a16z Podcast | Trends in Cryptocurrencies

Key Participants & Context

• Event: A16Z Summit recorded in November 2017.
• Moderator: Chris Dixon, General Partner at Andreessen Horowitz (A16Z).
• Panelists:
  • Juan Bennett: Founder/CEO of Protocol Labs.
  • Olaf Carlsen-Wi: CEO of Polychain Capital.
• Focus: Summary of cryptocurrency trends, infrastructure building, and the shift toward peer-to-peer networks.

Investment & Protocol Trends

• Polychain Capital invests exclusively in cryptocurrency protocols (not private or public company equity), focusing on ICOs and new network structures.
• Protocol Labs Mission: A research and development lab building decentralized networks like IPFS and Filecoin; they do not own the protocols but facilitate their deployment.
• Market Shift: The industry is moving from "peer-to-peer winter" (2012–2013) to "peer-to-peer summer," driven by the thawing of trust in centralized systems following major security breaches (e.g., Equifax, DNC).
• Core Philosophy: Networks should function as user-owned marketplaces rather than value-extracting entities (e.g., "Twitter the Protocol" vs. "Twitter the Company").

Infrastructure & Scalability

• Current Phase: The market is in a foundational infrastructure-building stage (comparable to the AWS era of Web 2.0), with consumer-facing apps expected to emerge in late 2018 or 2019.
• Filecoin Function: A decentralized storage network using a token to mediate exchanges between storage providers and clients; designed to convert Bitcoin-style proof-of-work electricity into useful storage work.
• Scalability Challenge: Ethereum currently handles only ~10 transactions per second, orders of magnitude lower than centralized systems like Facebook.
• Scaling Solutions:
  • Truebit: A developer-facing tool enabling verifiable off-chain computations to bypass blockchain limitations.
  • Future Expectations: High-throughput systems utilizing parallelism and hierarchy are expected to go live within the next two years based on existing academic proofs.
• Web3 Stack: A new technology layer required to replace centralized infrastructure (like AWS) to support peer-to-peer applications.

Initial Coin Offerings (ICOs)

• Definition: Crowdfunding new protocols by selling tokens directly to the global internet crowd in exchange for Bitcoin or Ethereum.
• Impact: Created a "genie out of the bottle" moment where capital formation is faster than ever, potentially accelerating development pace permanently.
• Current Risks: High noise and scam activity due to an influx of capital from participants lacking technical understanding; the industry is likely at the peak of the hype cycle.
• Future Outlook: Expect a correction toward rigor, with increased curation by credible investors and platforms to distinguish signal from noise.

Governance & Consensus

• Current Deficit: Most protocols (e.g., Bitcoin) lack formal governance models, leading to "holy wars" over minor technical upgrades (e.g., block size debates) without clear decision-making frameworks.
• Proposed Solution: On-chain governance systems where token holders stake assets to vote on protocol upgrades, allowing the protocol to self-govern.
• Design Challenges: Avoiding "majority rule by money" incentives that could lead to bad outcomes; learning from successful open-source models (e.g., Linux) that balance democracy with curation.
• Security: On-chain governance could reduce security and compliance weaknesses associated with external entities influencing protocol direction.

Resource Efficiency & Energy

• Bitcoin Waste: Proof-of-work mining consumes vast electricity (exceeding Slovenia's total power consumption at the time of the talk), representing an over-optimized incentive system that wastes energy.
• Alternative Mechanisms:
  • Filecoin: Rewires proof-of-work incentives to perform useful work (storage).
  • Proof-of-Stake: Ethereum's planned transition to reduce energy consumption by replacing energy-intensive mining with staking mechanisms.
• Game Theory: The ability to encode specific incentives into a protocol to drive massive, decentralized coordination without a central hierarchy is a unique advantage of blockchain technology.

Real-World Applications & Anti-Censorship

• Catalonia Independence: The Catalan government utilized IPFS to distribute their website and referendum data after the Spanish government censored their official domain, demonstrating early anti-censorship utility.
• Long-Term Vision: Decentralized protocols serve as a foundational layer to preserve internet freedom, end-to-end encryption, and open access against increasing government censorship and geopolitical restrictions.

Forward-Looking Statements

• Short-Term (1–2 years): Deployment of scaling solutions (off-chain computation, faster blockchains) and improved security via formal verification of smart contracts to prevent bugs.
• Medium-Term (Late 2018/2019): Emergence of consumer applications (e.g., social media, file storage) that offer genuine utility independent of crypto speculation.
• Long-Term: Rewiring internet power structures to maintain an open, censorship-resistant internet; potential for "sci-fi" applications leveraging advanced smart contract logic.