“A standard protocol for machines to negotiate bitcoin payments for resources”

Great idea from Brian Armstrong of Coinbase:

1/ Seems like there should be a standard protocol for machines to negotiate bitcoin payments for resources.

2/ Examples could be getting access to wifi hot spots, your car finding charging stations, mesh networks (net taker/giver).

3/ Devices could be like vending machines, you drop them out somewhere, and they generate rent for providing resources to passing machines.

4/ Sample protocol (a) i need X, anyone have it? (b) I have X for sale at Y (c) I accept, payment embedded (d) I reject, stop pinging me

We are dying to fund people working on ideas like this, or like these or these.

Some ideas for native bitcoin apps

Fred Wilson calls applications built using Bitcoin that couldn’t have existed prior to Bitcoin “native Bitcoin apps“. Most of the applications built so far on Bitcoin are not native by this definition. You can buy something at an e-commerce site using Bitcoin and it is cheaper than using a credit card but buying things online isn’t a new activity.

What will these native Bitcoin apps do? That is very hard to predict, just as it was hard to predict back in 1993 what the successful native Internet apps would be (try to find someone in 1993 who predicted Wikipedia, Twitter, blogging, etc). But we can make some guesses. Here are some of mine:

  1. International microfinance – Soon 5 billion people will have internet-connected smartphones but most still won’t have bank accounts, access to credit, etc. Bitcoin removes most of the cost and friction of cross-border transactions and allows anyone with internet access to participate in the global economy. Early examples of international microfinance services include P2P lending sites like BTCJam and Bitbond.
  2. Allocating bandwidth, storage, compute. Bitcoin could enable new ways to share and trade networked resources. For example, people have been trying for years to create mesh networks with only occasional success. It is possible that these systems mostly failed because they didn’t offer the right incentives to share resources. Bitcoin provides a mechanism for network nodes to pay for resources at the protocol level.
  3. Marketplaces – Ask anyone who runs a marketplace and they’ll tell you that paying out to people with bank accounts is a huge headache, and paying out to people without bank accounts is altogether impossible. Using Bitcoin, we could take ideas like crowdfunding and crowd labor services (oDesk, 99 Designs, Beacon Reader, Mechanical Turk) and open them up to anyone with a smartphone.
  4. Micropayments – The world just ran the first large-scale micropayments experiment – in-app payments on iOS and Android – and it was a huge success. In-app payments quickly became the dominant business model for mobile games, with some games generating billions a dollars a year using them. What would happen if we enabled micropayments on the web and not just for native mobile apps?
  5. Incentivized social software. Up until now, social sites have had to rely on non-monetary currencies such as likes, followers, karma, upvotes, etc. With Bitcoin we can add actual monetary incentives to the mix. This is happening organically on Reddit where users are tipping each other using Bitcoin and Dogecoin. A good exercise would be to go back and look at the history of failed social sites and try to rethink them using financial incentives.

The first phase of Bitcoin was about laying the foundational infrastructure – gateways, consumer wallets, developer platforms, merchant services etc. The next phase will be about native Bitcoin apps – building new things that could never have been built before. These will likely be the applications that drive Bitcoin adoption into the mainstream.

“Bitcoin is the currency the internet deserves and needs”

George Gilder discusses the importance of Bitcoin in a very interesting interview:

To have a civilization you need more than just bits and bytes. You need contracts, transactions, provable facts, titles, notarization, identities etc. You need all these other factors that can’t be accommodated very well on the existing internet. So you have to banks and all these other outside channels to conduct transactions. You have this comedy of bogus contracts to you are supposed to sign to proceed – click the button to accept the contract etc.

The internet is full of junk. It pretends that a lot of that stuff is free which of course is a lie. So it’s full of lies. It’s a hustle. This is the result just having pure Shannon information. Shannon identifies information exclusively by its surprisal- the unexpected bits. That’s how you measure information and bandwidth across the internet. Shannon’s a great genius. He created to perfect theory for the network layer. But as you know you need more than three layers on the network. You need a whole apparatus on top of the network layer.

Bitcoin is a breakthrough in information theory that allows you – without reference to outside 3rd parties – to conduct provable, timestamped transactions that can’t be changed, can’t be faked, and can’t be duplicated. Bitcoin is the currency the internet deserves and needs.

Why I’m interested in Bitcoin

Some people assume that all Bitcoin advocates are motivated by a libertarian political agenda. That is certainly not my agenda. I’m a lifelong Democrat who supported Obama in the last two elections. I think the Federal Reserve plays an important function, and I don’t agree with people who think inflation should be our nation’s primary economic concern.

It is true that many early Bitcoin proponents were libertarians. But it is also true that almost every significant computing movement had early proponents who were ideologically motivated. The developers of the first personal computers were closely aligned with the 60s counterculture movement. Open source software was originally created by people who believed that all software should be available for free. Early advocates of blogging and collaborative systems like Wikipedia were trying to democratize the production and dissemination of information. This isn’t coincidental: broad-based technology movements have depended on non-economic participants early on since it often took years for commercial participants to get involved.

If not for political reasons, why am I interested in Bitcoin? Like a lot of people, I was disturbed by the aftermath of the 2008 financial crisis. I thought the government did what it had to do at the peak of the crisis but missed an important opportunity afterwards to reform the financial system. It seemed to me that there were two ways to improve the system: from above through regulation (which I support), or from below through competition.

I wrote a blog post about this issue about four years ago. My argument was that if the technology industry wants to change the financial services industry, it can’t just build new services on top of existing financial services companies. That would be like trying to disrupt Google or Apple by building services on top of their platforms. To actually have an impact (and create large businesses) you need to create services that completely bypass incumbent financial companies. I gave a series of examples including payments:

Charging 20% interest rates (banks) and skimming pennies off every transaction (Visa and Mastercard) is a very profitable business. Starting a new payment company that doesn’t depend on the existing banks and credit card companies could be disruptive.

Since then I made a number of financial services technology investments, all of which were consistent with this thesis.

I started getting interested in Bitcoin about two years ago. Like a lot of people I initially dismissed Bitcoin as a speculative bubble (“Internet tulip bulbs”) or a place to stash money for people worried about inflation (“Internet gold”). At some point, I had an “aha!” moment and realized that Bitcoin was best understood as a new software protocol through which you could rebuild the payments industry in ways that are better and cheaper.

The payment industry is a $500 billion industry (or larger, depending on how you measure it). That means banks and payment companies charge $500B per year in fees to provide a service that mostly involves moving bits around the Internet. There are other services they provide like credit, security, and dispute resolution, but in any reasonable analysis these services should cost dramatically less than they currently do. The payment industry should be at least an order of magnitude smaller than it is today.

Another thing that informed my view was seeing what a huge headache payments were for startups I was involved with. Let’s say you sell electronics online. Profit margins in those businesses are usually under 5%, which means the 2.5% payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers, or taxed by the government. Of all of those choices, handing 2.5% to banks to move bits around the Internet is the worst possible choice. The other main challenge startups have with payments is accepting international payments. If you are wondering why your favorite technology service isn’t available in your country, the answer is often payments.

But the most exciting aspect of Bitcoin (and this is admittedly more speculative) are all the interesting new business and technology models that “programmable money” could enable. For example, I am very bullish on micropayments (this is a longer topic which I plan to write about separately). The world recently ran its first large-scale micropayments experiment – so called in-app payments on iOS and Android – and despite some serious design flaws (centralized control, 30% fees), it was a smashing success. I think Bitcoin could enable a micropayment system for the open web, and thereby provide a business model beyond banner ads for many important services such as journalism.

I’m not claiming that Bitcoin (or any new technology) can save the economy or the world. The technology industry is in the business of creating products and services that either enable new activities or make existing activities less expensive. Venture capitalists are in the business of funding entrepreneurs who run experiments to try to create these new products and services. I believe the only way the technology industry can offer meaningfully improved financial services is by building new services that don’t depend on incumbent companies. Bitcoin is a serious proposal for dramatically improving the payments industry. There are plenty of open questions but I think it’s an experiment worth running.

Coinbase

One of the interesting things about Bitcoin is the contrast between how it is portrayed in the press and how it is understood by technologists. The press tends to portray Bitcoin as either a speculative bubble or a scheme for supporting criminal activity. In Silicon Valley, by contrast, Bitcoin is generally viewed as a profound technological breakthrough.

The Internet is based on a set of core protocols that specify how information such as text, photos, and code should be transmitted. The designers of the Web built placeholders for a system that moved money, but never successfully completed it. Bitcoin is the first plausible proposal for an economic protocol for the Internet.

This matters for two reasons:

1) It fixes serious problems with existing payment systems that depend on centralized services to verify the validity of transactions. These services are both expensive (roughly a 2.5% tax on all transactions) and prone to failure (Internet payment fraud is rampant).

2) More importantly, Bitcoin is a platform upon which new technologies can be developed. Developers have created some early applications, and speculated about future applications. Some potential applications include: a) micropayments as a replacement for banner ads or subscription fees, b) machine-to-machine payments to reduce spam and denial-of-service attacks, c) a way to offer low-cost financial services to people who, because of financial or political constraints, don’t have them today.

But to proliferate widely, Bitcoin needs a killer app the same way HTTP had web browsers and SMTP had email clients. That’s why today I’m excited to announce that Andreessen Horowitz is leading a $25M financing of Coinbase, a service that provides an accessible interface to the Bitcoin protocol. Consumers can use Coinbase to convert to and from other currencies and to pay for goods and services. Merchants can use Coinbase to accept payments and convert currencies. Developers can build new services using Coinbase’s API.

Coinbase has grown extremely fast and is now the most widely used Bitcoin service in the US. The founders of Coinbase, Brian Armstrong and Fred Ehrsam, have worked closely with banks and regulators to ensure that the service is safe and compliant. We think Coinbase can significantly accelerate Bitcoin’s proliferation, and as that happens the Internet will enter a new phase of invention and opportunity.