Blockchains are useful [Crypto indexing part 7]
Blockchain computers are new types of computers where the unique capability is trust between users, developers, and the platform itself. This trust emerges from the mathematical and game-theoretic properties of the system, without depending on the trustworthiness of individual network participants.
/ Andreessen Horowitz, www.a16zcrypto.com
Firstly, trading increases our living standards. The trading of goods predates both writing and money. We know this because money had to be invented for trade, and the first writings ever found were debt ledgers. When humans started trading goods with each other they agreed to do so because both parties were better off after the transaction, thus economic value was created. Both theoretical and empirical evidence suggests that trade make us wealthier and increase our living standards substantially.
Secondly, trust is needed for trade. If two parties want to transact but do not trust each other, it will be hard to execute the trade. When the trust is too low, it will inhibit the trade. Larger transaction values require more trust. For a long-distance transaction the seller might worry that the payment will not arrive, at the same time as the buyer is unsure of the item’s durability. All forms of uncertainty are the enemy of trust.
Thirdly, we use trusted third parties today to facilitate trades. Trust is built slowly over time. To prevent a lack of knowledge about the counterparty to inhibit a transaction we use trusted third parties like stockbrokers and apartment brokers, who are employed by large corporations with recognizable names and logotypes. Their role is to increase confidence in the transacting parties. These companies essentially consist of trained people performing manual checks. These tasks can be automated by computers so that the employee supervise what the computer is doing rather than having to perform the manual work herself.
Fourthly, a blockchain digitize trust. It does so in part because the data cannot be tampered with, 2 so that if something is in the blockchain it will stay there. Imagine what this does to uncertainty. Blockchains are a cheap way to instil trust. Instead of relying on a trusted third party, the transacting parties can rely on the blockchain. This digitization reduces transaction costs and enables trade. An intriguing question is: how much economic value can be unleashed via trading thanks to the increase in trust and efficiency that blockchain technology can bring?
Given that (1) trading increase our living standards, (2) trust is needed for trade, (3) we use trusted third parties today to facilitate trades, and (4) a blockchain digitize trust, the inevitable conclusion is that blockchains are useful.
More content from the author
Jacob Lindberg, the author of this post, is the founder & CEO of Vinter — an index provider and data analysis firm specialized in cryptocurrencies.
This blog post is a part of our intro blog series on crypto indexing. Read the other posts on medium.com/vinter
