Why Do Blockchains Matter?
Why are millions of people collectively spending billions of hours on a topic as mundane as a “distributed ledger technology”? Don’t we have anything better to do?
Well I am here to tell you that the answer is actually “No, we don’t.” Blockchain technology is not only the most important advancement of the first half of the 21st century, but it is also an inevitable result of the accelerating pace of human evolution.
When homo sapiens crawled out of the primordial ooze, we organized ourselves into tribes. For 20,000 years, humans lived, loved, reproduced, and died in small independent groups. The hunter gatherer group that thrived on the savannah, had virtually no relationship to the agrarian village that starved in the steppes. For most of human existence there was no global trade, no reserve currency, no massive government. The only thing that mattered was the small group of incented and aligned individuals that we were immediately connected with.
And then society evolved. A series of advancements in math, science, the arts and governance moved us into the industrial era. Supply chains started to stretch across the continent and round the world. Suddenly, the cost of Opium in Hong Kong mattered very much to the traders in London. The how many bananas were rotting on trains stuck in Chicago mattered very much to the plantation owners in Ecuador.
It wasn’t just Dole and their banana republic that grew big. Business everywhere grew big. From The Dutch East India company to to Bethlehem Steel to British Petroleum to The US Government. Unlike the 20,000 years before it, the 300 years for 1690–1990 produced something that was never seen before; the emergence of the global corporation.
Ronald Coase was born in 1910 in Willesden, a suburb just outside the thriving metropolis of London. Both his parents were deeply aligned with the fast growing industrial era — they were both telegraphers for the Royal Post, the largest institution on the Royal Isle. In fact, many young men and young women left their farms and fishing communities in the late 19th century to take high-paying jobs as professional telegraph operators. In those early days telegraphers were in such demand that operators could move from place to place and job to job to achieve ever-higher salaries, thereby freeing them from subsistence lives on family farms.
Over the years, Coase became a star economist at the star school of economics — The University of Chicago, working alongside George Stigler and Milton Friedman. But early in his career, he began to take note of the lifestyle changes of his parents generation, and asked questions about why were businesses growing so large?
In the farming village of his grandparents, self-employed people made contracts with each other. But in his parents’ London, Giant corporations were emerging, one company doing the work of thousands of individual tradesmen. How could this be efficient he asked?
What Coase published in 1937 was an article titled “The Nature of the Firm”, and it explained why businesses were getting so large. Coase discovered that bigger businesses were more efficient at gathering, managing and acting on information. In fact, the more it cost to make a decision, the more that was at risk, the bigger the business could become.
It became more efficient for the Dole corporation, based in Boston, to own the plantations in Ecuador, the fleet of shops traversing the Atlantic and Pacific, the train cars that brought to bananas to market. Even the last mile of horse pulled cart deliver to the corner grocery shops. Each of these steps had massive information gathering opportunities to optimize the sales of bananas. And it became economically optimal for Dole to own and operate the entire supply chain. Or GE to deliver power plants, transmission lines and light bulbs. Or the Royal Mail to deliver letters, boxes… and telegraphs to 100 million addresses around the British commonwealth.
During almost all of the 20th century, business and governments grew to unprecedented size because the nature of the firm scaled with cost of information.
And then a funny thing happened that not many corporate titans anticipated. The Internet happened.
Within the span of just a few years over the turn of the millennium, the internet enabled the cost of information gathering to be decoupled from the value of that information. The world’s knowledge was suddenly at everyone’s fingertips.
When I was a kid, we only had a handful of TV channels. We could only get news from a few places, and we had to pay to access it. With the internet, we can find every conceivable angle on every conceivable story for free.
When I was a kid, we had only a few stores to go shop in. With the internet, we can find every product imaginable, and compare prices from around the world.
When I was a kid, we had to go to the library to look up something in an encyclopedia. Today, all that and more is at our fingertips, free and always up to date.
With all this free information everywhere, we need to reconsider the nature of the firm. It seems to me that the cost of acquiring information is being driven to near zero. And what does Coase forecast? He showed us that as the cost of information is driven to zero, the size of the firm is able to drive to zero as well.
In fact, in 2002, Harvard professor Yochai Benkler wrote a paper titled “Coase’s Penguin, or Linux and the Nature of the Firm” in which he presented the digital extension of Coase’s work.
Benkler was the first to introduce which he called “Commons-based Peer Production”. It describes a new model of socioeconomic production where teams work cooperatively over the internet. Contrasted with the Corporation, Commons based organizations have less rigid hierarchical structures and are often designed without a need for financial compensation for contributors.
That’s not to say there is no reward for participation. In Wikinomics by Tapscott and Williams, the authors suggest that people participate in peer production communities for a wide range of intrinsic and self-interested reasons. Basically, people who participate in peer production communities love it. They feel passionate about their particular area of expertise and revel in creating something new or better.
Today we see the digital commons all around us:
- Operating systems like Linux and GNU
- Knowledge sharing sites like Slashdot, Sourceforge, Gitlab and Wikipedia
- Collaborative Science projects like SETI@home
- Mapping services like Waze, OpenStreetMap and Ushahidi
The list goes on and on.
The problem with big companies is that they historically have a lot of inefficient middle-men who were employed to collect, manage, and pass along information up the chain of command. Again, this made sense when information was the most expensive, most critical asset the firm had. But when information is free and easy to access, a passionate people are motivated to collaborate around it, do you still want to pay layers of expensive employees to work for you?
Benkler lets us update The Nature of the Firm to understand that in low cost information environments, a small, distributed, motivated team should be able to not only compete, but overthrow the large incumbents.
Yet here we are, a quarter century after the launch of the Mozilla browser, and our work is incomplete. We’ve seen a lot of disruption, but not everywhere. Why is that?
Trust. Or lack of Trust. You see, as the size of the firm goes to zero, so does trust in that firm. Back in the village, when a stranger wondered into town, the locals might have put together a posse to run them out. And that’s sort of what happens on the internet too. Many small, worthy, projects wither and die before they are able to garner enough credibility to thrive.
And so we’re kind of stuck. We’re happy to bank online — but we still do it with Wells Fargo.
And that brings us to blockchain. Back in 2009 an unexpected thing happened. Some anonymous person(s) invented a decentralized provably trustfull machine based on math — we know it as Bitcoin and it was the genesis of the blockchain revolution.
Bitcoin is an idea whose time has come. By using two cryptographic concepts hash functions, and public/private key pairs, we are able to create systems that we can completely trust to maintain accurate information, while at the same time, we don’t have to trust the people running those systems. We just have to understand and trust the math.
With these two mathematical concepts, we can create and share knowledge freely, while still having complete trust that the knowledge we are consuming is correct. You can create a fabulous digital cat, and I can buy it, and we, and the rest of the internet can confirm provenance, the transaction, and ownership — on the blockchain.
But we can also do that with a financial instrument — say an ownership stake in by Tezos bakery. Or we can do it with physical goods — say we all get together and share a condo in Tahoe. Or we can do it with insurance products, or loan products, or predictions. Even our cars can create contracts with each other — you could get my car to move out of the fast lane for the right price. And we can do this anonymously, in peer to peer fashion, with very little overhead, and without a giant corporation or government taking a share of our agreement just for the purpose of providing centralized trust.
Blockchain technology is the perfect solution to drive human society forward. We now can dethrone the inefficient large companies (and maybe even governments). We can empower small teams to do great things with all the worlds information. And we can deliver value in a trustless environment, where all you have to do is understand the math.
I believe we are headed back to the tribe — but with the benefit of global connectivity. The way we organize ourselves a few decades from now will probably look much more like a fully immersive version of the villages of our agrarian ancestors then anything like the historical anomaly that was the 20th century. Blockchain provides the much needed link in our journey from the physical commons, through the industrial age and back again — this time to the new digital commons. Now carry on and keep changing the world!
