Seeing blockchains through energy
Lex Sisney put forth a really great hypothesis in his book, Organizational Physics: that organizations are complex adaptive systems that respond to energy in very similar ways that the laws of physics interact with the environment.
It’s a really great book for anyone who runs a business. But it gives you a lot of fruit for thought for any kind of organization. When an organization reaches a phase where complexity takes over, managing energy becomes increasingly important for the long haul.
Complexity in open systems is fascinating to watch. In my mind blockchains & their success give us a front seat view into how networks thrive (or don’t survive) through how well they integrate with their environment. And more importantly how it manages energy.
In the first six months of this year something crazy started happening in the blockchain ecosystem:
The chart above shows the total percentage of each blockchain’s market cap. Some would argue that there are other factors to look at when comparing the dominance of each blockchain, but market cap is a pretty good analogy for overall sentiment. You’ll see Bitcoin’s dominance losing huge ground to competing blockchains, especially Ethereum. So what happened here?
It might be possible to explain this when you look at it from the perspective of energy. Let’s explore this thesis.
I’ve known of blockchains since 2011, when I bought my first handful of bitcoin. The technology was just bizarre and I spent ages trying to figure it out. Bitcoin has had its ups & downs for years. And in fact many thought it would be a flash in the pan. From the end of 2012, with companies like Bitpay, Blockchain & Coinbase, Bitcoin started gaining huge momentum as a a method of payment. Heck, that’s what it made it so hugely popular among the dark markets. Even locally, in South Africa, Payfast teamed up with Bitx (now called Luno) to offer easy integration for services to enable bitcoin payments. I loved this! Our biggest ecommerce company, Takealot, was one of these adopters. I could almost purchase anything I wanted with Bitcoin.
The euphoria kept going. With even companies like Dell accepting bitcoins directly.
Then, things started to slow down. Not in terms of network activity. That kept growing.
But in terms of adoption, news slowed down. If you think about it terms of traditional product market fit. It seemed like bitcoin found it quite smoothly, then for some reason it didn’t quite maintain it. However, something else started happening. Bitcoin needed to scale and had to implement a solution. The blocksize was 1mb and it was going to hit that limit (and it has)!
This debate started heating up in 2015 already. There was time to find a solution and scale so that bitcoin can continue to grow. Yet, the debate just kept going. On & on & on. Developers clashed, companies clashed. Ad hominems were the order of the day. And this is where, if you knew about energy in organizations, could have predicted where this was heading.
Sisney, states it succinctly:
“An organization is subject to the second law of thermodynamics”
An organization’s available energy first flows to manage and counter the disintegrating force of entropy. If entropy in the system is high, then it costs the system a higher amount of its available energy to maintain itself and get work done. Therefore, it has less energy available to drive integration forward in its environment. To get an immediate, intuitive grasp of this principle, just imagine a business with a great market opportunity but which also suffers from high internal friction, politicking, and infighting. It takes a tremendous amount of energy to get any work done and the business can’t capture the external opportunity as a result.
If you go the r/bitcoin (and even it’s non-censored version r/btc), for the past two years, almost every day was about the scaling debate.
In Dr. Adizes’, Managing Corporate Lifecycles, which has very similar themes to Sisney’s thesis, calls this a battle between internal marketing and external marketing. The more energy you spend on internal marketing, ie solving challenges within the system, the less energy you are spending on external marketing, ie finding customers and solving the needs for them.
Which leads us to the 1st law:
“An organization is subject to the first law of thermodynamics.”
If there’s high integration between an organization’s capabilities and the opportunities in the environment, then the organization can receive an abundance of new energy and be successful. If there’s no integration between them, then there’s no new energy created for the organization and — just as a man on a desert island without food and water — it will soon perish.
Bitcoin had high integration. It was there! And it’s losing its opportunity rapidly as a payments system. Fees are skyrocketing, transactions are delayed and companies are leaving bitcoin for other blockchains [1][2]. What’s left is still a debate that’s been going on for more than two years.
Although, Ethereum captures a different a whole new segment using smart contracts, it has high integration at the moment, with tons of new energy entering the system through enterprise alliances, developer frameworks and hugely successful ICOs. Not that Bitcoin & Ethereum are necessarily in direct competition, but it just shows how two different blockchains could capture and hold markets very differently.
Ethereum is not without controversy. Last year, a smart contract bug exploited by a hacker caused huge amounts of money to be stolen. Developers forked the blockchain to allow funds to be returned. Effectively blocking the thief from gaining anything from this. It was controversial for a blockchain to do this, as blockchains are supposed to be tamper-proof. But that’s what makes blockchains so interesting, it’s a reality that’s chosen through consensus. It can’t exist on its own unless it’s chosen. Venkatesh Rao, states this well in his excellent blog post on blockchains:
There is no going back. There is no rewriting history. At best you can agree to disagree and fork off a parallel universe where the historical record of consensus is different.
The market chooses the blockchain. The one that is best adapted to capitalize on opportunities, and keeps doing so, is one that will survive. At any point in time, a blockchain can be become useless. This is why Ethereum’s fork is so interesting, because it took a risk that changing our reality there will be better for the future and it paid off. More importantly, it moved quickly beyond spending energy internally, ie should we fork? If we fork, what happens? If we don’t fork, what happens then?, and moved back towards spending energy to integrate with its environment: building applications, announcing enterprise partnerships and upgrading the protocol.
It’s important to note that blockchains are not controlled by any one person which is why energy is gained & spent on the periphery. It has potential to capitalize on a million opportunities that traditional organizations cannot. The blockchains that will become more resilient will be the ones that feature the right opportunities for adaptation, high integration and energy capitalization. As opposed to stubborn change, low integration and spending energy on maintaining entropy.
If Bitcoin’s block size debate is not solved very soon, we’ll see even more catastrophic effects.
Would you want to spend your energy in a system that is fighting for its own survival, with toxic infighting, or would you want to work in a system that provides energy and helps you capitalize on opportunities?
In blockchains as with nature, it’s not the survival of the fittest, but the arrival of the fittest.
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What do you think? I’ve trying to put down these thoughts for a long time now. There’s still some gaps here. Does this thesis ring true for you too? Keen to hear your thoughts!
Get in touch via Twitter @nieldlr
Note: Bitcoin might have lost its opportunity for payments, but the price rally is pricing in a new opportunity. This is what the whole block size debate is competing for: digital gold vs payments. Stay tuned for a post on that in the future.
