Should I use a blockchain?

By Chris Berg, Sinclair Davidson and Jason Potts

Blockchain as a business model can be imagined in one of two ways. It can be thought of as being a new general purpose technology. This category of technologies includes electricity, transistors, computers, the internet, mobile phones, and so on. To this way of thinking a blockchain can be represented as the next generation of the internet.

But if this is how people come to think of a blockchain we believe that many are going to be disappointed. Here the blockchain would be — what economists call — a factor augmenting technology. This is the standard economic story about how technology drives economic growth. People adopt a new technology because it reduces the productions costs associated with producing a given output. Technology ‘economises’ on scarce resources. We do more with less. This is the better-stronger-faster-cheaper model that we have come to associate with new technology.

DEC PDP-1 Demo Lab at Mountain View’s Computer History Museum | cat_collector

But there is a problem with this approach to blockchains.

It is not immediately obvious that a blockchain is better-stronger-faster-cheaper for many general purpose uses. If managers are looking for improvements to their back room operations they will likely be underwhelmed by what a blockchain has to offer. There are many existing database software solutions that will very likely outperform a blockchain.

Another way to think about blockchains is as an institutional technology. As The Economist magazine insightfully suggested some years ago the blockchain is a trust machine. We have argued that blockchains industrialise trust. This is where the gains to using blockchain technology originate — not that it economises on production costs, but that it economises on transactions costs — especially trust.

When Satoshi Nakamoto solved the Byzantine general’s problem he also provided a solution to what economists call the coordination problem. Historically economists have recommended the price system, bureaucracy and managerial hierarchy as solutions to coordination problems. Now we also have the blockchain.

That blockchains are fundamentally an institutional rather than a technological innovation is not mere semantics. This distinction matters because it focuses attention on what is actually driving the creative-destruction this innovation generates.

What has changed is the technology of economic coordination and governance.

In the real world there is a trade-off between the price system and bureaucracy and hierarchy. The price system provides clear incentives — prices and profits determine what should be produced, how it should be produced, and who will produce it. In bureaucracy and hierarchy, however, those high-powered incentives are missing. But large scale economic activity generates large transaction costs and a lack of trust means that prices and profits can’t weave their magic.

This is where blockchains have a competitive advantage — the decentralised ledger technology provides a platform for coordination where transactions costs are dramatically reduced and trust industrialised. In an environment of complex economic activity that previously relied on bureaucracy and management we can now have prices and profits doing their magic.

Those adopters who think blockchain is just another backroom business tool are missing the main game. The blockchain is going to be your business model.

Chris Berg, Sinclair Davidson and Jason Potts are from the RMIT Blockchain Innovation Hub, the world’s first social science research centre into the economics, politics, sociology, and law of blockchain technology.