A computer scientist who co-authored the first white paper to conceive of a “block chain”, Scott Stornetta, is joining an investment fund that will seek out businesses commercializing crypto-currencies.
First Digital Capital is an Australia-domiciled vehicle being populated with hedge-fund managers and high-profile technologists such as Stornetta.
FDC intends to raise over $100 million to make equity investments in opportunities around commercializing distributed-ledger technology, says Deryck Graham, co-founder and chairman of the Perth-based firm.
Stornetta is the first of several technologists whose identities will be announced over the coming months, and will serve as chief scientist.
He is best known for a series of papers dating to 1991 in which he and Stuart Haber theorized about how to time-stamp a digital document, to order transactions and authenticate their provenance.
Their idea of a hierarchy, dubbed a “block chain”, was one of several of theirs adopted by Satoshi Nakamoto when he published the paper inventing Bitcoin in 2008.
Stornetta and Haber were part of a California-based community eager to develop digital cash, and they were early entrepreneurs: the two established a company, Surety, a spinoff from Bell Communications Research, in 1994. Surety, which tried to sell their digital time-stamp ideas, is considered the first blockchain startup. Since then, Stornetta has advised venture capitalists, universities, and entrepreneurs to assess their tech for its commercial potential.
He tells DigFin he joined FDC to apply that experience as its portfolio managers seek out attractive businesses.
“There are hotshot tech organizations, run by clever people, who think people will simply come and pay them in order to acknowledge their brilliance,” he said. “I’ve spent many years learning to be product- and customer-oriented.”
Looking back over the history of blockchain and digital cash since his landmark work, Stornetta expresses pleasure at the technology’s newfound prominence, while acknowledging there are a lot of needed improvements.
“The key element of blockchain is to be an immutable record, with decentralization of trust,” he said. “Satoshi made a collective series of design decisions, which are the reason why we’re having this conversation today.”
In some ways, the invention of Bitcoin removed the need for some of the theories he and Haber had put forward: Nakamoto figured out a way to embed time stamps in the data itself, rather than rely on the blockchain infrastructure for that. But his ideas resulted in some of the protocol’s flaws, such as an unwieldy means of achieving network consensus called Proof of Work, and the huge amounts of electricity required to power that process.
Stornetta says Satoshi Nakamoto’s achievement was to take many ideas that had been circulating within that techno-libertarian community in the 1990s and 2000s, and create a system that actually worked.
“Satoshi made enough of the right moves,” he said. “The crypto-cash community had been waiting for a savior, and this one was good enough.” He is eager to emphasize the role of the community in embracing Nakamoto’s work. “Bitcoin was successful in spite of some design decisions, because the community was eager to make it work.”
He supports second- and third-generation attempts to improve on Nakamoto’s work, including Ethereum, NEO, EOS and other new blockchain protocols, which are grappling with issues of scaling and alternative consensus mechanisms.
“Stuart and I talk with these people,” Stornetta said. “Thank goodness someone is addressing the problems and not taking Satoshi’s design as gospel,” although he’s also quick to praise Nakamoto’s achievement.
“Bitcoin is good enough to be criticized,” he said. “Satoshi created an immutable record, with all the world as witness. So what can we do now?”
Hype versus value
Stornetta recognizes there’s a lot of froth in the crypto development space today. Asked about the proliferation of tokens that seem to have as their purpose only ways to interact or influence other tokens, Stornetta said, “These self-referential spaces are not creating actual value. They’re issuing coins to address interchangeability of other coins, and hoping the music doesn’t stop. But can they identify where the dog is actually going to eat the dog food?”
But he says he has seen the same market dynamic at work before, from neural networks in the 1990s to the internet and the dot-com bubble, and in each case there emerged a few companies of genuine value.
There are in fact blockchain initiatives he says are creating real value, but so few are in the not-for-profit space, such as work the United Nations is doing to provide Syrian refugees with identity documents. But last summer, Daimler used blockchain to issue a E100 million bond, and Maersk and IBM are working on moving shipping-industry finance to blockchain.
These blue-chip initiatives are the sort of thing that will move usage forward, says Graham. Citing the Maersk experiment, “If shippers use a digital currency to transact, trillions of dollars would leave the banking system.”
Stornetta added, “What we’re seeing is the democratization of the transfer of risk. It feels like the early days of Lloyds of London.”
But he says the aim of blockchain tech should not be about disintermediation, at least not for its own sake – a lesson he’s learned since his youthful, libertarian days. “You can move the ball without destroying existing players. Focus on doing basic value-creation for the end user, and then let the chips fall where they may.”
Investing through FDC
Graham says he hopes FDC, which is regulated by the Australian Securities and Investments Commission, launches what becomes the first regulated crypto-fund. It is raising funds from Australian family offices and small institutional investors, and Graham says the first close should occur in the next two months. The fund will invest with fiat money, however, not via tokens.
FDC is in the process of setting up offices in New York, London, Geneva and Hong Kong. Graham declined to discuss the fund’s investment style, other than to say it will layer traditional methodologies into the blockchain space.
FDC will invest in four broad categories of company: early-stage protocols, middleware, dApps (decentralized applications), and blockchain infrastructure, from miners to exchanges. Fintech and healthcare are industry priorities.
One inevitable question for Stornetta wraps up the interview.
“I receive letters asking me if I’m Satoshi,” he said. “I’m not. You can tell by comparing my work at the time with the caliber of the code written by him in Bitcoin’s initial deployment.”
It’s a topic he acknowledges but prefers to lay to rest. “It was clear Satoshi was embedded in the digital cash community.” But for all of his efforts to create true anonymity, it didn’t really work: Nakamoto (be it an individual or a group) still had to operate under a pseudonym.
Why the need for privacy, though? And do we need such a trustless system?
“I’m all for trust. We’re building networks of trust. But we no longer need to accumulate power in a single authority,” he said. But he says the issue of privacy via DLT should not be confused with pure anonymity. “It’s not about keeping data private so much as it is about having control over your data, controlling its access, and keeping the ability to monetize it. Privacy isn’t the right way to frame it. This is about liberty and personal control.”