How the BlockChain will radically transform the Economy
Economists have been exploring people’s behaviour for hundreds of years, how we make decisions, how we act individually and in groups how we exchange value.
They’ve studied the institutions that facilitate our trade like legal systems corporations’ marketplaces. But there is a new technological institution that will fundamentally change how we exchange value and it’s called the blockchain. Now that’s a pretty bold statement but if you take nothing else away from this talk I actually want you to remember that while blockchain technology is relatively new it’s also a continuation of a very human story and the story is this as humans we find ways to lower uncertainty about one another so that we can exchange value.
Now one of the first people to really explore the idea of institutions as a tool in economics to lower our uncertainties about one another and be able to do trade was the Nobel economist Douglas North.
He passed away at the end of 2015 but worse pioneered with called new institutional economics and what he meant by institutions were really just formal rules like a constitution and informal constraints like bribery. These institutions are really the grease that allows our economic wheels to function and we can see this play out over the course of human history if we think back to when we were hunter-gatherer economies.
We really just traded within our village structure. We had some informal constraints in place but we enforced all of our trade with violence or social repercussions as our societies grew more complex and our trade routes more distant. We built up more formal institutions. Institutions like banks for currency governments corporations. These institutions helped us manage our trade as the uncertainty and the complexity grew and our personal control was much lower.
Eventually, with the internet, we put these same institutions online. We built platform marketplaces like Amazon, eBay, Alibaba just faster institutions that act as middlemen to facilitate human economic activity. As Douglas north saw its institutions are a tool to lower uncertainty so that we can connect and exchange all kinds of value in society and I believe we are now entering a further and radical evolution of how we interact and trade. Because for the first time we can lower uncertainty not just with political and economic institutions like our banks or corporations or governments but we can do it with technology alone.
So what is the blockchain?
Blockchain technology is a decentralized database that stores a registry of assets and transactions across a peer-to-peer network. It’s basically a public registry of who owns what and who transacts what. The transactions are secured through cryptography and over time that transaction history gets locked in blocks of data that are then cryptographically linked together and secured.
This creates an immutable unforgettable record of all of the transactions across this network. This record is replicated on every computer that uses the network. It’s not an app, it’s not a company I think its closest in the description to something like Wikipedia. We can see everything on Wikipedia. It’s a composite view that’s constantly changing and being updated.
We can also track those changes over time on Wikipedia and we can create our own wiki’s. Because at their core they’re just a data infrastructure on Wikipedia. It’s an open platform that stores words and images and the changes to that data over time on the blockchain. You can think of it as an open infrastructure that stores many kinds of assets.
It stores the history of custodianship, ownership and location for assets like the digital currency Bitcoin. Other digital assets like a title of ownership of IP it could be a certificate, a contract, real-world objects even personally identifiable information. There are of course other technical details to the blockchain but at its core, that’s how it works. It’s this public registry that stores transactions in a network and is replicated so that it’s very secure and hard to tamper with which brings me to my point of how block chains lower uncertainty and how they, therefore, promised to transform our economic systems in radical ways.
So uncertainty is kind of a big term in economics but I want to go through three forms of it that we face in almost all of our everyday transactions. We’re block chains, can play a role, we face uncertainties like not knowing who we’re dealing with, not having visibility into a transaction and not having recourse if things go wrong. So let’s take the first example.
Not knowing who we’re dealing with?
Let’s say I want to buy a used smartphone on eBay. The first thing I’m going to do is look up who I’m buying from are they a power user do they have great reviews and ratings or do they have no profile at all. Reviews, ratings, checkmarks these are the attestations about our identities that we cobble together today and use to lower uncertainty about who we’re dealing with. But the problem is they’re very fragmented.
Think about how many profiles you have block chains allow for us to create an open global platform on which to store any attestation about any individual. From any source this allows us to create a user controlled portable identity more than a profile. It means you can selectively reveal the different attributes about you that help facilitate trade or interaction for instance that a government issued you an ID or that you’re over 21 by revealing the cryptographic proof that these details exist and are signed off on having this kind of portable identity around the physical world and the digital world means we can do all kinds of human trade in a totally new way.
So I’ve talked about how block chains could lower uncertainty and who we’re dealing with. The second uncertainty that we often face is just not having transparency in our interactions.
Not having transparency in our interactions?
Let’s say you’re going to send me that smartphone by mail. I want some degree of transparency, I want to know the product I bought is the same one that arrives in the mail and that there’s some record for how it got to me.
This is true not just for electronics like smartphones but for many kinds of goods and data things like medicine luxury goods any kind of data or product that we don’t want tampered with. The problem in many companies especially those that produce something complicated like a smartphone is they’re managing all of these different vendors across a horizontal supply chain.
All of these people that go into making a product they don’t have the same database. They don’t use the same infrastructure and so it becomes really hard to see transparently a product evolved over time.
Using the blockchain we can create a shared reality across non-trusting entities by this I mean all of these nodes in the network do not need to know each other or trust each other because they each have the ability to monitor and validate the chain for themselves.
Think back to Wikipedia it’s a shared database and even though it has multiple readers and multiple writers. At the same time, it has one single truth so we can create that using block chains we can create a decentralized database that has the same efficiency of a monopoly without actually creating that central authority so all of these vendors, all sorts of companies can interact using the same database without trusting one another.
It means for consumers we can have a lot more transparency as a real-world object travels along we can see its digital certificate or token. Move on the blockchain adding value as it goes this is a whole new world in terms of our visibility. So I’ve talked about how block chains can lower our uncertainties about identity and how they change what we mean about transparency in long distances and complex trades like in a supply chain.
The last uncertainty that we often face is one of the most open-ended and it’s reneged a what if you don’t send me the smartphone can I get my money back?
Blockchains allow us to write code binding contracts between individuals and then guarantee that those contracts will bear out without a third party enforcer. So if we look at the smartphone example you could think about escrow you are financing that phone. But you don’t need to release the funds until you can verify that all the conditions have been met you got the phone.
I think this is one of the most exciting ways that block chains lower our uncertainties because it means to some degree. We can collapse institutions and their enforcement. It means a lot of human economic activity can get collateralized and automated and push a lot of human intervention to the edges the places where information moves from the real world to the blockchain.
I think what would probably floor Douglas North about this use of technology is the fact that the very thing that makes it work the very thing that keeps the blockchain secure and verified is our mutual distrust. So rather than all of our uncertainties slowing us down and requiring institutions like banks or governments or corporations we can actually harness all of that collective uncertainty and use it to collaborate and exchange more and faster and more open.
Now I don’t want you to get the impression that the blockchain is the solution to everything. Even though the media has said that it’s going to end world poverty. it’s also going to solve the counterfeit drug problem and potentially save the rainforest. The truth is this technology is in its infancy and we’re going to need to see a lot of experiments take place and probably fail before we truly understand all of the use cases for our economy but there are tons of people working on this from financial institutions to technology companies start-ups and universities and one of the reasons is that it’s not just an economic evolution it’s also an innovation in computer science. Blockchains give us the technological capability of creating a record of human exchange, of exchange of currency of all kinds of digital and physical assets even of our own personal attributes in a totally new way. So in some ways, they become a technological institution that has a lot of the benefits of the traditional institutions we’re used to using in society.
But it does this in a decentralized way, it does this by converting a lot of our uncertainties into certainties. So I think we need to start preparing ourselves because we’re about to face a world where distributed autonomous institutions have quite a significant role.