1/7/2015

Joel Monegro The Blockchain Application Stack

joel.mn

http://joel.mn/post/103546215249/theblockchainapplicationstack

TheBlockchainApplicationStack
LastweekIledaworkshopatNYUsBitcoinHackathon,HackBit,whereItalkedaboutBitcoinasaProtocol,
alternativeusesfortheBlockchain,andalittlebitaboutthechallengesandopportunitiesthatlietherein.I
triedtoshareeverythingwevebeenlearningaboutthisspace,butunfortunatelytimecoinstraintsprevented
usfromdoingadeepdive.Tocompensate,Illbewritingaseriesofshortblogpostsexplainingsomeofthe
ideasinthatworkshop,startingwithalookatwhatImcallingTheBlockchainApplicationStack.
ThefirstthingBradtaughtmewhenIjoinedUnionSquareVenturesisthatoneofthegreatestthingsabout
workingintheVentureCapitalbusinessisthatyougettolookatmarketsfromaverydifferentvantagepoint.
Everyday,wehavetheprivilegetolearnwhatthefutureisgoingtolooklikefromthecompaniesand
entrepreneurswhoarebuildingit.Itsthrilling,especiallyifyoureatechnologygeeklikeweare.
WespendalotoftimelookingateverythingthatsgoingonwithBitcoinandtheBlockchain.Thisinvolvese
mailing,tweeting,texting,calling,skypingandmeetingwithteamsallovertheworldwhoarebuildingnext
generationtechnologiesandapplicationsthatleveragetheblockchaintoundomanyoftheparadigmsthat
dominatethesoftwarebusinesstoday.Somearejustideas,someareproductsalreadyinthemarket.Some
haveflopped,andsomehavegoneontoraisemillionsofdollarsinfunding.Beingexposedtoallthesehas
allowedustoidentifycertainpatternsandtrendsthatarehelpingusbuildanimageofwhatscoming.Idlike
tobeginsharingwitheveryone,aswellasinviteyoutohelpusthinkthroughthis.

ThisiswhatIthinkthearchitectureofinternetapplicationsisgoingtolooklikein10years.Thisisjusta
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Joel Monegro The Blockchain Application Stack

simpleillustrationanditleavesalotofimportantinsightsandissuesout.Illtrymybesttoexplainthe
thinkingbehinditbelow.Tokeepthingsshort,wellrunthrougheverypartofthestackfromthebottomup,
anddoadeepdiveoneachinthepoststhatwillfollow.
Thebasicideaisthateverythinginsidethegrayrectanglesisdecentralizedandopensource.FornowIm
callingthesetheSharedDataandProtocolLayers.Nobodycontrolsthesepartsofthesystem,andtheyre
accessiblebyanypersonorcompany.IfweuseBitcoinasanexample,theBlockchainistheshareddata
layerandtheBitcoinprotocolisaDecentralizedProtocolthatspartoftheSharedProtocolLayer.
Youllnoticethateachlayergetsthinnerthehigherupyougo.YoullalsonoticethattheSharedDataand
ProtocolLayerscoverabout80%oftheentirestack.Internetapplicationstodayarebuiltontopofopen,
decentralizedtechnologieslikeTCP/IPandHTTP,butifyouweretographthecurrentinternetapplication
stacklikeabove,thoseopen,decentralizedprotocolswouldprobablyonlymakeupabout15%with
everythingontopbeingprivateandcentralized.
1.MinersandtheBlockchain.
IfyouknowalittleabouthowBitcoinworks,youknowwhatminersare.Inanutshell,minersarethenodes
inanetworkofcomputerswho,together,verifyallBitcointransactions.Inexchange,thealgorithmrewards
themwithBitcoin.BecauseBitcoinhasrealworldvalue,theoperatorsofthesemachinesareincentivizedto
keepthemrunning.Ifyoudliketolearnmoreaboutmining,thisisagreatexplanationofhowtheywork.
TheBlockchainisthepublicledgerthatholdsapermanentrecordofallBitcointransactions,andis
maintainedbytheminers.Itsnotcontrolledbyasingleentityanditsaccessiblebyeveryone.Youcanread
moreabouttheBlockchainhere.
2.OverlayNetworks
Thisiswherethingsstarttogetinteresting.Developersarestartingtobuildnetworksthatworkinparallelto
theBitcoinblockchaintoperformtasksthattheBitcoinnetworkcant,butthatmakeuseoftheBitcoin
blockchainto,forinstance,timestamporvalidatetheirwork.
OneexampleisCounterparty.AnothermightbeSideChains.Whateverformtheseoverlaynetworkstake,
theonethingtheyhaveincommonistheirconnectiontotheBitcoinblockchain,andhowtheybenefitfrom
itsnetworkeffectstoachieveliquiditywithouthavingtobootstraptheirownalternativecryptocurrencyand/or
blockchainlikealternativesolutionssuchasEthereumrequire.
3.DecentralizedProtocols
ThankstotheBlockchain,forthefirsttimewecandevelopopensource,decentralizedprotocolswithbuiltin
data(thankstoOverlayNetworksandTheBlockchain),validation,andtransactionsthatarenotcontrolled
byasingleentity.Thisiswherethetraditionalarchitectureofsoftwarebusinessesbeginstobreakdown.
ThebestexampleofadecentralizedprotocolontopofaSharedDataLayerisBitcoin,andwerealready
wellawareofhowitsaffectingmoneyandfinance.
CompanieslikeEbay,FacebookandUberareveryvaluablebecausetheybenefittremendouslyfromthe
networkeffectsthatcomefromkeepingalluserinformationincentralizedinprivatesilosandtakingacutof
allthetransactions.Decentralizedprotocolsontopoftheblockchainhavethepotentialtoundoeverysingle
partofthestacksthatmaketheseservicesvaluabletoconsumersandinvestors.Theycandothisby,for
example,creatingcommon,decentralizeddatasetstowhichanyonecanpluginto,andenablingpeerto
peertransactionspoweredbyBitcoin.
Infact,anumberofpromisingteamshavealreadybegunworkingontheprotocolsthatwilldisruptthe
businessmodelsofthecompaniesabove.OneexampleisLazooz,aprotocolforrealtimeridesharingand
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anotherisOpenBazaar,aprotocolforfree,decentralizedpeertopeermarketplaces.
4.OpenSourceandCommercialAPIs
Protocolsarehardfortheaveragedevelopertobuildontopof,sotheresanopportunityinmakingiteasyto
connecttothem.Whetheritsagoodbusinessinthelongtermisupfordebate,butIthinkitsavery
importantpartofthestack.Makingitquickandeasyfordevelopersofanyskillsettoquicklybuildan
applicationandexperimentontopofthesedecentralizedprotocolsisparamounttotheirsuccess.
Thesewillbeeithercommercialservicesoropensourceprojects.Goodexamplesofthistrendare
Chain.comsAPIsandCoinbasesToshiforBitcoin.Theybothservethesamepurpose,butChainisa
hosted,commercialservice,andToshiisOpenSource.
5.Applications
Thisistheconsumerfacingpartofthestack.Applicationsbuiltatopthisarchitecturewill,inmostcases,
workverysimilarlytotheoneswehavetodayjustlikeCoinbaseworkssimilarlytoPayPal.Thebig
differencetoconsumers,however,isthatbecausetheyarebuiltondecentralizedprotocols,theywillbeable
totalktoeachother,justlikedifferentemailapplicationsandbitcoinwalletscaninteroperate.
OnethingIlikeaboutthisstackisthatitsgrowingfromthebottomup.Firstwehadminers,theblockchain,
andBitcoin,andnowwerebuildingeverythingelseontop.AsfarasIknow,themostsignificantrevolutions
intechnologyhavebeenbuiltthisway.
Thisimposesaveryinterestingsetofchallengesfordevelopers,entrepreneurs,andinvestorsassomuchof
thevalueinthecurrentInternetstackwillbecommoditizedbythisarchitecture.Butthebestthingaboutthis
stackisthattheuserisbetteroffthankstolowerornonexistenttakerates,switchingcosts,individual
ownershipofdata,andconsumermarketpower.ThisisthepartIdliketofocusmoreoninthepoststhat
follow.
Ifyoulikedthispost,youshouldfollowmeontwitterheretobenotifiedwhenthenextoneintheseriesis
up.
(ThankstoFredWilson,AlbertWenger,andMuneebAliforhelpingmepolishthispost)

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