The audience snickered. Famed venture capitalist, Tim Draper, had just made a bold proclamation at the Adam Smith Society’s recent National Meeting in a debate on if Bitcoin is a bubble. In his opening statement, Draper stated that Bitcoin is a bigger innovation than the Internet and that it’s on par with the industrial revolution and other economic revolutions before that.
While the debate was structured to focus on Bitcoin, as it’s the most understood example in the crypto space, Draper’s point speaks to the power of blockchain technology and the impact it will have. It can sound audacious to believe that blockchain is such a large innovation when its actual impact on our everyday lives can barely be seen yet. But that wave of innovation is coming and it’s coming because blockchain harnesses the power of three forces — networks, incentives, and technology — that together will change our economy and society more than the steam engine did.
Power of Networks
The first force that blockchain harnesses is the power of networks. Networks are obviously not a new phenomenon. Human beings have formed networks for as long as they’ve been around, hundreds of thousands of years. Hunter-gatherer societies were networks that enabled humans to share resources and skills in order to better the group. Then the agricultural and industrial revolutions came around and humans were able to gather in larger still networks. We were able to create towns and cities, coexisting in ever greater numbers. Then, of course, the internet created a global network and has allowed for still further specialization and sharing of resources and skills.
Yochai Benkler, in his book The Wealth of Networks, discusses how the internet is allowing humans to harness the power of networks in ever greater and creative ways. Networks like Wikipedia have crowdsourced information, creating a living, continuously improving source of information about topics of all sorts. Wikipedia’s even greater innovation is that all individuals and network members (not just corporations) can contribute as much or as little as they would like to the network in order to improve it. One can decide to edit a typo that consists of adding an “s” to the end of a word or one can decide to devote all their working hours to writing new articles for Wikipedia. Collectively, the people who decide to devote a minute contributing to the network and the people who devote much more time and effort create a much more robust product than would otherwise be possible.
Twitter is a similar phenomenon. One can add value to the Twitter network simply by being a member, by being a follower of other members, or by liking and retweeting tweets. Or one could be a “power user” of Twitter, like The New York Times or Donald Trump, and create and disseminate all sorts of information and opinions that, regardless of your political views, create more content for the network to sort through, consume, and make sense of. All of these actions add up to a vibrant place to find real-time information, content, entertainment, and education about almost any topic one could imagine, undoubtedly creating real value for society without any single entity in charge of what information should be posted on the site.
Blockchain harnesses these same forces that networks bring and it utilizes them to create further value for society. Cryptocurrencies, e.g. Bitcoin, allow for users to harness the power of each currency’s network to do the work of executing and confirming the validity of each transaction. There is no Wells Fargo or Visa that needs to confirm that Jack indeed has enough money in his account to buy something from Jill; as we will see later, the power of incentives creates a reason for individuals around the world to want to check Jack’s account and make sure that he’s not trying to “double spend” the same dollars with both Jill and Judy. Additionally, if Jeff is Jack’s friend and colludes to say that Jack actually does have the “double spent” money to send to both Jill and Judy, there are thousands of other computers on the network that can override Jeff’s inaccurate claim, similar to how Wikipedia editors collectively override the typo or misinformation that somebody posts to a certain Wikipedia page.
While cryptocurrency is the first real mainstream use case of blockchain technology, it will not be the last. Mike Maples, on the Tim Ferriss podcast, talks about how corporations in which investors could buy shares were invented in order to crowdsource capital for a national railroad. Of course, in the past few centuries since, corporations have created the vast wealth and high standard of living we enjoy today. Maples explains that blockchain technology enables us to evolve the corporation for the digital world and create a way to better utilize these network organizations that the internet has enabled. Tokens, e.g. Bitcoin, are simply ways to interact with and utilize blockchain networks. As the technology develops, we will see how the power of these network organizations comes to life in all areas of our society, from health care and insurance to entertainment and the arts to consumer goods and the government.
Power of Incentives
The second force that blockchain harnesses is the power of incentives. Incentives are the lifeblood of capitalism and they lead to economic innovation for society far greater than any other force. As Adam Smith famously stated in the Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” A fair and equal playing field that harnesses individuals’ self-interest will lead to the greatest good for society. That is the power of incentives.
Going back to the example of Bitcoin, blockchain technology harnesses incentives to power the network. Looking at members of the Bitcoin network, there are the developers who write and update the code, the miners who validate transactions, and the individuals who transact with BTC. Bitcoin harnesses the incentives of all of the members to run the network and increase its value.
First, and most obviously, the miners are incentivized to do work of validating transactions for the network with the hopes of getting rewarded in Bitcoin. This idea of being compensated for work underpins our capitalist society and Bitcoin and other blockchains harness this. Not as immediately obvious, but perhaps more importantly, the holders of Bitcoin, which includes the developers and those who transact with the coin, are incentivized to make the network more valuable in order to make their own holdings more valuable. Just as employees receive stock options in the hopes that they will do better work for their company, holders of Bitcoin are equally incentivized to make Bitcoin itself more valuable. This results in the developers agreeing on how to best update the code in order to make the network more valuable over the long run. It also results in ordinary holders of Bitcoin being motivated to tell their friends and family about it, try to convince retailers to accept it, and do other work to increase the value of their individual holdings.
An example of how powerful these incentives are comes in the form of all the work different blockchain networks do to ensure their cryptocurrency becomes the most valuable it can be. Joe Lubin, a cofounder of Ethereum, created a company called ConsenSys. ConsenSys exists to foster innovation on top of the Ethereum blockchain in the form of additional companies, applications, tools, and more in order to make Ethereum more valuable. Stellar, Ripple, EOS, Cardano, and other crypto networks have undertaken similar efforts to make their own networks more valuable as well. The power of incentives is massive.
Taking the power of incentives further is the example of a decentralized cloud storage network. Projects like Filecoin, Storj, and Sia have the goal of creating a network of people incentivized to provide their excess storage capacity. The idea is that an individual’s computer may have excess storage that they can rent out to the network in return for payment. Individuals are incentivized to rent their capacity as they will be rewarded for doing so. Similar to Bitcoin, the developers, miners, and holders of Filecoin, Storj, or Sia will be similarly incentivized to improve and promote the network in order to increase their own holdings. All members of the network play their part and the result is a robust and resilient system due to the power of incentives.
Power of Technology
The final power that enables blockchain is the power of technology. By this, I mean the power of software, artificial intelligence, and the internet of things. Blockchain’s real value will come in the form of the automation that these technologies will enable.
Michael C. Munger, in his book Tomorrow 3.0: Transaction Costs and the Sharing Economy, notes how services like Uber have utilized software to automate the process of hailing a cab. There is no employee at Uber that directs each individual driver to each individual rider. Instead, software is written and combines with GPS technology to determine the best driver for each rider at a market-rate fare price. Once the software is written, the drivers and riders use the app and the transaction happens automatically, dramatically increasing the number of rides a driver can give and decreasing the lead time a rider needs to order a ride.
Blockchain networks will enable similar increases in process automation. One example of how this will happen comes in the form of an automated employment contract enabled by OpenLaw, an Ethereum legal agreement protocol. The video linked above shows how OpenLaw enables the creation of a contract that allows an employer and a new hire to digitally sign an employment contract. Once signed, the contract automatically and regularly deposits ETH payments into the new employee’s digital wallet. This will dramatically decrease the amount of time and paperwork required by a company’s HR department to onboard and compensate their employees, freeing up time for other responsibilities.
Another example comes from an MIT research project called b_verify exploring how blockchain will enable innovations in the measurement and verification of commodities. The project is taking place in countries where farmers can greatly benefit from automation. Take, for example, a grain farmer in Eastern Europe. Currently, the farmer, which may be hours away from the nearest bank, doesn’t have an easy way to prove that the grain they’ve harvested actually exists and then receive financing against that grain. Imagine a way, however, where an internet-enabled scale logs the amount of grain a farmer has harvested onto a blockchain. The farmer can then call the bank to obtain financing against the harvest and the bank can trust the farmer as the amount of grain has been verified through the smart scale and the blockchain network. This innovation increases economic activity, as the bank now has a new customer and the farmer can now obtain financing to reinvest in their farm.
These may be specific examples, but they are specific simply to illustrate how this technology will actually be used in the world. Legal agreements of all shapes and sizes will be stored on the blockchain and innovative uses, like the automatic payment of employees, will flourish to include use cases that don’t currently exist today, just as happened with the internet. Commodity measurement, as well, will expand to include all aspect of the supply chain and will lead to further innovations throughout the economy. As alluded to before, blockchain networks combined with additional technological innovations will lead to improvements throughout the economy and will enable new, unimaginable use cases just as Uber was unimaginable ten years ago.
Conclusion
When viewed through the lens of networks, incentives, and technology, it is clear that the blockchain revolution is just beginning or, as Jeff Bezos likes to say for Amazon, it’s still Day One. These blockchain networks are just starting to grow, but they will soon become as impactful as the corporation was for the industrial revolution. Following Metcalfe’s Law and the exponential power of networks, the change that comes with blockchain networks will happen slowly and then all at once.
There are naysayers that come along with any innovation, from the telephone to the automobile to the iPhone. There will always be those that think it all sounds too good to be true. Right now, those people think that Bitcoin is a bubble and that all other blockchain networks are a fad. But Tim Draper was correct when he said that this is bigger than the internet and the industrial revolution. The powers of networks, incentives, and technology are combining to create the next economic revolution, one that’s powered by blockchain.
Originally posted on LinkedIn
