Introducing FOMO and FUD

In venture capital parlance, FOMO and FUD are the equivalents of Calvin and Hobbes. FOMO, or the Fear of Missing Out leads angels to invest, or overinvest in ventures with little future. A classic example from very recent memory is the $440 million investors have pumped into Therano, a blood testing startup that claims to turn the experience of blood tests into something your five year old will seek out in the same way that he seeks out minecraft videos on youtube today. As rumour goes, Therano has little by way of academic research, patents or IP and as of Friday, with the US FDA walking landing at Therano's HQs for a surprise inspection, FOMO has morphed into FUD in less time than it took Cyberdyne Systems Terminator, Model 101 to stop smiling and start shooting.

The Bull Run of Pamplona

FUD's long name is Fear, Uncertainty and Doubt. Life in the mythical venture land starts with a ride of FUD and ends deep in FUD too. Go back a mere two years and Bitcoin was a space of pure FUD in the same way that the otherwise sweet kid in Omen was pure, innocent evil. Fast forward to today and FOMO shines the kindly light upon the entire Blockchain planet, leading investors to pump a billion dollars in Bitcoin related ventures alone. This excludes angel investments, investments by banks and other market participants in their blockchain labs, cost of blockchain events, bitcoin foundation salaries and a whole slew of costs that are unaccounted for.

To be fair, a lot has happened in those two years with the banks (UBS, Barclays, GS), regulators (CFTC), governments (UK, US, Russia) taking the lead in playing nice with the bit coiners and everyone else jumping in in sheer FOMO. However, anyone who’s watched the Bull run of Pamplona on TV would know – the warm, loving arms of FOMO hide his evil little sister FUD, ready to take a bite off everyone’s ear, as soon as there’s a trigger, from a completely unrelated source – such as the Fed & the BoE raising interest rates… or the Chinese government doing what it does best – surprise the rest of us.

I was there – I was there in 2001, and I was there in 2009…

The Internet of Value Needs Standards 

If we think of the Internet as the backbone used to move information around from subnet to subnet through routers; both permissioned and permissionless blockchains, connected by sidechains, might form the backbone that’s used to transfer value around.

In that scenario, GLOBAL trust is not required, it simply emerges from LOCAL subnets of trust communicating with other subnets of trust via trusted side-chains.

However, as bright as this future of Blockchain looks, it CAN NOT arise in the absence of standards. The lack of standards prevents market participants from trusting or talking to each other, having the level of technology and process infrastructure to run real, regulated businesses in a controlled manager or trust the technology itself. It prevents governments, regulators and enablers like professional services firms from doing what they best as enablers. It prevents developers from monetising their innovations and consumer endpoint owners (think Apple and Square) from scaling.

We Evolved, But Not By Accidents Alone…

Let’s be clear, we didn’t end up with the internet as it is today with a random walk of the crowds. The OSI layered architecture for the internet is a negotiated standard.  So are the countless protocols for each layer that we simply rely on today, including TCP/IP that emerged out of the 1974 IEEE paper and much else that sits on it.

And let’s not forget the role of DARPA… the ultimate, noble central authority.

In that context, we are still way back in the 1980s when it comes to Blockchain. While certain service providers e.g. exchanges, wallets and payment providers are vaguely profitable, there’s no real market participant who can claim to have built a real, scalable, Blockchain business in the same way that Amazon or Netflix have built an internet business.

Four types of Industry standards

• Evolutionary Standards (Bitcoin)

Bitcoin is the classic example of a standard where a community without any central control pools an infinite sequence of ideas and some get voted for and evolve into a de-facto set of standards. A number of alt-coins have also evolved from Blockchain with small communities treating these as standards, well, until something bad happens.

This is when everyone makes a little bit of money but no one really makes much, apart from Dr. Nakamoto, and even he can’t use his coins without having his picture taken by a KYC man at a bank. Beautifully dangerous, deceptively treacherous.

• Forced/Proprietary standards (Apple and Everything Apple)

This is a scenario when let’s say the Ripple protocol evolves into the predominant market standard for a subsector of payments in the same way that SWIFT is today. This is when DAH owns the cryptosecurities P2P network and becomes another NASDAQ of sorts, charging everyone else a Toll to drive throught on their highway.

In a scenario like this, it’s the technology player, or the endpoint provider that will capture the value. I don’t like this monopoly planet one bit. It’s possibly the worst economic outcome because it raises prices for the consumers and we’re back to the times when banks sweetly and nicely, though secretly and unashamedly charged PPI insurance on loans.

• Open Standards (Linux/Ethereum – think IBM PCs/HTML/Android)

This is much of today’s internet. It’s a set of free for all (GNU is not Unix), but controlled, widely understood and selectively negotiated standards that came out of the DARPA and a number of universities and grew. Initially, the only players that made money were Cisco and Telcos but then RSA came around and powered the backbone that allowed the consumers and the merchants to talk to each other safely. The rest as they say, is hotmail, and history…

This is the best economic outcome – but one that can take very long, and may never arrive.

• Regulated/Negotiated Standards (GSM)

This is when the  standards bodies like the government sponsored consortia and the R3 partnership, lead to an active marketplace for a wide variety of market participants.  

This is a smaller future but it’s very big – big enough for everyone – and it arrives much faster, and much more safely than evolutionary standards.

Move Over Satoshi-san, the POTUS is Here…

I do not anticipate completely de-centralised solutions like Bitcoin to work, or to be permitted in most financial markets. What’s much more likely is that the bulk of the internet of value will  have permissioned, scalable, monitored chains that are hosted or run by trusted third parties – the government, the central banks, the regulators and so on.

So what should governments do to power the economic efficiency that these automated networks of value promise to deliver? On one hand we have the dictatorship of the regulators – and I like it just as much as I like the Internet in North Korea. On the other we have kids watching at home everything I don’t want them to watch, except this time if they watch it with money, I will not use the internet at all.

Prescription: Let the Philosophers Rule on Mount Acropolis…

The best option is for the governments to faciliate rather than control the standards in the same way that DARPA did. I don’t believe in crowds and I don’t believe in governments. I do believe in selfless academics who want nothing more than a modestly paid tenure, negotiating standards for beauty, on Mount Acropolis, far from the maddening FOMO and FUD of the crowds & the VCs.

If Blockchain has to deliver the promised future it holds, the industry needs to negotiate standards in each application area where the technology holds promise. These include, but are not limited to verticals such as Identity Chains, Crypto Securities, Payments, P2P Insurance and so on, but also horizontal areas such as cryptographic standards, scalability parameters, interoperability standards such as side chains and legal and regulatory standards too. 

However, the agencies of the government have a key role to play in facilitating and accelerating the definition of these standards. My prescription of the state actors would be that they join and seed such bodies to get things going but then fund focused academic research into shaping these standards through their own versions of DARPA.