Blockchain — A story of Encryption, Communism and Digital Assets, Commodities & Securities (D.A.C.S) (Part One)

Blockchain is many things. For the “experts” in the decentralized tech community blockchain remains a conundrum, swaddled in an enigma. For “non-experts,” it is a lot like a duck in underwear — weirdly confusing. Which leads to many people misunderstanding what blockchain is; I mean, really, “What is blockchain?” The following is to help demystify blockchain, so that you, me and everyone else, can embrace the possibilities of not what blockchain is, but what we might create with it.

What is blockchain?

Blockchain is:

1. Encryption
2. A tale of Libertarian’s love affair with communism

What does that really mean?

Blockchain: An Encrypted Ledger

In late 2018, as I teetered on the edge of ripping out all of my hair, I had an epiphany about blockchain. I was somewhere past the 12th take of recording a video for Tokenomics & Cryptocurrency Regulations course, for the University of New Hampshire School of Law Blockchain, Cryptocurrency & Law Program. The funny thing about teaching someone who has never heard of tokenomics is that it literally makes you question everything you know. Every time you say something, you’re like, “Is that even possible?”

As part of explaining tokenomics, we start with an explanation of blockchain, cryptocurrencies, ICOs/STOs, crypto wallets and security, just to name a few elements. After all, how can we explain tokenomics if the audience has never heard of blockchain or cryptocurrencies?

Many takes, bloopers and A Brilliant Mind revelation later, here are three questions for you:

1. What happens if we kick the rich Libertarians out of the blockchain ecosystem?

2. What if we don’t look at blockchain as a way of getting rid of governments and middlemen?

3. What if we treat blockchain for what it really is?

Rich Libertarians and Their Cryptocurrency Fantasies

Did you know that the cryptocurrency market is being controlled by a few rich libertarian dudes? Look at who the major hodlers of Bitcoin alone are.

• 61 percent of all Bitcoins are owned by just 0.07 percent of wallets.
• 70 addresses — less than .001 percent of all Litecoin wallet addresses in existence, hold the majority of Litecoin
• The numbers for EOS, XRP (Ripple), IOTA and other pseudo-cryptos are even more interestingly centralized

Out of the roughly 30M+ people who own ANY amount of bitcoin (plus a bunch of other #shitcoins aka #altcoins), less than 500 people worldwide control the vast majority of cryptocurrencies. It’s probably less than 200, as many who control BTC also hold the majority of other cryptos. It’s a little hard to pin down the exact number; probably has something to do with anonymity. That being said:

What happens if you ignore the Libertarian feint at “freedom” via cryptocurrencies?

As it turns out, these few wallets don’t want to free you from your overlords. They want to become your new crypto overlords. Just ask any of the 3rd party, trusted exchanges (Binance, Bittrex, Circle, Coinbase, etc…) who operate just like banks and other exchanges. Odd how that happened.

Cryptocurrencies are to today’s technocratic libertarians what Communism was to Mao Zedong in the 1900s: a mechanism for mobilizing the disenfranchised to a call to action. Communism on paper is strikingly similar to “consensus” on a blockchain: Groups of people, working together, to agree on a thing and establish a system for the benefit of the group as a whole. The consensus model calls this “democratizing access”. Access to what exactly (other than perhaps a very large ponzi scheme on par with 401Ks), I’m not sure. So, ponder these as you read:

• What have cryptocurrencies democratized?
• What value have cryptocurrencies actualized in the real world?
• How do cryptocurrencies address, reduce or remove the historical legacies of slavery, colonialism, and capitalism* throughout the world?

So what happens if you remove libertarians’ wet dreams of overthrowing the government from the blockchain equation? What are you left with?

Encrypted by Blockchain

Having lightly touched on the second question, “ What if we don’t look at blockchain as a way of getting rid of governments and middlemen?” — we progress, without the political element of decentralized ledger technology, to addressing what blockchain really is, our third question.

What is blockchain? Blockchain is a way of encrypting data. The blockchain methodology of encrypting data is so secure, you can safely share that data publicly.

Blockchain = Encryption

Go to any house in America, walk into the bathroom and you’ll find an orange toilet plunger next to the toilet. In case you didn’t know, a toilet plunger is the go-to housewarming gift that is initially greeted with suspicion, then regarded as hands down the best thing they’ve received. Cause no one ever doubts the brilliance or utility of a toilet plunger when you need one. It is literally one of the best under $10 all-purpose gifts you can give. The real moment of hilarity comes when you learn that it isn’t a toilet plunger.

That orange thing you call a “toilet plunger” is for the sink, not the toilet. It gets even funnier when I ask you, “Have you ever used a plunger in your kitchen sink?” To which you balk at the sheer grossness of the idea, as you’d never us a toilet tool where you wash your leafy green vegetables! Too, to unclog 99% of the sink, you simply turn on the garbage disposal. Side note: Did you know that many cities, like Philadelphia (along with a bunch of other jurisdictions), require garbage disposals on all new homes as part of the building code?

The real question now becomes, if you’ve never seen this orange plunger thing used on any sink and 99% of sinks are required by law to have garbage disposals, “Why are they still being sold?”

It turns out, blockchain, is a lot like the “toilet” plunger. Ninety-nine percent of people have been using it the wrong way. Blockchain is a brilliant tool but much like that so called toilet plunger, you’ve got to know what you can use it for.

Public Service Announcement: Below are the two types of plungers. See, you learned something new today. In this instance, form does dictate function.

Blockchain — The World’s Most Secure Security Application

Do you know that if you remove the “overthrow the government/get rid of the banks” notions from blockchain, you’re left with a really secure way of encrypting data. As you let that sink in, it will occur to you that people have been using blockchain like they’ve been using “toilet” plungers. Right tool, wrong application.

• Can a blockchain be hacked?

No, not to date. For the quantum computing nerds out there, by the time we get to quantum computers, quantum computing puts everything else at risk. So blockchain is as secure as you’re gonna get for the next decade. Yes, I’m intentionally ignoring 51% attacks as its an utterly stupid and useless exercise in ad nauseam.

• But what about cryptocurrencies?

So what? Who cares? Ripple isn’t even a blockchain (long nerd fight to ensue), nor is EOS (shorter nerd fight), but they nonetheless call themselves blockchains. So, do we really care about their fake, not even close to being cryptocurrency, cryptocurrencies? Remember those libertarians? EOS and Ripple are even worse than them and banks. They’re SaaS companies**.

I know, I know. What about the other 4,546,044,883,257 cryptocurrencies out there? Eh. Turns out until one of them has an actual use, they’re really only good for gambling. Don’t get me wrong, I love to gamble. But you gambling with your mortgage payment is different from your investment advisor gambling with retirement by “investing” in cryptos. Added to the completely speculative nature of cryptocurrencies (to date), is the lack of focus on education and adoption. How are cryptocurrencies making it easy for people to use them? Here is a brilliant 2 minute video that accurately sums up the world of cryptocurrencies today (January 1st 2019).

However, when you think of blockchain as an encryption layer that your business uses to do whatever its business is, in a more secure, transparent, fraud resistant and resilient way — well yes…blockchain makes complete sense.

Blockchain Encryption (CyberSecurity Application), Tokens and Tokenomics

As I was killing myself trying to come up with a way to explain tokenomics to a lay person, it struck me:

“Suppose we just used blockchain as an encryption feature to safely and transparently track ownership of digitized assets, commodities and securities?”

How would that work, you ask? Here is a simple example. We take gold, oil, gummy bears or pokemon figurines and note ownership of each on an encrypted ledger. Now that we know who owns what, that person can buy, sell, trade, or exchange their digital assets, commodities, and securities (D.A.C.S. from here on out). The buying, selling, trading of these DACS could be done person to person or even on exchanges. Additionally, they can be done using existing commodities regulations. Anti-money laundering (AML) and KYC is baked into the process.

Wait, what? That sounds too simple, right? For instance, now that I know Samson has been issued 10k DACS red gummy bears from the Haribo Gummy Company (Shameless ask: If you or a loved one works at Haribo, I so want to be a spokesperson. I love your gummies!), Samson can now go onto the Haribo Digital Commodities Exchange (HDCEx) (this doesn’t exist for the record…yet) and trade all or a portion of his DACS gummies for the market price. Or, if Samson opts to trade/exchange/sell his DACS gummy bears in a Peer-2-Peer (P2P) transaction, anyone (that means you, regulators) will be able to track the entire provenance and history of ownership of these encrypted DACS gummy bears because the transaction history is being noted on HDCEx’s ledger that uses blockchain encryption. In this scenario, blockchain is what blockchain has always been. A really secure way of time-stamping transactions and encrypting ownership. Encrypting ownership also resolves the mysterious double-spend problem. As you can’t spend something twice, if we all know you never had it, no longer have it nor have the right to spend it. “It” can be anything, e.g.: gummy bears, commodities, apartment building, pedigree puppies, DACS, etc…

Yes, I know you’re thinking, “How do we “know” Samson has been issued 10k red gummy bears?” Well, this is where the mysterious enterprise blockchain application comes in. At some point, we have to take that leap of faith that the data noted on the blockchain is accurate. Does the Haribo Gummy Bear Company actually have 10k red gummy bears to give to Samson? Yes. Do they have the right to sell, give or exchange those gummy bears to Samson? Yes. Does Samson have the right to accept those gummy bears? Well it depends. Depends on what? CFTC’s existing rules for buying, selling and trading commodities and digital assets. But generally, we should assume, “Yes, Samson (or you) has the right to accept or buy these digital commodities of red gummy bears.” (Note — if these digital gummy bears, encrypted by blockchain were securities, they would have to follow SEC rules.)

This is example is important as in this example, we’re not creating “tokens”, we’re just noting the ownership of existing commodities on a ledger. Why is this important and what does this mean for the future of commodities?

• The future of commodities isn’t tokens, it’s digital assets and commodities.
• The future of commodities isn’t defined or determined by a concept of “tokenomics” as much as it is by basic sentiment of the market. Does the market have an appetite for the asset/commodity that these tokens represent?
• Eventually blockchain will lead to decentralized exchanges
• Blockchain encrypted DACS will be recognized as a “new” class of Digital Assets, Commodities, and Securities; that will enable them to be bought, sold, and exchanged on “normal” and decentralized exchanges

The future of DACS is actually the future of traditional assets, commodities and securities as a whole, whose ownership will be noted using blockchain encryption. Currently, everyone is busy trying to create new classes of virtual DACS that they’re calling “tokens.” And from this so-called new asset class of tokens, a whole new manner of economic sorcery is being stewed. Welcome to a world of pseudoscience promoted by the pseudoscience that is economics, tokenomics!

When blockchain is used to encrypt data, the concept of tokenomics doesn’t exist. As once ownership of an asset/commodity/security is noted, there is no need to create a new layer of economic theory (tokenomics). Rather, the true profit lies in realizing what exactly you’re dealing with.

Commodities Profit: This is achieved by increasing the efficiency of distributing commodities (the last mile), increasing sales of these commodities and making distributing these goods so cheap that you can sell more of them because people can afford them.

Digital Assets & Securities Profit: This will be achieved by increasing access and simplifying accredited and non-accredited individuals ability to invest in digital assets and securities. The current SEC/CFTC and specifically JOBS Act regulations are so onerous as to inhibit, not encourage, investing in small and medium sized businesses.

Alas, humans being humans will speculate to no end. So, while we will go through an episode of tokenized assets and tokenomics, after the initial hype the markets will realize, that those still holding tokens are on the losing side. In the meantime, those who confidently buy and trade DACS, may suffer less volatility and more predictable profits (this is not investment advice).

Remember, commodities themselves don’t get digitized and encrypted; just ownership of these goods gets recorded securely on an electronic ledger that is encrypted using blockchain. So, the value of the blockchain record of goods isn’t the record itself (token) but the underlying asset that backs the record. Yes, I know this sounds eerily similar to an “asset -backed token.” However, how so called asset backed tokens are currently used is for purely speculative nature. Mainly because there are no secondary exchanges on which to trade these tokens and more importantly there are no real goods/commodities (gold, wheat, oil, orange juice etc…) whose ownership has been noted using blockchain encryption. But fret not, 2019 will be a breakthrough year for blockchain encryption. And yes, even for tokenomics. Why? Humans. We can’t accept just calling blockchain what it is, encryption. Nor can we simply accept that this magical technological fairy dust known as blockchain, role in commodities, is simply for the purpose of encrypting ownership. So yes. Despite the obvious, tokenomics will be a thing — despite not being needed at all. The future is DACS. Not tokenomics. More on the evolution of DACS later.

Regarding Libertarian’s Love Affair with Communism via Blockchain…

That’s a longer chat that I’ll write about later. For the moment, realize that “decentralization” via consensus is just communism in theory, practice and implementation. As, what you think you’re “decentralizing” is actually “redistributing” power, authority and control to everyday people. We’ll call the everyday people the proletariat. (Viva la proletariat! Viva la revolucion!) So for all the “blockchain enthusiast” out there, you’re all communist. Now, act accordingly.

Conclusion

Given what’s been discussed above, let me be clear: The future is digital assets, digital commodities and digital securities (DACS)…that are called “tokens”. These “tokens” will simply be encrypted records of ownership, on distributed, tamper/fraud-resistant ledgers, that leverage blockchain for what it always has been — a means of encryption. Digital assets, commodities and securities (colloquially and incorrectly referred to as “tokens”) that are on DLT (distributed ledger technology) networks will ultimately be easier and faster to trade, sell or exchange. While DACS will leverage existing regulatory structures, new issues will arise as high-speed trading and AIs come into play; which will create new, presently unknown unknown market risks.

Why should you care?

• Peer-2-Peer transactions of DACS will be as easy, secure and tamper-resistant as text messaging;
• Autonomous vehicles will leverage tokens and DACS to operate, navigate traffic and ultimately buy their freedom (longer nerd/policy/wonk chat, best discussed over drinks);
• The increase in Peer-2-Peer transactions will fundamentally change the nature of investing, as truly decentralized, ownerless exchanges are created;
• DAOs (Distributed Autonomous Organizations) will present new, unknown unknown regulatory, legal and cultural challenges (read that again so it sinks in);
• These changes won’t happen in 10 years, but rather in 5 years;
• But! In ten years, people will still be using orange plungers in toilets and not sinks cause humans are humans.

Notes

* I debated whether or not to call it “zero sum” capitalism or just capitalism. Ultimately, I opted for just plain ole capitalism, as when has capitalism not been zero sum, #GlobalSouth?

**EOS and Ripple aren’t SaaS companies. They’re…they’re something other than blockchain. The best taxonomy for them is “centrally controlled, distributed database companies,” and that’s ok. We need those, too.

Next Up

Part II — DACS Regulatory Recommendations for Profitability and Small Business Growth

My name is Samson. I’m an Adjunct Professor of Blockchain at Univ of New Hampshire School of Law, human and an anthropologist at Axes and Eggs, a Washington, DC based Think Tank and Digital Advisor. If you like what you read, share it! If you disagree, share what you know or how you feel in the comment section below. Feel free to hit me up on Twitter or Instagram @HustleFundBaby or follow me on LinkedIn. Finally, I would say thoughts are my own but I probably stole them from a woman.