Why I like blockchain
Tags: Development, Blockchain, Ethereum, Economics, Bitcoin

Image source: crypto-news.net

Bitcoin is the first thing that comes to mind regarding blockchain, and then the gold rush second. Get rich with a new tech which is in its infant days; who gets in now has a chance in the first wave as it was with the industrial revolution, IT revolution, gold rush and, as it stands with blockchain, all of them combined 😃

But I am more interested in the fundamental changes this technology can bring in our society.

Being an entrepreneur, I love building systems and understand social systems. If you look at the entire society as a system, every individual is an actor in the system. Every system has functional rules, incentives and penalties. This is how the economic circuit works.

If the whole world would be a monopoly game, we need rules, incentives, penalties to make sure everyone plays the game in a fair and rewarding manner. As the game grows from 4 to 6 to 8 to 10 players, more issues can occur. As the game grows to 7 billion people many issues appear, considering that players speak different languages, have different cultural background and value systems. This makes it a huge hassle to create a consistent system for all players while trying to be fair to all parties involved.

Nowadays the game is played with different rules, incentives and penalties and huge administrative costs at this scale. Blockchain has the fundamental ability to create a consistent ecosystem for all players, and insure that all parties have clear rules, incentives and penalties, without the huge hassles of present day administrative and non intentional or intentional biased ruling.

There are multiple applications of this technology, but I will brain-dump a fews macro perspectives.

Property

fundamental change on how we report to property

The ability to trade is based on trust. I trust that I have the ability to own what I trade, and the counterpart owns what is traded. It seems a normal state of facts, but not so normal in present day circumstances.

How we see and report to property has been in a continuous change depending on the legal system in the country you live in.

But no matter the country and legal system where one resides, any trade has 2 characteristics:

a central authority establishes the rights for the asset traded

any trade is denominated in a currency which is centrally owned and ruled

These have multiple direct and indirect implications.

Establishing the rights to owe the asset by a state authority leads to bureaucracy and overhead costs which do not add value to the asset itself, translating into difficulty in trading especially over different legal systems.

Denominating the asset in a local or international currency creates a global market where the value of the asset has a lot to do with monetary policy, transactions costs and money regulations that, once again, influence the trading value of the asset, but does not add value to the asset itself.

For example, you are a music composer in Europe and want to sell your music in Asia. You must sign a contract with a record label company which certifies your digital rights for distributing the music. The central authority validates your ownership of the asset created. For this “courtesy”, the record company takes a hefty part of what you make either from the sale price or by adding it to the sale price, and usually both.

Going through distribution channels and payment systems, more commissions are paid to different payment systems, leading to currency differences. Again this is done by taking a cut from the asset sold value or by adding these fees to the asset sale value (many times both).

Blockchain allows you to create your music with digital rights embedded and sell it using cryptocurrencies without the need of an established authority to guarantee it is yours — the blockchain structure guarantees it is yours and that it is original.

Store of value

But to be sure it is a store of value , you must be absolutely sure that you own it and the possibility of being deprived of your possession is as low as possible. With central banks and governments controlling the entire monetary circuit, your money might not be your money if the bank or government decides otherwise (see ex-communist countries or bail-in events during post 2008 recession).

If you secure your blockchain data (money or any type of info it posses), there is no way other people can access it, not even a central authority, without your expressed consent.

Moreover, the value of your holdings is determined by supply and demand. Especially in the beginning, it is pretty normal to wildly vary, but it is a fairly more transparent mechanism than a value set by a central organisation.

Considering money, even if inflation is embedded in the network (token) mechanism, there are stakeholders which have a voting power in the mechanics, leading to a multi-decisional process with more parties at the table, for the environment’s economics.

Unit of account

Being completely digital, the money is easily fractional compared to traditional currencies without the administration cost behind it, in the traditional FIAT system.

Medium of exchange

Freedom to trade — one should be able to trade freely as her/his conscious dictates. As the control of monetary circuit is regulated and/or restricted, this is not possible. If one engages in trades which might later on be considered of antisocial nature or not obeying the law than the person will face the consequences of the system. But restricting the person to freely trade even with good social intentions is a big drawback.

Cost of trading — It is way lower as the digital, secure and trustless* nature of the system means less administration than with normal FIAT currencies where central authority costs a lot to issue and maintain the system with all the regulations, manpower and establishments behind them to keep the system in place.

It becomes easy to trade across traditional borders (countries, continents) as the cost and time of sending $1 to your friend standing next to you and to a person in a different country, jurisdiction, continent is the same.

Micro transactions — one specific usage is in micro transaction ecosystem like here on medium. If I want to gain money from writing this article I think a fair price would be 1 cent per each reader. But the cost of processing 1 cent from each reader is way higher than the 1 cent I will be receiving. So this means to be able to transact I must set a price high enough to cover the administrative cost of selling which means I can not offer it in this price range.

Blockchain enables with low fees the ability to create micro transactions and makes it possible for me to see you this content for 1 cent. Otherwise the would most probably be to high for you to make a payment and would mean I can not earn from what I produce

*Trust-less

Trust among people works based on a track record that your actions are in good will and will not hurt me or might even benefit me. It is built over time, evaluating one’s actions and their repercussions on me. If I meet someone new, I should trust that (s)he is who (s)he says (s)he is, that her/his money is worth what (s)he says it is worth, and so on.

This can work in a small village where everyone knows everyone, but in a global system we rely on central authorities to guarantee this trust.

Your ID is your proof of identity and your money is guaranteed by a government.

Blockchain means I can trust your money have value no matter who you are, and even that your identity is true as it has been validated in a much more secure manner than any government could ever do it. On top, I can also have access to your history and track-record if YOU CHOOSE TO SHARE THEM WITH ME, something that, until now, was restricted only to government institutions.

So the system itself is a guarantor of the participants and its components as it is not possible to alter it (so far at least 😃 ).

Decentralised

We used centralised systems as they are the normal way of managing systems with multiple components in a more efficient way. Take for example traffic, you are heading out of your house with the purpose of getting fast to work. You take what you know is the fastest route. In the same time, another 10.000 leave to work taking what they also know is the fastest route. All of you find yourselves stuck in a terrible jam.

A central processing unit would see this and establish rules for directing traffic so this would not happen the second time.

But this poses multiple issues:

the central processing unit (a person or an institution of more people) could present several flows

the speed of decision could be lagging behind the speed of what is actually happening in reality (many traffic issues)

the way the central processing unit interprets the information might be biased and decisions might be good only for a small percentage of the participants

the central processing unit might transform into a bad actor for several reasons and intentionally make decisions to the advantage of a small few, and to the disadvantage of great majority.

Now, as the technology allows it, there is no need for a central authority as Waze takes real time input of data and presents every participant to the traffic with the best option suiting his/her need to arrive fast to destination.

If we apply this for legal system, monetary system, and all other social system, it results in a better way of reaching decisions for the best interest of all participants in that system.

It does not necessarily rule out a central authority, but even in this case the ability to deal with systemic information and take into account the best interest of all participants is greatly improved and in most cases it rules out the intentional bad actor.

Transparency

Transparency means the ability to see an actor in the system walks the talk, and/or his track record. While this might pose some privacy issues, for what means a community and the common use of resources, it is crucial to have this kind of transparency and each party playing the game to have transparency on what is happening in the system.

Stake

Our participation in any system is based on the incentives the system offers. But if we feel disengaged in that system in any way, in the best case scenario, our participation is mandatory by some form. Blockchain ability to allow communities to form as they see fit around a certain monetary valuation (like having their own coin) and having a stake into what is happening with that coin and that community, allows people to feel connected with the system, and actively participate, not based on mandatory enforcing rules, but on the natural envelopment.

On blockchain, you can participate in communities where you believe in the product, in the community and you have a sense of identity not only with the product, but with the basic economic output: the money = the token. There is a personal relationship.

You can have a stake in the system decision making and you are at the table actively participating if you choose to do so and the structure allows it (many blockchain systems allow and encourage participative governance).

Participative governance

It enables members of the community to participate in a secure transparent way to the ruling of the community, removing the bad actors and fraud factors from actual participative systems.

The most basic implementation can be done with elections. Each person has only one vote to allocate and it can be done in a private secure way without the suspicion one person votes multiple times.

As it can be private, any person in the organisation can see the results real time but without knowing how a specific person allocated the vote, or publicly transparent at individual level — seeing how a person allocated their vote

this can apply to a company, a small or big organisation.

One major advantage is that the administrative cost of organising a fair transparent vote is almost zero (without the PR and marketing of course)

Another application can be for running public budgets of the city hall. Participants can vote easily on major decisions of how and for what budgets are allocated

Contractual trust

A contract is the will of 2 or more parties agreeing on certain terms and conditions.

As it is done now parties must relay on an institution to enforce conditions of contract if parties breach contractual terms. these leads to timing and cost issues which do not add value to the relationship, administrative hassle

Blockchain through the usage of self executing smart contracts enables the contractual agreement of all parties to be “set in stone” and self execute based on specified conditions

Let’s say we agree that I will execute a small number of tasks for which you will pay per task 10 dollars. As I execute each task according to specifications (quality, time, etc) the money are automatically released to me. The fear that you will not pay on time or at all simply do not exist anymore

Or maybe I want to fund an organisation based on specific milestones. Upon reaching each milestone the funds are released. this way both I and the organisation has security.

Empowering communities

If you are an artist you can be part of an artist community, but the economic incentives are measured in the same currency as everyone’s else. For example, in a country with a strong artistic community which contributes in an exceptional manner with 15% to the country’s GDP, this community gets paid in the same currency as all other even though its buying power should be priced different.

Through blockchain, the artist community can create its own token freely floating on exchanges and the parity is set by market value and people trading with that token. What is more, there is a sense of attachment to economic incentives as it is more rewarding to be able to spend your community token artist-coin versus general FIAT currency everyone uses.

Banking the unbanked

The problem with poor people is that the cost of issuing money and establish their identity to be part of the monetary system is higher than what they can produce in terms of economic value translated into that specific currency.

This does not mean they can not produce value. But the administrative costs of issuing money to them is high so economically, as it stands now, it does not make sense. With blockchain removing the identity and administrative costs, they can benefit of being part of any economic and monetary circuit they are able to provide value.

Unleashing potential

Easy access to funding from community enables creative people’s access to resources without friction. A programmer can easily create value through what he does best, programming an app that creates value for someone, with much more ease than in the actual context where he must convince a few investors to allocate initial capital.

The crowdfunding pool can easily consist of programmers alike, each with a small investment, but with numbers equal or even more than the traditional investor who may not understand the tech and be unable to validate the idea. This happens many times and not for lack of knowledge, but for the lack of communication skills as the parts do not understand each other properly. It is difficult for a programmer who knows how to create code to express differently about his creation and misalignment in communication generates impossibility of discussing at the same level.

This applies to many other areas where creation can be understood by some who are somehow connected in that domain of interest.

Also, investing based on trust (trusting the team, the idea, etc) becomes a more democratic tool of finding resources. I know a lot has to be solved to make this run long time as it is not clear now what will happen with those tokens and how the regular Joe will gain value on the long-term. But these are things to be resolved, the logic and tech behind them are here now.

Prosperity

Generating inflation has been a must for all economies as a measure of progress. An economy without inflation means stagnation and deflation is the worst nightmare, even worst than recession. As people create value and are able to create communities around that value, the participants invest and the value raises. This creates inflation, but it is a different kind of inflation generated not through printing money, but by inventing money. This money gain value and, overall, the price inflates. When prices inflate, more and more actors are stimulated to produce even more economic value.