The Blockchain Economy: A Beginner's Guide to the Institutional Crypto Economy
Published: 2022-12-15 07:36:02


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Blockchain is a digital, decentralized and distributed ledger.

Most explanations of the importance of blockchain start with Bitcoin and the history of money. But money is only the first use case of blockchain. And money is unlikely to be the most important.

It might seem odd that a ledger – a boring, clumsy document primarily concerned with accounting – would be described as a revolutionary technology. But blockchain matters because ledgers matter.

## Ledgers are everywhere

General ledgers do more than just record accounting transactions. The general ledger consists only of data organized by rules. Whenever we need consensus on facts, we use ledgers. Ledgers record the facts that support modern economics.

The ledger confirms ownership. Property titles list who owns what and whether their land is subject to any warnings or encumbrances. Hernando de Soto has documented how poor people suffer when they own property that has not been confirmed in a ledger. The company is a ledger, as a network of ownership, labor relations and production with one goal. A club is a ledger, listing who benefits and who doesn't.

The ledger confirms identity. Businesses have their identities recorded in government ledgers to track their whereabouts and status under tax laws. Registers of Births, Deaths and Marriages record the whereabouts of individuals at key moments, and use that information to confirm identity when those individuals interact with the world.

The ledger confirms the status. Citizenship is a ledger, recording who has rights and is subject to obligations due to national membership. The electoral register is a ledger [habanero88](https://bit.ly/3HsQaD1), allowing those on the register to vote. Employment is a ledger, giving those employed a contractual claim to payment in return for their work.

The ledger confirms authority. The ledger identifies who can legally sit in parliament, who can access what bank accounts, who can work with children, who can enter restricted areas.

At the most basic level, ledgers chart economic and social relationships.

Agreement about facts and when they change—that is, consensus about what is in the ledger, and the belief that the ledger is accurate—is one of the fundamental foundations of market capitalism.

## Ownership, title rights, and ledger

Let's make a distinction here that is important but easily overlooked: between property rights and possession.

Take the example of a passport. Every country asserts the right to control who crosses its borders, and every country has a ledger that its citizens have the right to travel. A passport is a physical item that refers back to this ledger.

In a pre-digital world, ownership denotes ownership rights. The Indonesian passport ledger consists of index cards kept by the government. The country's border agent who is issued a passport may presume that the traveler holding it is registered in a ledger as proof of being permitted to travel. Of course this makes border control very vulnerable to fraud.

Ownership implies property rights, but ownership is different from property rights. Modern passports allow authorities to confirm ownership rights directly. Their digital features allow airlines and immigration offices to query national passport databases and determine that passengers are free to travel.

Passport is a relatively simple example of this distinction. But as Bitcoin has shown: money is also a ledger.

Ownership of banknotes indicates ownership rights. In the nineteenth century, the owner of the note had the right to withdraw the banknote's value from the issuing bank. These banknotes are a direct liability to the issuing bank, and are recorded in the bank's ledger. A possession regime that demonstrates proprietary rights means that banknotes are vulnerable to theft and counterfeiting.

In the era of fiat currency, a one hundred thousand rupiah note could not be returned to the central bank for gold. But the connection remains — the value of paper money depends on a social consensus about the stability of the currency and the government that issues it. Paper money is not wealth, as the people of Zimbabwe and Yugoslavia and the Weimar Republic have learned. Paper money is a vocation on a relationship in the (now synthetic) ledger and if that relationship collapses, so does the paper money value.

## Ledger evolution

For all its importance, ledger technology has remained largely unchanged... until now.

Ledgers appeared at the dawn of written communication. Ledgers and writings developed simultaneously to record production, trade, and accounts payable. Clay tablets carved in cuneiform with details of units of rations, taxes, workers and so on. The first international 'communities' were organized through a network of structured alliances that functioned much like a distributed ledger.

The first major changes to ledgers came in the fourteenth century with the invention of double entry bookkeeping. By recording debits and credits, double-entry bookkeeping stores data in multiple (distributed) ledgers, and allows reconciliation of information between ledgers.

The nineteenth century saw the next advance in ledger technology with the emergence of large corporations and large bureaucracies. This centralized ledger allows for a dramatic increase in the size and scope of an organization, but relies entirely on reliance on a centralized institution.

In the late twentieth century, ledgers moved from analog to digital ledgers. Databases allow for more complex distribution, calculation, analysis, and tracking. The database can be enumerated and searched.

But databases still rely on trust; Digital ledgers are only as reliable as the organizations that maintain them (and the individuals they employ). It is this problem that the blockchain solves. Blockchain is a distributed ledger that does not rely on a trusted central authority to maintain and validate the ledger.

## Blockchain and capitalist economic institutions

The economic structure of modern capitalism has evolved to serve this ledger.

Oliver Williamson, 2009 Nobel laureate in economics, argues that people produce and exchange in markets, firms, or governments depending on the relative transaction costs of each institution. Williamson's transaction cost approach provides a key to understanding which agencies maintain the general ledger and why.

The government maintains a ledger of powers, privileges, responsibilities, and access. The government is a trusted entity that maintains databases of citizenship and travel rights, tax obligations, social security entitlements, and property ownership. Where a ledger requires coercion to be enforced, government is required.

The company also maintains ledgers: ledgers of job ownership and responsibility, ownership and distribution of physical and human capital, suppliers and customers, intellectual property and company privileges. A company is often described as a 'contractual relationship'. But the value of a company comes from the way these relationships are structured and structured—a company is really a ledger of contracts and capital.

Companies and governments can use blockchain to make their work more efficient and reliable. Multinational corporations and enterprise networks need to reconcile transactions globally and blockchain can enable them to do so almost instantly. Governments can use the immutability of blockchain to guarantee that property rights and identity records are accurate and undamaged. Well-designed permission rules on blockchain applications can give citizens and consumers more control over their data.

But blockchain is also in competition with companies and governments. Blockchain is an institutional technology. This is a new way to maintain ledgers — to coordinate economic activity — different from the conventional way of companies and governments.

Blockchain can be used by companies, but they can also replace companies. A ledger of contracts and capital can now be decentralized and distributed in a way they could not before. A ledger of identities, permits, privileges and privileges can be maintained and enforced without the need for government support.