The three core concepts of crypto

We are moving into a truly digital world.

In this new world, we need digitally native assets, digitally native contracts, and digitally native accounting. All three concepts are evolutions of traditional assets, contracts, and accounting, but incorporate new technology to be better prepared for the future.

We lived in an analog world with physical assets for thousands of years. In the 1970s we began a shift to the electronic world, which allowed us to transact assets by near-instantaneously moving ones and zeros on a computer screen (representations of the physical assets), but still required multiple days for the physical assets to move and settle the transaction. This shift from the analog to electronic world created enormous value and was the foundation for the world we live in today.

Half a century later, there is another shift underway — the move from the electronic world to the digital world. This transition is driven by (1) the acceleration of technology and (2) the inevitability of algorithms and machines running major aspects of the economy and our lives. In the digital world, legacy assets (and their electronic representations) are outdated technology that are too inefficient and inferior to their digital versions.

Digitally native assets are stocks, bonds, currencies, or commodities that have been created in the digital world and have an aspect of “programmability” to them. These assets have unique features that allow for near-instantaneous settlement times, micro-transactions, low fees, and are compatible with the algorithms and machines that will govern the automated world. (I always joke that “the machines don’t want our paper money!”)

Digitally native contracts (more popularly known as “smart contracts”) are software-based agreements that automatically execute based on previously agreed upon criteria. These are important for two reasons: (1) legacy contracts are incompatible and too slow for the algorithms & machines and (2) the automated world moves counterparty risk from human-led organizations to software code, which requires digitally native contracts to effectively interface with these new counterparties.

Lastly, but potentially most importantly, is digitally native accounting. When you have digital assets, you have to remember that these are simply computer files. An individual can take a computer file (ex: music file), duplicate it, and send the two separate files to two separate individuals. Neither recipient would know whether they received the original file or the duplicate — this is not a problem when sharing music files, but becomes a big problem (known as “double spend problem”) when transacting money or valuable assets.

Digitally native accounting is a triple entry accounting system that allows for both participants in a transaction, along with a shared public ledger, to keep track of all transactions within a system. Without digitally native accounting (this is what a blockchain does), we would be unable to use digitally native assets.

These three core concepts of crypto (digitally native assets, contracts, and accounting) are accelerating the transition from the electronic world to the digital world. The creation of economic value will dwarf the value created by the shift from the analog world to the electronic world, while also allowing a more global audience to participate in the upside.

The blockchain and crypto industry revolves around a single idea — the digital world needs state-of-the-art assets, contracts, and accounting. Updating these features of the global system on the fly is like switching out airplane parts in a faulty airplane while in mid-air.

No one said it would be easy, but it is necessary. The algorithms and machines don’t want our outdated technology. We have to upgrade our assets, contracts, and accounting, or humans will continue to be the rate limiting factor of innovation and progress.


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Nothing in this email is intended to serve as financial advice. Do your own research.