What on earth is blockchain?

As for Apple, Icloud is by far the world’s most complained source about privacy data breaches. Based on their original attributes., I don’t think these show disrespect to their users, because the leakage of private data will improve in the foreseeable future.

In 2005, one mid-level employee of Amazon proposed that offer distribution service Prime within two days to clients who pay an annual fee of $99. In terms of the level of logistics at that time, everyone from Wall Street to corporate executives thought this must be crazy. However, Bezos pushed through the project. At the time, the biggest holdout was his CFO. As Bezos’ sidekick , This CFO was very effective. However, he thought it wasn’t initiative to provide free delivery but just let our future balance sheet go wrong again. Once at a meeting, he even demote the person who offered the advice.

So far, Prime has more than 90 million members worldwide. At $99 per person per year, that’s nearly $9 billion, But so far the project has been loss-making, Amazon is spending far more on Prime benefits. Looking back, the annual fee of $99 boosts the desire of clients to make good use of Prime, they placed more orders and a large number of customers become fans of this service, which was considered one of the best deal Amazon ever made. Amazon sold their own products at the very beginning, and then it not only opened up to a third-party called Marketplace, but also opened up its price comparison tool to customers. Apparently, it would hurt Amazon’s interests and was opposed by countless people. For example, when you want to buy a book, you may find a used book is the cheapest, which will make the booksellers unhappy. Products are sold cheaper than Amazon’s also makes the business owner upset. Bezos brought outside forces worldwide to stimulate inner strength and make it the lowest price in the world.

Bezos once said, there are only three things at Amazon’s core: Prime, AWS, Marketplace. In an open letter to shareholders in 1997, Bezos made a statement about taking a long-term view of everything, stating his Amazon business management. He promised to take a long-term view and focus on market domination. It was written in every open letter for the next 20 years! After reading all these letters, you will find that the basic principles of Amazon remain the same these years. It’s all about commitment and consistency. Long-term thinking, all aim at that ultimate goal of infinity, the process in-between can be ignored, and carry out strictly all the way.

What does it mean that the process in-between can be ignored?

Amazon’s market cap peaked in April 2018, which made it worth over $1 trillion. However, the profit of Q2 in 2008 is only 25 billion dollar. It means that if you follow the traditional PE algorithm( your market cap divided by your net profit per share ) it will be as much as 400 times, namely, the capital markets give Amazon the money it will make in 400 years. That’s not scientific at all.

Actually,Most companies use multiples of profits to calculate market capitalization, but not Bezos. From 1997, the valuation model Amazon uses is that enterprise value is equal to the discounted present value of the free cash flow created in the long run. In other words, Amazon’s valuation method is free cash flow multiplied by multiples. Therefore, from 1997 to 2014, Amazon had never made a profit, and started to get a little profit until 2005. But Amazon’s cash flow has been growing at an annual rate of 200%.

In fact, Netflix sticks to the same idea that return the profit to each user, using long-term thinking over the life cycle of the enterprise to win the short-term profit margin to obtain user growth, and finally beats its opponents by enterprise innovation. Bezos once said in a shareholder letter: I believe that any enterprise will eventually wither away, and we just put that day off as long as possible.

So far, you may be still confused, because you still can’t figure out what this has to do with blockchain.

Open Source Community

Let me give you one or two more examples. On 28 Oct. 2018, IBM bought out an awesome company called Red Hat with $33 billion .Red Hat is an open source software platform operated in a community way. Most of codes in the platform are not developed by its own but contributed by community developers . That’s a company that makes $2.9 billion a year in revenue and $259 million a year in profit.

What is the concept of 33 billion dollar? It gives the company 127 times the PE. But it’s an open source community company.

Red Hat opens all its codes to everyone, however, it actually sells its value-added services. The logic is that companies want better, more stable services, so I give you the data and the code for free, and I only charge for the value-added services. Can IBM do that? If the president of IBM asks the company to do the same, he probably will be fired. That’s in the corporate DNA.

As a public company, IBM must be accountable to shareholders. The systems, patents, codes are its core competitiveness, it certainly doesn’t want it open to the world. Because it will result in worthless stocks. So the chain reaction is that it’s going to hire a lot of businesses, BD, visiting customers, having meetings again and again, having social engagements and customizing systems, which creates a lot of unnecessary time and cost. Over 40 thousand people worldwide work for IBM, there is no way to reduce cost. IBM ended up buying Red Hat for more than 10 times its price-to-sales ratio, 100 times its PE ratio.

In Jun. 2018, Microsoft also acquired Github, an open-source software platform of a similar nature ,which cost 7.5 billion. GitHub is not just a programming tool. It’s the core of open source community, sort of the intersection of social networking and project management tools. It’s the biggest among the similar websites so far. Numerous companies and organizations host open source software projects on it, including Apple, Amazon, Facebook, Google, Wal-Mart and American government. According to Microsoft, GitHub has 31 million users and 85 million code bases. It also provides proprietary code and internal communications services for many companies that pay to use its private hosting services.

How do we value a company like this? Not in the traditional valuation method and valuation system. Most of the value of these companies is in intangible assets, intellectual property software system data or code, not plant, machine or land anymore. At first, you’re going to take a mortgage you need to take your land, your house, your car, however, now a company can show its open source codes to get an assessment of value.

What Microsoft purchase with $7.5 billion is the consensus of 31 million users for an open source technology community platform.

Today, the enterprise model, the organization type of an enterprise and the method of calculating the enterprise valuation have changed greatly. The net –profit-centric model is being replaced by the companies like Amazon. The essence of free cash flow is user-centric and innovate at all costs. The organization of enterprises has shifted from a completely centralized organization to an open source community. Originally, data and information are charged, and then add the cost of service. Today, data and information are free , it only charge for service. The original enterprise valuation is calculated by multiplying the net profit by multiple, and now we only value it by multiplied consensus.

Blockchain is the consensus network formed by the open source community with its own long-term thinking.

Why I say it has its own long-term thinking? Because most people can’t think like Bezos, even they can, they cannot carry out. So at the beginning, the network architecture has written the rules of the game in the code, which carried out by the net, and you can’t change it. Nobody can change it means that it ensures that the network is designed to maximize user benefit at first beginning.

Like the examples I made above, Microsoft purchases Github and IBM buys Red Hat, which are not the corporate form that we’re familiar with, it’s run in a community way. Github has 31 million technologists who are not its employees at all. They put codes on it and open to everyone, people can read them and copy them for free.

After that, more and more business forms will approach or become blockchain companies, running in a community way, not a tight organizational structure anymore, the familiar corporate structure no longer exists. There are no office hours, no HR management, no finance department managing the financial budget, but only a bunch of value-driven tech geeks, operating geeks, PR geeks, community geeks, who work for all mankind day and night.

There are over 40 thousand employees worldwide in Amazon, while Red Hat has thousands of employees, only 300 people work for Github.

How about blockchain? Maybe 100 employees are enough in the end. Ethereum, for example, as the world’s second biggest valued blockchain project, employs only 1000 staff, it had a market cap of more than $140 billion. In the future, the number of employee will be smaller while the market cap grows exponentially.

But the way these communities operate must be value-related, because the entire blockchain network is the internet of value. So how does it embody value? When we talk about any blockchain project, what we’re all thinking about are the three original factors: technology, economy, community. These are very important factors.

Network Consensus

People all know the internet stock bubble in 2000. But how did it come about? Let’s start all over again. In the middle of 1990 last century, the U.S. economy was in the doldrums. Manufacturing had not fully recovered, while the transition to a service economy was also long and painful. Silicon valley was in a slump at that time, Japan was on the verge of winning the semiconductor war. Big bosses were still kids, the Internet had yet to develop. For one thing, its commercial use was limited, the other was the lack of good software, like explorer. Until Mosaic was officially released in November 1993, people had access to the Internet. Mosaic was later renamed Netscape, and launched its own browser in late 1994—Navigator. Navigators were quickly accepted, from Jan. 1995, it took less than a year to go from 20% to 80% of the browser market. Even before the company became profitable in August 1995, Netscape went public with an initial public offering. In five months, Netscape’s shares jumped from $28 to $174.

Many companies are trying to gain user resources quickly in the early stages of development, choose to trade losses for market share, the slogan “get big and fast” was a response to this pattern. In addition to direct contact with customers, there are each kind of television advertisement plane advertisement activity support and so on. In order to impress customers, some companies come up with simple and meaningless onomatopoetic names, like Yahoo! The market is full of infinite imagination, with a lot of money quickly come in, a new model has sprung up: any company that comes up with a novel concept, will be hot in the market after the venture capital pre – packaging, and then directly have access to the capital markets. The initial investor exits while the company gets the money it needs to develop, the founders make a lot of money from it. This money-making effect, in turn, is attracting a growing number of Internet start-ups. As long as you can finish the story, you have the opportunity to grab a lot of wealth. Even if you don’t have a story to tell, the money will make up a story for you and sell it to the market.

In this way, with the pursuit of capital, the bubble blowing bigger, the Internet economy got into the new millennium. But the Internet industry in 2000 did not usher in a new atmosphere, but was hit by the millennium bug. The emergence of the millennium bug made people realized that the development of Internet technology was still in its infancy, many models were not mature enough and many problems had not been solved.On top of that, news of the collapse of the company, which began in 2000 by burning through investors’ money, became much more pronounced. People’s enthusiasm turned rational, cautious and even panicky, the government had also begun to clean up the overheated Internet economy. Finally, in 2000, the dot-com bubble burst.

So far, is the previous story particularly familiar to you? We can exchange Netscape for Bitcoin, Amazon for Ethereum, Yahoo for Wave Filed. Isn’t that what just happened with blockchain?

Let’s go over the history of blockchain again. First we need to think about what the Internet like now, it’s information Internet. In essence, it connects both ends of information asymmetry through a medium carrier. And we now understand that the distribution of information eventually leads to monopoly platforms. Why? Since it is a medium, it means that information must be highly concentrated to produce high efficiency and low marginal cost until it reaches the bottleneck. So there is Bat in China and FAANG in America.

Now let’s review the development history of modern human society. In the industrial age, any enterprise has boundaries, when the scale develops to a certain extent, it will appear uneconomic phenomenon. As business expands in an industrial economy, its marginal cost increases, there’s always going to be a boundary where is not economical and not cost-effective.

The most representative industrial manufacturing enterprise in the world is GE, which was removed from the DJI in June 2018. Why? Because it’s not representative anymore. The highest market cap of GE was 600 to 700 billion dollars, it is the largest company in industrial manufacturing by market value, serving for 100 million people, a market cap of around $100 billion is enough. Companies in the Internet age, Apple has become a $1 trillion enterprise, Facebook serves for 2 billion people while Tencent 1.2 billion. In an industrial society, industrial economy, it is hard to imagine that a business can serve so many people, the company is bound to fail. Because the marginal cost is too high. But Internet enterprises can serve 1 billion to 2 billion people, because its marginal cost has been greatly reduced.

After all, the Internet is still a centralized business organization, it runs for money. So both Google and China’s DiDi will take a cut of the transaction fee. So the seemingly free Internet is actually paid for. It’s just a hidden payment. WeChat, for example, will often push you ads in the circle of friends. 90% of Google’s profit comes from advertising, Not to mention other Internet companies. The emergence of blockchain is to cancel the Internet intermediary, then the marginal cost is nearly zero. This is when we discovered the essence of blockchain, which is also the Internet, but it’s valuable Internet. In short, all for one, one for all, everyone contributes to and benefits from network value.

When everyone becomes a node involves in the network, it drives edge computing. Take a simplest example, Bitcoin mining can be developed from ordinary computer CPU and GPU. Each participating mining node uses no additional resources, only its own idle hardware system, bandwidth and power to participate in mining, driving the growth of bitcoin.

For instance, I can register to be an Uber driver and take passengers on my way to work to earn extra money, without any additional effort. With blockchain’s multiplier effect, increased participants improve network efficiency, and in return benefits participants more. No one can miss the great opportunity.

In other words, featuring with minimum marginal cost and maximum marginal effect, blockchain can serve up to 10 billion users, a total of residents on earth. As mentioned in previous articles, the value of blockchain is captured by protocol, which is estimated to worth 10 trillion USD.

To sum up, blockchain rule is reinforced by technology and code, valued by long-term thinking, allowing maximum users to contribute the network, and to form consensus.

In the past year, we have witnessed the failure of countless valueless “blockchain” project without practical application scenes, attracted no one but speculators. Their failure is doomed. But please remember that at the turning point of 2000, when Internet market boomed, we witnessed the rise of Amazon and Google.

I believe, blockchain will finally benefit the network contributors.