Understanding the blockchain economy
Whether we’re paying bills, sending birthday cards, or sharing holiday photos, our transactions today are often digital. And it feels like it’s been that way for a pretty long time now. Still, many people older than millennials can remember a time with paper cheques, camera film developers and buying groceries with cash, among other analogue experiences.
If life in the pre-digital economy feels antiquated now, just imagine how much different the blockchain economy might be.
“It means we can do all kinds of human trade in a totally new way,” blockchain researcher and entrepreneur Bettina Warburg said in a 2016 TED talk. By assuring the validity of transactions without third-party oversight or trust between parties, blockchain will “fundamentally change how we exchange value,” she said.
One key innovation enabled by blockchain is the smart contract, which revolutionises the traditional contract by adding automation and cryptography. Rather than requiring people or organisations to affirm that contractual conditions are met, smart contracts validate terms and finalise agreements algorithmically. This paves the way for decentralised autonomous organisations, or DAOs, that could make all kinds of contractual decisions without human intervention.
“Smart contracts can execute transactions autonomously, without interference from agents or the need for approval from third parties,” researchers Roman Beck, Christoph Müller-Bloch and John Leslie King recently wrote in a paper titled, ‘Governance in the Blockchain Economy: A Framework and Research Agenda’. “They can be embedded into digital assets or into the digital representation of physical assets in the form of tokens that enforce autonomous contract fulfilment… For instance, through smart contracts, it might become possible to autonomously and remotely lock a leased car if the owner failed to fulfil leasing obligations. The blockchain ensures that contracts are fulfilled and not corrupted.”
In response to a question about the blockchain economy on Quora earlier this year, the SovTech software team noted that banks and other financial organisations today see blockchain as a potential solution for verifying stock transactions quickly. However, the team added, “a true blockchain economy will essentially take away the need for a bank, which is very exciting, or threatening, depending on which way you look at it”.
Education could also work radically differently in a blockchain economy, enabling much wider, yet validated, access to elite institutions and instructors.
“Where schools like Harvard and Stanford have for centuries only opened their doors to a few select individuals and even those are often the descendants or offspring of graduates of these elite institutions, companies like ODEM.IO are pioneering decentralised marketplaces,” Trepoint founder and CEO Bill Carmody wrote in Inc. in late 2017. “Here, tenured, career professors from such schools can interface directly with students outside the university (or even the country) to crowdsource new models of credentialed education using decentralised ledger and blockchain technologies.”
For now, a lot remains uncertain about how exactly a blockchain economy would work. For example, many questions still need to be answered regarding how blockchain and smart contracts would handle decision rights, accountability and incentives, Beck, Müller-Bloch and King note in their paper.
“Smart contracts are valid indefinitely, but also entail high risk to the involved parties due to autonomous enforcement mechanisms in which coding errors or changes in conditions could have major consequences,” they write. “The negotiation of smart contracts might bring substantial coordination costs to mitigate such concerns. It is too simplistic to say that problems will be handled by smart contracts. Mechanisms must be specified and subjected to serious criticism and testing.”
Warburg adds: “We’re going to need to see a lot of experiments take place and probably fail before we truly understand all of the use cases for our economy. I think we need to start preparing ourselves, because we’re about to face a world where distributed autonomous institutions have quite a significant role.”
