. Here is my favorite quote from this article from Wired. 

"By simply announcing himself as a genius on his business card, Wile E. Coyote epitomized the spirit of the Silicon Valley entrepreneur. When you’re starting a company, you sometimes have nothing more than an idea. You have to begin somewhere, so you declare yourself an entrepreneur just like Wile E. declared himself a genius. Then you make a business card and give yourself the title Founder and CEO.”

You can learn about "Faking It" Here.

Personal API Key

I read an interesting blog post yesterday by Albert Wagner of USV. In it he talks about the impact that many new companies are having with freelancers as traditional employment is falling. And while these marketplaces are growing, the biggest influence will be access to the information they employ (with the marketplaces winning since they will have access to all of their information). His suggestion is an individualized API key that would have the right to access full read/write capabilities in the marketplaces system that the user can then see via an application. Or as he put it, it will be the right of the individual to be represented as an algorithm. My thoughts immediately started thinking about how this could be done via blockchain technology but I will have to look more into that idea.

I am currently working on an essay about the "increasing returns" that information can bring to a company and should have it posted within the week. If you are interested, you can check out Albert's essay here.

Kitchen-Table Economics

There is a question that economists have dealt with for years which is "if we have markets, why do we need the corporation"? I'm pretty sure this isn't a thought that crosses most peoples minds on a day to day basis but it is something that I have thought about from time to time. So how do we find the answer? Let's first look at the question another way, "What is the best way to properly allocate capital and organize labor"? From that question, we can say say that the best method has been the corporation. So why is that? And is the corporation the best way to go about it?

Economist Ronald Coase was able to analyze and answer this question with his seminal essay The Nature of the Firm. Due to a set of issues related to discovery costs, transactional costs, and obscured reputation, it is simply too expensive to keep making and doing certain processes over and over again. So the solution has been to start a corporation and create and sell a product or service to the public that way. It works pretty simple. People are hired into a corporation to work on a specialty and they focus primarily on that output. Each employees input (whether that is an expertise in marketing, finance, sales, or product creation), contributes to a much larger output (a finished physical good or service) that the corporation then sells to its customers. For example, Ford's assembly lines in the early 20th century are an amazing example of inputs coming together for a bigger output. In fact, Ford's process was so great that it revolutionized the way that factories were run, and help put in place more specialty focus for each employee. This process caught on to many other companies in other industries and suddenly more products could be made much quicker and gotten out to more people in less time. For the majority of the 20th century, The U.S. was the biggest exporter of manufactured goods.

Skip ahead to the 21st century and things are not what they used to be. China is the number one exporter of manufactured goods and the U.S. has slowly turned itself into a service driven economy. Because of this, I think that we will start to really see some major changes with manufacturing. In the past, and thanks to the assemly line revolution, large quantities of the same product could be made quickly and shipped to its destination in a short frame of time. Furthermore, with Deming's statistical research and systems put into place (think lean manufacturing and six sigma), manufacturers could suddenly make their products faster with little defects. Japans rise to dominance in the 1980's is a prime example of what could happen when manufacturing is done correctly. (I will skip over their economic fall from grace in the early 1990's to the present). 

But times change and broadly speaking, more people want products or services that are individually made for them. This isn't something that is easy to do when your entire line of products has little variation and your company must sell a large quantity just to break even. The fashion industry is catching on pretty quickly thanks to the Spanish behemoth Zara. Although they don't manufacture clothing for each individual person who wants it, their supply chain is so streamlined that they can sell out of a popular product, have more quickly made, and shipped back to the store in a heartbeat. Their process is unreal and a testament to how effective a well run supply chain can be for a company. There are only three other companies that I can think of with such an effective supply chain and that is Apple, Amazon, and Wal-Mart.

So what about hardware products, or smaller products that don't need huge assembly lines to create? Will it be easy to manufacture these products that are tailor made for each person in the future? Part of that answer could be 3-D printing, which has the ability to really throw the manufacturing world on it's head. 3-D printing is still in the early adoption phase, but once more people start to see how it can be used, and the price of printers comes down to the point that most anybody can easily buy one for a cheap price, we will probably start to quickly see some changes with the manufacturing process. It has even been stated that 3-D printing could bring about the second manufacturing revolution here in the U.S. I don't know if it's true but I'm pretty sure we will find out quickly enough. With this type of technology, more and more people will be able to print and manufacture their own products right at their own kitchen-tables (or garages if they need more space). But this technology is still in the early adoption phase and unless there a few companies that are able to cross the chasm soon, then this will remain a niche technology for those who understand it.

The other part of the answer are the newer types of marketplaces that give smaller creators access to more people. Etsy is the most prominent example I can think of at the moment and it has done wonders to create a whole new market for people to sell their creative wares to other people. These micro niches give people access to (mostly) hand-made products that will work out perfectly. And I wouldn't be surprised if customers contact these smaller one-stop shops to request a product made specifically for them. 

So what does all this have to do with my original question, "if we have markets, why do we need the corporation"? Because we are starting to move into a place where more people will start making their own products and services to sell to other people on an individual basis. And by that I mean more products will be tailor made for people instead of the one size fits all approach. These people are creating new marketplaces at their kitchen table with technology leading the way. And some of these people will have products that sell more than others and it will require them to better organize their labor and allocate the capital working for them. And the best way to do that will be through a corporation. Love them or hate them, the basic idea of the corporation is the best we have come up with yet to do all of this. 

Dead Capital

A few days ago I purchased some Ether from the Ethereum Project Genesis Sale and was curious what other people though about it. In doing so I was led to this this article by economist Hernando de Soto from 2001 on dead capital. You can read the whole article here, but the stand out thought to me was this: 

"To be useful in an expanded market, capital must first be represented in a property document where it can then be assigned a status that allows it to produce additional value. What most people possess outside the West is not “paperized” in such a way as to produce capital."

According to de Soto's research and findings, there is over $9.3 Trillion in dead capital outside of the West. That is, there are $9.3 Trillion in unaccounted for assets that cannot be claimed by anyone. And this value lies among those who are the poorest in the world. This has happened for a number of reasons such as government bureaucracy, politics, and ignorance to name just a few. Unfortunately, this keeps the poor from being able to make any claims or uses of their property. 

So this is where Ethereum can come into play. The project uses the Blockchain concept (which I explained here) but brings it to a whole other level. Whereas Bitcoin is mainly used as a virtual currency that can be used for transactions, Ethereum wants to be the protocol for any kinds of applications to be built on top of and used. In other words, Ether can be used to transact almost anything.

Think of it like this, most of the protocols that have been created have mainly been targeted towards the financial industry. Ethereum is intended to be as general as possible and allow anyone to create specialized applications for whatever purpose they think up. Suddenly we have a way to start representing those trillions in dead capital again. This could be a truly revolutionary concept if it's successful. It has the capability to register property and give those rights to the poor, which in turn can help reduce corruption and could ultimately be the way to help free up a large amount of dead capital.

This isn't just a pipe dream either. I truly hope and believe more technologists and businesses will start using the tools and platforms that are being created right now to start helping more people in the world. Although I know that Ethereum will be used in many other great ways in the future, what it is capable of changing for many people in the world will be truly astounding. This is definitely an area worth keeping an eye on.

Wide-Open Frontier

Reading through a blog post Kevin Kelly wrote I came across this quote: 

Can you imagine how awesome it would have been to be an entrepreneur in 2014? It was a wide-open frontier! You could pick almost any category X and add some AI to it, put it on the cloud. Few devices had more than one or two sensors in them, unlike the hundreds now. Expectations and barriers were low. It was easy to be the first. And then they would sigh, “Oh, if only we realized how possible everything was back then!”

The optimism that runs through this essay is great and I highly recommend this interview for further thoughts on the future of tech and it's place in the world.

Questions for the Information Age

I've been thinking a lot about the information age, artificial intelligence, and how machine learning are affecting society today and it's led me to start pondering a few questions. So I thought I would write them down. Here they are in no particular order. 

  • What are the implications of a truly intelligent machine? And by truly intelligent machine, I mean one that doesn't need to take directions from a human, but can instead make decisions based on the information it has gathered and the information it predicts will take place in the future. 
  • There has always been talk that machines will take over everybody's job and we will all be jobless. I don't think that is completely true, and there is an excellent argument as to why that won't happen here. But I will argue that machines and software will take over many jobs that can be easily automated leading to many who don't have the correct skills or even the ability to learn those skills to suddenly be out of work. Which leads me to ask how society will deal with these types of changes? Will government have to step in with a new set of regulations or mandate a basic wage for everyone effected? 
  • In what ways will machine learning really begin to help push our society forward in the future? This is a question that has really been ringing in my mind for a while. Currently there are a lot of machine learning algorithms that are used to help sell us products we may not know we want or help choose the right movies or music recommendations. But how will it be applied in fields like health, weather, logistics, supply chains, or even sports? The right creative applications in these fields will really change society and I would argue for the better. Health is an area that I think will be truly changed, especially if these apps are combined with hardware elements. Being able to collect data about ourselves and better understand the probabilities associated with certain health issues will truly revolutionize the field and help future generations live longer, healthier lives.
  • How far into the information age have we transitioned from the industrial age? I would argue that we are still in the middle of the movement and that this is one of the reasons there is a lot of pain the in economy right now. We are seeing it on an almost daily basis with the types of products and services that companies are creating and how people and governments are reacting to them. Many of the past transitions have been extremely painful for everyone but we still have those movements to learn from. I would recommend this book by Carlota Perez if you want to understand what is happening now. The models she uses really help shed a light on what is happening in our current economy and why. 
  • Will it be possible to create a Sentient A.I. and if so, how close to it becoming a reality is it? The answer to this question seems like a pretty good dividing line in the technology world and has already gotten some pretty big players a little nervous. I for one am very interested to know if this is even possible in this lifetime. 

As I stated above, these are just questions that are going through my mind at the moment. I don't know the answers to them yet but the direction our society is heading leads me to believe that we will begin to understand them more and more as time goes by.

Hedging Risk

In my last post I talked about some of the issues that many people have when it comes to trusting Bitcoin. Speculation and volatility are too high and it's seen as a risky move to start accepting it as a regular currency. Luckily, there are a lot of players in the community who are working through these issues to help build trust with potential adopters. I recently came across the news that Coinbase is now allowing merchants to instantly sell their Bitcoin and convert it into dollars. This will help alleviate and hedge any risk that merchants may have with using it for transactions. The hope is that if more companies start making moves like this, more people will start adopting and using it on a regular basis. And that is a good thing for the community that already uses it.

I'm also starting to come across many articles and news stories about Bitcoin entering it's disruptive phase, including this video from Bloomberg. Whether you are interested in this market or not, it is definitely going to start making a larger impact soon. 

Thoughts on Bitcoin

I've been thinking a lot about Bitcoin lately and decided that I really wanted to understand it better so the decision was made to compose this essay. After doing a ton of research it became apparent that this technology can be seriously disruptive but that many people don't yet understand the value it can bring. Hopefully this essay will help fill in the blanks for people who don't quite yet understand completely how it works. 

Bitcoin has the capability to be an extremely disruptive technology but it still has a lot to prove. In order for it to really take off, more people need to start using it as an exchange of value. The ability to make everyday purchases with it will certainly help its adoption rate increase. As it stands, many traders and some early adopters are treating it more like a speculative financial instrument, holding it in hopes that the price will increase the way it has been moving over the past six months. But there could be a higher adoption rate if more people would start spending it on goods and services. After all, Bitcoin could be the next natural step in the evolution of money. So how can we get more mainstream adoption, what else can it do, and what could it look like in the future?

For starters, Bitcoin is the first real money (currency) to be born on the internet and used in the real economy. There are over 12.85mn Bitcoins in circulation with a total market cap of $8.3bn. This is astounding seeing as how it was basically mined out of thin air not more than five years ago after Satoshi Nakamoto released his paper. But what is even more astounding is that as a protocol for the exchange of value, it does not need any intermediary (such as a bank or credit card company) to make a transaction happen. All transactions are validated using its public ledger, known as the block chain, by miners. These miners essentially donate their computer power in exchange for the chance to gain Bitcoins. There is also a fixed supply of 21bn coins and no monetary authority creating them. So what does this mean for Bitcoin as a store of value? It means they are deflationary and since no central authority can make monetary decisions with it, it cannot be defended with policy actions.

So what differentiates Bitcoin from other financial technologies? First of all, it is peer-to-peer meaning there is no need for an intermediary to validate any transactions as I stated earlier. It is also open source and yet still securely authenticated with the combination of the miners and block chain validating each block. I won't go into the security mechanisms but I highly recommend anyone read the original paper as it is described how it works there. Finally, it is a self-propelling because it uses its own product to pay the miners who are authenticating each transaction. It is able to function properly based on all these actors and processes participating within in its system.

In order for this system to truly work though there needs to be a higher adoption rate. But it order for that to happen Bitcoin needs to be used more as store and exchange of value, not as a highly speculative financial instrument. With price volatility occurring almost on a daily basis, there could be more cause for concern among people who have not adopted it yet. And eroding the trust of potential users is not what the community should want. If more governments begin offering guidance, then more businesses may be willing to start accepting it, giving consumers a better reason to spend it. However, too much guidance may cause potential entrepreneurs to balk at regulations. Security concerns will also top the reasons for a low adoption rate and the implosion of Mt. Gox sent many negative signals to potential users. There simply needs to be tighter security implemented into future banks and exchanges. Perhaps following the protocols of traditional banks should be looked into. 

Beyond it's currency aspects, there are many other products and services that be built using this technology. For one, it simplifies the process of transferring assets. This is where the block chain really comes into play. For example, by denoting small portions of Bitcoin as physical property, also known as colored coins, it can then be used to publicly identify who currently owns a piece of property, the record of past ownership, and the history of that property. Think of titles of cars, financial contracts, and real estate. Each owner of these coins could then directly transfer their property with out the need of an outside broker (such as a lawyer or notary).

Identity management is another idea that could be implemented with block chain. For example, instead of needing a passport to travel from country to country, one could simply provide their public key, which could then be implemented as an entry on some block chain network. This concept could also be applied to IP addresses where each address is a payment layer. I didn't have time to dig to deep into this idea so I recommend reading this post.

But for any of these ideas to take hold there must be a healthy amount of trust among potential adopters. In order for that to happen, the current Bitcoin community should work on solving those trust and security problems. Another exchange meltdown, security problems, and continued high volatility will create more problems for the system and ultimately keep it from potential new adopters. Although it goes against many of the early and current opinions of how Bitcoin should work within the system, governments that issue guidance and create safeguards for mainstream consumer protection could help the benefits of the technology become more realized.

Bitcoin is a great example of how a truly new and revolutionary technology can seemingly pop out of nowhere. And consumers, companies, and governments should keep a close eye on it because of its potential for impacting many aspects of our lives on a daily basis.