Software is Eating Software
In 2011 Venture Capitalist Marc Andreessen wrote an article in the WSJ titled ‘Why Software is Eating the World’. The gist of that article was that more and more major industries and businesses were being run on software. Thus it would makes sense to invest in this new infrastructure despite the market creating a dot com bubble at the end of 90s.
We believe that crypto assets are powering a new generation of software and that this software has the power to disrupt many of today’s industries and businesses which in turn are run on software. However, we are not just talking about a new generation of software that is replacing the current system, we are talking about something much bigger — software that is displacing current business models. Just like Amazon disrupted bookstores, this new generation of software called crypto networks will disrupt some of today’s businesses built on software.
This new paradigm involving crypto assets that ends up with Software Eating Software is likely to play out in a gradual fashion going through different phases. Below I outline a possible scenario how it might play out:
Phase 1 — Software Eating Commodities
Digital scarcity was the first application of crypto assets. Bitcoin like gold is scarce but is superior in many other ways through the power of being based on software. Bitcoin is programmable, can be stored more easily than a physical commodity, it can be sent quickly and effortlessly like an email, it can be easily divided and unlike gold its authenticity can be easily verified with software.
So in phase 1 of this crypto based revolution we have digital scarce objects and specifically Bitcoin as a digital Gold:
Phase 2 — Software Eating Contracts
In the second phase we have software performing simple contracts. These have so far centred around certain well defined financial contracts. These have recently gained traction in what has been called the Open Financial System or Decentralised Finance (DeFi). Contracts range from lending, borrowing to derivatives prediction markets and decentralised exchanges.
This is still a young market and many of the first services have just been launched in the past 6 months.
Phase 3 — Software Eating Software
In the third phase software primitives that have been developed and battle tested in phase 1 and 2 will be combined and reiterated over to create whole new applications that disrupt current businesses.
There will be new services built on the building blocks of the Open Financial System that will take market share from current centralised businesses for lending and borrowing. The first users will be those that value a permissionless and censorship resistant service. Many might be based in the developing world where access to financial services is limited.
Likewise, Decentralised Exchanges will take market share from more centralised brokers and exchanges with customers who value the obvious benefits of no or little counterparty risk.
Those who value a social network free from censorship might move to a more decentralised network built on top of a blockchain.
Today’s shared economy companies such as Uber, AirBnB etc could also be built on an open network — with no rent seeking middlemen.
These new blockchain based ‘businesses’ can be fuelled by crypto assets and the token-economics of the network act as a catalyst for adoption. No financial institution needs to be behind tomorrow’s lender, no company needs to be behind tomorrow’s Twitter, no platform fees need to be levied tomorrow’s Uber driver. Simply put, these could be the new public utilities built on open source code accessible anywhere by anyone at anytime.
10 years after the Bitcoin whitepaper, there is a growing consensus about the value of Digital Scarce commodities. We are seeing the first iteration of blockchain based contracts. Over the coming 10 years we will see crypto networks disrupt current businesses which in some cases will be replaced with open source software which for the first time can replace third parties and middlemen with open networks — this is the exciting new era of computing.
Still we face many challenges. Blockchains are slow, and in some cases they have proven to be insecure due to too much centralisation. Just like after the dot.com crash people are focusing on the bubbles and crashes that markets create and not on the breakthrough innovation.
Many of today’s crypto networks will fail to live up to the expectations. Still we see some of the best engineers working on solving some of the current challenges — that’s a huge opportunity and where we are putting our money to work.