What I learnt from Professor Potts at the launch of Blockchain APAC

Professor Jason Potts is an economist and a business model innovator who heads the Blockchain Innovation Hub at RMIT.

Today, in Melbourne at the launch of the Blockchain APAC conference he discussed what he and the centre sees as the potential of blockchain.

And it’s mind blowing!

Blockchain APAC is the brainchild of Steve Vallas is on the 29th of August in Melbourne. The Victorian government is supporting this and is seeing the potential of this opportunity.

He defines blockchain as an “institutional technology”. It is not something that is going to make things better, cheaper and faster however, keep everything the same. It is transformative.

It comes around every 400 years like the Joint stock company which changed how we create companies.

This is big thing. An institutional technology. It changes the way we think about blockchain

He asks, “What is at the heart of economies?” What is the building block of economies?”.

He suggests it is:

• Consensus
• Agreements
• Identity
• Property rights

This technological shift that is “blockchain” is about transforming these underlying aspects of our economies.

It is a “new economic infrastructure and will transform governance”.

This is a big idea.

Property rights at the heart of why developed countries are successful. Hernando de Soto in his masterful work “The Mystery of Capital: Why Capitalism Triumphs In the West and Fails Everywhere” looks at the role of property rights and their effect on economies.

De Soto says

“The moment Westerners were able to focus on the title of a house and not just the house itself, they achieved a huge advantage over the rest of humanity.”

In the article “Key Concepts from Hernando de Soto” they define what you can do with a property right like a house.

With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are — houses used for shelter — to thinking about what they could be — things like security for credit to start or expand a business.

If you look at the poor, especially in the developing world and the informal economy, you can find a lot of dead capital.

Despite obvious poverty in the informal sector, de Soto’s work shows that even those who live in slums possess far more capital than anyone realizes. These possessions, however, are not represented in such a way as to make them fungible assets. Dead capital cannot, therefore, create value for the poor.

Fungible assets are the big idea.

What if we can increase fungible assets? What if we can not only create new kind of fungible assets for the informal economy, the poor but in cases where it was too hard to understand and quantify a property right.

For example: the social and economic impact of volunteers? How might you measure and quantify that? Or how philanthropic dollars are used and the way we can measure social impact?

And where does it apply?

Professor Potts suggests everywhere you need a ledger. Wherever you need organisation and record keeping there is a potential application.

He suggests that “It’s because we are talking about the fundamental transformation of entire economies and how we are governed we need a conversation. We need to discuss this phenomenon”.

He says that there needs to be a “recognition that things will change”. It will be disruptive and transformative and will actually go to the heart of what is the role of government? It will cut deep into regulation.

These are deep questions

Where can you use it?

It will create entirely new sectors, what he calls “data markets”. Places where there never were property rights and now have them. It is transformative.

In short Professor Potts suggests “whenever we need data and governance”.

For example they are focussed on supply chains. It is a massive new space and a global problem. The sectors it can effect are agriculture, wine, fisheries and create massive disruptive.

Let’s think about this for a second

Agriculture is the oldest of the industries. It moved us from hunter-gatherers to living in villages and then entire cities. Blockchain will revolutionise the oldest of all sectors.

And it is key to our future.

Future of food. Future of climate change. Future of health and well being.

For example, provenance is a big deal in agriculture and food.

How do we know that the wine that comes from the Barossa Valley is from there? How do we know that Basmati Rice comes from the areas in India and Pakistan that make Basmati? Canola oil from Australia. Dates from the Middle East. Sustainable fisheries. Eggs. Coffee…it goes on.

Driven by these possibilities we can explore other avenues.

Creative industries and digital provenance. Stickers in games for example.

Construction and all the layers of sub contracting. It’s complex and is hard to audit. Blockchain and especially “smart contracts” can enable a faster and more transparent space here.

Transparency and Transaction costs

Professor Potts goes onto to another aspect of the economy and why Blockchain can transform us into a new economy.

Transaction costs are a big idea in economics.

According to the Wikipedia:

In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Douglass North states that there are four factors that comprise transaction costs — “measurement,” “enforcement,” “ideological attitudes and perceptions,” and “the size of the market.”

Ronald Coase argued that transaction costs determine what kind of things are done within a “firm” and what are done in a “market”. In cases where there are higher transaction costs a firm will be better to manage it. This idea will be connected to another one below.

The reason transaction costs are important is Douglass C. North argues — institutions that facilitate low transaction costs, boost economic growth. This is logical.

• If you can start a business in one day or 100 days matter. There is a transaction cost to it.
• If you have to go through the legal system faster or slow matters. There is a transaction cost to it.
• How fast can you hire or fire someone?
• How much do you have to pay to get something done? Is there corruption? And on and on…

This is the fun part. What is an institution? According to the same Douglas C. North he suggests that “institutions are understood as the set of rules in a society, and are key in the determination of transaction costs.”

Institutions are a set of rules. And if rules can be transparent, can be coded, can be on the blockchain, can be immutable, can be a “smart contract” then you can build institutions on the blockchain. And this means you can decrease or lower transaction costs tremendously.

This new type of economy which lowers transaction costs and information costs then needs a new governance model and a new business models.

This is my interest. How might you use strategy design to create new business models in the blockchain future?

The RMIT Blockchain Innovation Centre looked at a recent research project on trust. The question they asked is “How much of the economy is spent on trust?” And they explored this using US jobs data.

The answer is 35% of the US economy is built on organic trust. If this is the same for the world, it is $28 trillion dollars.

That is the TAM or the Total Addressable Market for blockchain = $28 trillion

Of course TAM is not always possible to achieve. That gives us a ceiling. And its a big one. And he believes we right at he begginning of this potential value.

Coming down to the last major idea.

Post Capitalist?

Blockchain if you have followed till now is not a technology but will change the building block of our economies.

It requires different governance structures. Professor Potts suggests that he is a “free market economist” and he still wants to talk about the post-capitalist economy.

The Industrial economy brought to us the industrial capitalism.

• Large companies
• Needed to bring together large Capital
• Monitor work and Labour contracting
• This required large hierarchical organisations
• and the regulation to go with it.

Post capitalism is the beginning of a much larger market society.

• New organisation
• New governance
• New contracting
• For profit and civil society
• world beyond hierarchy
• more egalitarian

In my worldview we are moving from the “tree of life to the web of life”.

It is about being adaptive and agile. Smaller and nimble. Responsive organisations. It is going to be a decentralised economy. A new economy.

Finally he believes that the scale of transformation is big. It will go from sector to sector. It will go deeper. It will change our institutions — economic and then political.

He asks why we are interested as a research centre? Because there will be costs for this, there will be winners and losers. And there will be risks and disruption.

It’s a conversation we need to have. In all the years they have studies technological change, this is the fastest moving in the entire human experience.

It has never moved so fast. He says “Whatever number we are thinking of how long it will take, it will be faster”.

Big idea