Enron

The Transaction Costs of Tokenizing Everything

I wonder if Al Gore ever looks down at us peons, crawling around the internet like eight-legged leeches:

I invented that. I took the initiative in creating the Internet. Now all these freeloaders are using MY internet protocol to drive billions of dollars worth of value. For FREE.

Damn, I should have done an ICO.

Even though Al Gore neglected to tokenize his internet protocol*, someone else came along with the next-best thing.

In 1999, a clever company called Enron invented something called a bandwidth contract.

The internet is just a bunch of routers and cables, sending and receiving data all day long. Most internet providers have peering agreements, where they carry each other’s traffic for free. Sharing is mutually beneficial, and their customers pay a fixed monthly rate regardless of use.

That’s all well and good when capacity is plentiful, but what happens if half the country wants to stream Sunday Night Football while I’m trying to sync my Bitcoin node? Whose data gets to go first?

Enron’s bandwidth contracts were designed to solve this potential queueing problem. By forcing internet users to bid for bandwidth by the minute, the free market would decide the optimal allocation of resources [1].

Sadly, Enron imploded before it could fully realize its bandwidth trading dream. Still, the idea of turning every network into a market was pretty hot in the dot-com days [2]. To see how things might have turned out, we can look at a company called Mojo Nation.

A MASSIVE AMOUNT OF STORAGE SITS UNUSED IN DATA CENTERS AND HARD DRIVES AROUND THE WORLD. Let your hard drive shit out money by fulfilling storage requests on the open market!

Such is the marketing pitch of services like Filecoin, Sia, Storj, MaidSafe, and all those other decentralized file storage tokens. Seventeen years ago, their founders were still in diapers when Mojo Nation launched to address the problem of Pareto-inefficient data storage.

Mojo Nation created a digital payment system to buy and sell computational resources. Participants could earn Mojo tokens by contributing things like disk space, bandwidth, CPU cycles. Those who wanted resources offered bids in outgoing requests. Mojo tokens relied on a centralized mint because blockchains weren’t around yet, but centralization was the least of its problems: Tokens were a huge distraction from what users really wanted to do, which was share files [3].

A bidding market is an awfully complicated thing. Take Bitcoin, for instance. Each block has a finite capacity, so participants submit transaction fees to incentivize miners to include their transactions. It’s a simple concept, but transaction fees are the most aggravating part of Bitcoin. There are people like Roger Ver who have been using Bitcoin since 2011 and STILL can’t figure out how transaction fees work.

I’m not trying to pick on Roger here; this is not a user-friendly experience. Those who want to tokenize all the protocols are effectively shoehorning the same shitty experience into every aspect of the internet. My mother can’t even update her Facebook picture without backup assist; how on earth will she manage five-dozen protocol tokens to navigate the web?

Many dot-com era platforms tried to create bandwidth exchanges, but none found willing participants. Enron and Blockbuster temporarily joined forces to create on-demand streaming video, in hopes that they could clog up so much bandwidth that internet providers would start a bandwidth bidding war. No such luck. As it turns out, bandwidth — and most computational resources — are simply too cheap to meter.

After Mojo Nation’s demise, a former employee stripped the token incentives out of the protocol and created a simple tit-for-tat filesharing system. The software client uploads files to peers that provide downloads [4]. Users can’t accumulate credits, and sometimes freeloaders go unpunished, but people don’t care about perfect resource allocation — they just want convenient file access. By 2004, BitTorrent was responsible for a quarter of all the traffic on the internet.

And everyone lived Pareto sub-Optimally ever after.

* Kidding. The Internet Protocol was created by Vint Cerf and Bob Kahn. The only thing Al Gore invented was global warming.

References:
1. Enron’s Bandwidth Trading patent, 2001.

2. Mark Miller and K. Eric Drexler. The Agoric Papers, 2000.

3. A conversation about Mojo Nation on Unenumerated, ca. 2007.

4. Bram Cohen. Incentives Build Robustness in BitTorrent, 2003.

5. Bryce Wilcox-O’Hearn, who now goes by Zooko, CEO of ZCash. Mojo Nation: Experiences Deploying a Large-Scale Emergent Network, IPTPS 2002.

6. Mojo Nation website from 2000.

Hire the Engineers without Pedigrees

Stanford_Graduation

One of the biggest challenges of a technology startup is finding star engineers. There are plenty of them in the Valley, but we have to compete with companies like Google and Apple who dangle six-figure starting salaries in front of their prospects. Not to mention other employee perks and benefits.

Silicon Valley is a dog-and-pony show where pedigrees command a premium. In the last 3 years, 80% of the startups funded by the top five VC firms had team members from one of either Stanford, Harvard, or MIT.

But apart from investors, who cares?

McKinsey consultants began advocating the War for Talent in the late 90s dotcom boom. With no real metric for measuring talent, managers deferred to the US News rankings of the applicants’ alma maters. This standard has persisted into the present.

McKinsey also advised Enron to recruit the best and brightest. Remember Enron?

Emboldened by the mantra of A players, Enron created an undisciplined, narcissistic company that believed it was too talented to fail.

Enron succumbed to a culture of dishonesty because no A-player was willing to admit failure in a company that was too talented to fail.

Startup employees need to be ready to fail. And they need to be honest when something fails.

The highest-pedigree employees are particularly averse to failure. They probably haven’t had much practice at it. Nobody goes to Stanford for a PhD in Computer Science because they want to embrace risk.

Star engineers don’t even necessarily make the best employees. Intel hired me because I’m a stellar circuit designer, but I spent most of my workdays watching cartoons or hiding in the bathroom. No amount of pedigree can make up for a lack of motivation.

In a startup, anything less than committed passion is death. Will that Stanford PhD you hired remain loyal in your startup’s darkest hour – even with Google recruiters knocking on his door?

Last week, Seth Godin made a case for having a war for attitude, not talent. Motivation and honesty trump skills and talent any day. Cal Newport says that the ability to focus will be the superpower of the 21st century. These three things are all harder to find than an Ivy-League diploma.

You don’t need a degree from Harvard, Stanford, or MIT to be able to focus and yield a positive attitude.

There’s a good argument against purchasing pedigree dogs – they come from a limited gene pool and are often inbred. The same applies to hiring pedigree engineers – get all your employees from the same three universities and your company becomes inbred, narcissistic, and diseased.

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