Compute and Connectivity Meets Crypto
By: Meltem Demirors
Tags: Blockchain, Telecommunication, Privacy, Bitcoin

Compute and Connectivity Meets Crypto

Building Resilient, Private, and Performant Internet Infrastructure using Economic Incentives

At CoinShares Ventures, we spend a lot of time thinking about politics given our team is in the United States and the United Kingdom, and has been witnessing a very interesting time in both of these political landscapes. We are not political commentators, but it would be incorrect to say we are not political. The aspirations of the crypto ecosystem are inherently political in nature — everything we invest in has some element intended to decentralize, disintermediate, and minimize unnecessary rent seeking — whether by governments, tech oligopolies, or financial intermediaries like brokers and banks.

(sidebar: yes, we are certainly aware of the underlying tension present in CoinShares itself being an intermediary, and discuss this at length in our board meetings and as it pertains to our growth strategy.)

In addition, we have spent the last year running a series of meetups focused on mesh networking where we hosted projects like GoTenna, Althea Network, Helium, and many others focused on ushering in a new vision for how compute and connectivity will get operationalized, financialized, and disintermediated. After all, how permissionless can bitcoin and other digital currencies really be if the infrastructure upon which the bitcoin network is run is entirely dependent on the internet?

The Rise of the Political Internet

Over the last six months, we’ve witnessed a drastic acceleration in the shift to all things digital. Our information, content, and communication is already mostly digital, delivered via wires and device, flowing as 0’s and 1’s over fiber, radio waves, and sat link. Finance has resisted this trend for a long time, but now the digitization of trading, banking, payments, and lending rushes full speed ahead, and governments around the world are contemplating how to digitize the money printer itself, in the form of central bank issued digital currencies (CBDCs). And all of digitization sits right on top of one highly centralized and highly fragile system — the internet.

To understand the present and the future, let’s briefly visit the past.

The year is 1962. The United States and the USSR are in the depths of the Cuban Missile Crisis, and both sides are building nuclear systems and figuring out how to use technology to ensure mutually assured destruction in case of an attack. US authorities, deep in their planning, were facing an interesting challenge — how would they communicate in the aftermath of a nuclear attack? At that time, all communication technologies used central switching facilities that routed communications to their destinations in a hub and spoke model. This meant that if enemies could bring down one of the hubs, all of the spokes would be offline and the whole system would collapse.

Paul Baran, a researcher at RAND, the private think tank, dreamed up a new system. He envisioned a network of unmanned nodes that would act as switches, routing information from one node to another to their final destinations. The nodes would use a scheme he called “hot-potato routing” or distributed communications. Furthermore, the information would be divided into “message blocks” before sending them out across the network. Each block would be sent separately and rejoined into a whole when they were received at their destination.

This was the foundation upon which the World Wide Web was built.

Over the last sixty years of the internet, the technology that was supposed to decentralize critical information and communication infrastructure has become the very thing it was supposed to circumvent — a highly centralized, deeply vulnerable global oligopoly.

Our digital overlords have only become more powerful. Over the last six months, power has been consolidated into fewer and fewer hands as more and more of our activities shift online.

As of August 18th, FAAMG stocks make up more than 25% of the S&P 500 by market cap.

But their supremacy goes far beyond markets.

AWS controls over 40% of the public cloud market, with the remainder owned by Google and Microsoft.

Google owns over 75% of the search market.

In 2009, the top 10 companies in the world had a market cap of $2.3T combined. In August 2020, Apple alone commanded a balance sheet the size of a small nation state’s economy, at over $2T.

The centralization of tech hasn’t only fueled the wealth and power of these platforms (and the men who run them). It has allowed a small handful of individuals to own and operate the infrastructure and interfaces that allow us to navigate, search, communicate, transact, and store information.

The Politics of Being a Digital Oligarch

As everything becomes digitized, politics are also shifting from the world of the physical to the world of the digital. Just look at this short list of political events:

February : Huawei gets hit with RICO charges in the US, which are typically reserved for members of the mob and the JP Morgan metals desk. While Huawei had won numerous 5G contracts in Europe, the US began its campaign to completely remove Huawei from the process (and insert US and European companies into it).

: Huawei gets hit with RICO charges in the US, which are typically reserved for members of the mob and the JP Morgan metals desk. While Huawei had won numerous 5G contracts in Europe, the US began its campaign to completely remove Huawei from the process (and insert US and European companies into it). March: In March, a number of tech companies competed to win contracts for a US Department of Defense cloud procurement contract of unprecedented scale. The DEOS contract worth $8B and the JEDI contract worth $10B were both awarded to Microsoft. Amazon sued. The US Federal government has announced its intent to spend over $100B on cloud compute and services over the next several years. Compute and systems spend is estimated to exceed weapons spend in the next decade.

In March, a number of tech companies competed to win contracts for a US Department of Defense cloud procurement contract of unprecedented scale. The DEOS contract worth $8B and the JEDI contract worth $10B were both awarded to Microsoft. Amazon sued. The US Federal government has announced its intent to spend over $100B on cloud compute and services over the next several years. Compute and systems spend is estimated to exceed weapons spend in the next decade. June: US lawmakers propose a $23B bill to support the semiconductor industry, and TSMC, one of the world’s largest chip fabs, announces it is building a $12B facility in Arizona. Similar statements follow from other semiconductors companies as the US extends various incentives.

US lawmakers propose a $23B bill to support the semiconductor industry, and TSMC, one of the world’s largest chip fabs, announces it is building a $12B facility in Arizona. Similar statements follow from other semiconductors companies as the US extends various incentives. July : Trump administration declares intent to ban TikTok and force its US entity to sell to a US tech company. Microsoft was first to announce its bid, but since then, every company has thrown its hat in the ring, and ultimately Oracle won the bid but it was really just TikTok using Oracle’s cloud services and selling a minority stake? Also all the tech oligarchs are called to testify in front of the House Financial Services Committee via video conference, but most of the time was spent having these CEOs explain why email works in an embarrassing show of boomer incompetence. (Imagine being a sitting senator and asking Jack Dorsey why your emails are going to spam?)

: Trump administration declares intent to ban TikTok and force its US entity to sell to a US tech company. Microsoft was first to announce its bid, but since then, every company has thrown its hat in the ring, and ultimately Oracle won the bid but it was really just TikTok using Oracle’s cloud services and selling a minority stake? Also all the tech oligarchs are called to testify in front of the House Financial Services Committee via video conference, but most of the time was spent having these CEOs explain why email works in an embarrassing show of boomer incompetence. (Imagine being a sitting senator and asking Jack Dorsey why your emails are going to spam?) August: Trump administration announces the launch of the “Clean Network” — a vague plan to “purge” Chinese tech companies from America’s internet. The stated intent of the program is to keep American citizens safe from Chinese spies and censorship.

Source: Clean Network announcement

Reading between the lines, this is spelling out the new battle front for a digital war between the rest of the world and the US. These actions lay outline a more explicit approach to expanding the great American firewall on all compute and connectivity infrastructure and flows. There already is an American firewall to some degree in the form of fiberoptic taps, get out your tin foil hats and read about Room 641A if you are into these sorts of things. For now, “clean” = not Chinese… but as the battle for this new digital frontier heats up, it’s inevitable that it won’t be limited to just one tangible enemy, but expanded to include a larger ideological battleground.

Source: The internet, not sure who created this meme, but thank you, it’s BRILLIANT

It will cover not only software, like TikTok, but also hardware and connectivity, the very systems we rely on in this new world of digital finance. It is well known that China interrupts the hardware supply chain for equipment being send to major American tech firms including Amazon, Google, and network equipment vendors.

Just like all financial transactions flow through the NY Fed, one could imagine a world where all data flows through a central, national hub commandeered by intelligence under the guise of “security.” And it’s not even such a far-fetched future. As it stands, within the US, 75% of the population have only one service provider for connectivity speeds higher than 25 MB/s.

p.s. Already we see this with the battle against end-to-end encryption, where the logic is (in the words of David Vorick) “Because criminals lock their doors and sometimes this inhibits police, we decree that nobody is allowed to have locks on their doors anymore.” I will not be surprised if consumer E2E is “banned” by the end of this decade. Ghoulish, really.

Welcome to Digital Dictatorship

Most of us take our connectivity to the internet and other telecommunications networks for granted. But behind the simple and benign act of connecting to the internet lies an intricate maze of physical hardware, wires, and complex routing logic consisting of layers upon layers — and many curious parties sniffing your web traffic.

Overall, today’s model of computing (and arguably, corporations and capitalism as a whole), is akin to dictatorship, not democracy.

In this race for control, sadly, there are few US or European companies who can dominate the compute and connectivity infrastructure race. As it stands, there are only a handful of companies in the world who have the sophistication, systems, and manufacturing capabilities to produce mass-scale infrastructure.

European companies, in particular, have fallen behind due to onerous regulatory pressure and are not capable of pursuing large infrastructure projects, so they cannot afford to make the equipment, to lay fiber optic cables, and to install this much-needed compute and connectivity infrastructure.

America has a handful of companies ($ market cap at COB 10/14/2020)

Qualcomm ($147B) in the wireless communications space

Cisco ($170B) builds hardware and software for routing and switching

Juniper Networks ($8B) provides more than 65% of the world’s router infrastructure for the Internet

Data centers REITs like Equinix ($72B) are US based and serve a global client base

However, none of these companies have the balance sheet strength or capital base to compete, despite their best efforts. (The great irony here is that a single tech company, like say Google, has a bigger market cap than all of the infrastructure players combined.)

If America & Europe do not compete for the digital future, China will very likely be our new digital overlord. And Huawei is competing with two assets neither America nor Europe has — an unlimited amount of capital and political will.

Putting the pieces together, it’s clear that we now have a battle on two fronts:

An economic war — US dollar hegemony v everyone else (see prior writing on this topic here)

A technological war — US led alliance v everyone else

That’s precisely why we need to build as much distributed, open infrastructure as we can.

Hidden Forces: How Economics Drive Design

So, what is an internet citizen to do? To understand the present, we must understand the past. So let’s explore why it is that our digital infrastructure looks the way it does today.

Now it would be easy to say the reason the internet looks the way it does is because of some sinister plot by tech companies to take over the world. But that would be a naïve interpretation. One of the reasons the internet has become highly centralized has to do with the economics of operating an internet business. After all, operating a business is an activity that requires you to make money. And current internet business models necessitate scale and efficiency to drive unit economics.

Centralization enables efficiency in planning — where to put towers, where to lay wire, where to build servers and data centers, and allows private companies to finance this build and charge for access to it. Business models also influence where commoditization is happening and where innovation is happening. As a result of the challenges of implementing profitable business models, everything from network design to hardware to critical software like search has been commoditized, and innovation has been pushed to the edges. The below graphic illustrates the commoditization of each progressive layer of internet infrastructure over time.

Source: From the brilliant Marco Rodrigues

Because so much of the internet has been commoditized by decades of centralization and margin compression, it feels like innovation at these core layers is impossible. However, we believe that the introduction of programmable internet money, in the form of digital currencies, facilitates an entirely new model for infrastructure innovation. For example, the introduction of asset backed debt in bitcoin is a game-changer, as evidenced by the rapid financialization and build out of US onshore mining facilities.

The idea of distributed networking has been around for a long time, as mentioned at the start of this piece. Distributed compute and connectivity hasn’t been as fast or as cheap, and the right tools haven’t existed to incentivize people to contribute resources to these network. Until now…

With the introduction of a token as an incentive and monetization layer, new models for constructing networks become possible. In addition, new distributed governance structures like DAOs (decentralized autonomous organizations) make it possible for groups of pseudonymous people on the internet to coordinate decision-making in various ways.

With these new crypto-incentivized models being introduced, the objective is to keep all components of internet infrastructure distributed or decentralized, so the only way to shut down or otherwise disrupt these networks will be to shut down every node in the network. And if these networks become diffuse enough, this will be practically impossible to do. This is precisely what made BitTorrent, the file sharing protocol, such a nuisance for IP law. Because the network is comprised of global set of nodes operated on a wide variety of non-proprietary hardware ranging from personal laptops to sophisticated data centers, it becomes much more resilient to interference from government, law enforcement, or other disturbances.

Investing in an Open Internet

So this all sounds great. But practically speaking, how does a firm like CoinShares invest in this theme?

We believe a few core things will happen over the coming decade to fundamentally change how networks are constructed, from infrastructure all the way through to compute and connectivity and the end-user experience via apps.

First, given the rise of high bandwidth consumption across the globe (thanks to streaming and gaming), we will move to more metered bandwidth consumption models that allow for more dynamic pricing and pay-as-you use models. After all, bandwidth and network capacity is a finite resource.

This gives rise to our investment thesis around the financialization of compute and connectivity, and our investment in Blockdaemon, who are building a full-stack blockchain compute platform.

Second, the demands for compute across blockchain networks will accelerate the build-out of new protocols and layer 2 solutions, which allow for utilization of networks best suited for the compute and connectivity needs of a particular use case. Already we see this playing out on the Ethereum network…