What Brian Armstrong understood that Satoshi did not
Disclosure: Opinions expressed are solely my own and do not express the views or opinions of my employer. I am a personal investor in Coinbase.
The Bitcoin whitepaper is one of the more elegant pieces of mathematics and computer science ever written. Satoshi Nakamoto, the infamous and anonymous author, cracked an unsolved problem in computer science known as The Byzantine Generals Problem. In layman’s terms, Satoshi figured out how to build a system for reaching consensus — and therefore transferring value — over a trustless network like the internet.
But there was an error in the code. Or more precisely, an imperfect assumption about human nature embedded in the paper. Satoshi implicitly assumed that human beings don’t want to trust a central party; that they would rather have a trustless system where they only have to trust themselves and sophisticated mathematics. The whitepaper states:
“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” — Satoshi Nakamoto, Bitcoin Whitepaper 2008
Brian Armstrong is a vocal fan of Bitcoin and of the whitepaper itself, but the business he built demonstrates that he also saw its limitations. The Coinbase vision and business plan is in some ways an addendum to the Bitcoin whitepaper to correct this flawed assumption.
Coinbase during its early years — and to some extent today — was controversial within the crypto ecosystem. If the central innovation underpinning blockchain technology is the decentralization of trust, the elimination of the need to trust a central counterparty like in the traditional financial system, Coinbase’s brokerage and wallet products flip that value proposition on its head: customers put their trust in Coinbase to hold and transact their funds in much the same way that they would with a traditional bank or brokerage.
What customers get in exchange for that trust is abstracting away the complexity and risks of dealing with crypto. Customers of Coinbase don’t have to worry about losing their money if they misplace a 64-character long string of numbers and letters. Instead, if they forget their password, they can go through a reset flow. Similarly, Coinbase customers can sleep well knowing that their funds will not be stolen in a hack (so far Coinbase has never had an incident where customer funds were stolen).
It turns out that the mainstream user of crypto today prefer this format of interaction with their holdings. Human beings ultimately want to be able to trust someone else. Brian and the team at Coinbase implicitly understood this dynamic.
It may be ironic that the most valuable company created within crypto — a trustless system for transferring value — is the one that asked users to give it their ultimate trust. But it is precisely because trust within the crypto ecosystem is so elusive that Coinbase has succeeded to such great extent.
In summary, Brian understood that iconic financial services businesses are always built around deep customer trust, and while crypto solved a problem in computer science, it wouldn’t change human nature.