With an array of emerging tech such as AI, VR and IoT going through the “hype cycle” on an evermore regular basis, one can be forgiven for failing to grasp the enormity of blockchain’s potential to shift the world order and revolutionize the way we live.
The blockchain represents an evolution in the way information can be stored, accessed and used. Ledgers have been an integral part of everyday life even if we don’t necessarily see them. They confirm our identity, our ownership of assets, our status and our authority among other things (Berg, Davidson, Potts 2017). This data is managed in ledgers by organisations and individuals to coordinate, verify and validate transactions. As members of society, we need to trust in the ledgers and the organisations that control them and we do so thanks to government regulations and structures.
The most important feature of blockchain as represented in this article is its ability to provide trust regardless of the parties involved in a transaction and without the need for any intermediary, whether governmental or otherwise (Oh, Wallsten 2018). Its decentralised nature has the inbuilt ability to gain consensus which makes it almost impossible for data to be deleted or corrupted.
Institutional Cryptoeconomics
Although the term may seem academic, the underlying concepts of institutional cryptoeconomics are simple to fathom and provide the theory that supports the claim that blockchain will be a disruptive force in our world. Institutional cryptoeconomics is based on institutional economics, a school of economics made popular by Ronald Coase and Oliver Williamson in the last century. They posit that it is more than supply and demand that dictate the price of goods and services as there are inherent costs within each transaction of the supply chain. The two main transaction costs are information and trust.
These costs arise because actors engaging in a trade are by nature opportunistic and self-serving. They want to get the best price or value and will take advantage of any situation to obtain it. To keep these costs at a manageable level, we have built institutions and societal structures to minimise our need to trust the other party in a transaction. We use banks, escrow agents, brokers, auditors, lawyers and countless other systems to allow us to trade. We have set up these expensive centralized entities because we can’t inherently trust others - and despite their expense, these systems do reduce the transaction costs and the price of goods and services.
But what if all of a sudden, we had a new way to establish trust? A transaction method that didn’t need banks, lawyers, brokers or auditors? What would that mean for our way of life? Yes, it could mean a huge shift in the labour market and the end of many institutions and structures but what would it mean to our everyday lives? What would it actually look like when blockchain technology has matured and is part of our world?
1. A world without banks
As can be seen from the interest in Bitcoin and its ilk, the idea of a world without banks is appealing to many. Banks have been a vital element in society ever since there was trade. They have allowed us to form our way of life and become a highly advanced civilization. Banks have not only enabled the supply of capital, they have enabled trust and facilitated local, national and international transactions through their systems of rules and regulations.
Despite banks’ current importance in our world, they add a huge cost to our transactions. This means that blockchain’s ability to allow parties to transact without the need for trust or intermediaries will become an existential threat to financial institutions everywhere.
No more bank queues, no more ATMs, no more financial collapses or scandals. Decentralized finance (DeFi) is becoming the new way for people to borrow and lend money with dozens of apps and companies launching in the last year alone. It remains to be seen how central banks will continue to regulate economies as new methods of trade appear but many of them are already on the case and exploring their options.
2. Cheap, renewable energy
With climate change policy and renewable energy production being issues of global importance, everyone will welcome the idea that all the energy we need can be produced in our own neighborhoods for a fraction of the cost of the current supply. Advancements in small scale renewable energy plants and energy storage solutions mean that more and more, homes, businesses and communities are producing their own electricity. Most people still depend on connection to the main grid to guarantee supply however this need could be eradicated with the implementation of smart local grids that are powered by blockchain technology.
Smart contracts will create a localised energy marketplace where consumers can also be suppliers and only pay if they use more than they produce. The loss of dependence on a huge supply chain obviously means massive cost savings for household budgets and the environment.
3. Cheaper, fresher products and services
As consumers in the global economy, we are usually the end of the line for extensive supply chains for all manner of goods and services. The more complex the supply chain, the higher the transaction costs, which are of course passed on to us, the consumer.
In fact, new forms of organisations will form that can out-compete traditional business structures which necessarily have many layers of trust-enabling functions (Davidson et al, 2018). In “Trustless architecture and the V-form organisation”, Berg, Davidson and Potts (2020) describe a V-form organisation as an “outsourced, vertically integrated organisation tied together not by management and corporate hierarchy but by distributed ledger technology” (p7). Whereas there are currently cost savings for a business to vertically integrate, the trust provided by the blockchain allows non-related businesses to share the benefits without the need for additional hierarchies.
4. Less crime and corruption
When implemented well, blockchain technology will make it very difficult to get away with fraud, theft, embezzlement or corruption. It might be still possible to commit these crimes but with the greater transparency, traceability and trackability afforded by blockchains, it becomes pointless to try as it is a sure thing that you will be caught.
The higher level of security and safety again reduces the cost of transactions as each stage of a supply chain no longer needs to factor in losses from crime to their price. Furthermore, the need for security systems, guards, police and legal structures are drastically minimized. Not only a saving for consumers but to society as a whole.
5. Lower taxes!
Yes, I’ve saved the best for last. The purpose of government is to organise our societies through creating and enforcing regulations. As the greatest providers of trust, governments also add huge costs to our lives. Even the most ardent anti-capitalist would find it hard to disagree with reducing the size of government if we had technology to replace it. Of course we will not stop needing some form of government but one can hardly refute the amount of money to be saved if we have no further need for a large proportion of the government services we have now.
Regulations will still be needed but can be built into the code of smart contracts on a blockchain. This means that it is not possible to act in contradiction to the regulation. Without the need for policing, investigating and auditing among many other activities, and along with the assets and management involved with the coordination of it all, a decrease in costs of government would obviously lead to the reduction of taxes (Davidson et al, 2018).
Conclusion
So even though it might be a number of years before blockchain has matured and is part of our world in this way, the potential benefits are too compelling for them to be ignored. You can be assured that thousands more research papers are being written, countless entrepreneurs are exploring opportunities and even governments, at risk of total transformation, are investigating how they can take advantage of blockchain technology.
Blockchain’s potential impact has been compared with the digital transformation that has occurred with the advent of the Internet. In the early years of the world wide web, the Internet was described as an “information superhighway”. I also like the road analogy for blockchain and think it could be referred to as a “transaction superhighway”. If you can picture our current societal structures as regular city streets with endless intersections and obstacles, you can see that the cost of moving goods from one place to another is slow and expensive. Although it would be a huge investment to build a superhighway and it would involve knocking down houses and reorganising other existing infrastructure, the benefits to be gained will be there forevermore.
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