Blockchain & Economy
Blockchain technology has relevance for virtually all domains but because of its nature as a secure value exchange protocol the most readily identifiable ones are within finance, business, and economy. As with other areas the blockchain has the capacity to decentralize economic organization creating distributed peer-to-peer networks for exchange, in so doing greatly expand the scope and extent of economic markets and finance. With the ongoing developments of economic globalization, we are in the process of a massive scaling up of the global economy of exchange. Since the fall of the Berlin Wall over a hundred countries have come into the global economy and the global middle class is growing rapidly. Already, about 140 million are joining the middle class annually and by 2030, it will more than double in size, from just over 2 billion today to almost 5 billion according to Reuters. Although we are becoming connected through urbanization and telecommunications many remain excluded from the formal global economy. The distributed web offers us the capacity to link individuals and small organizations directly into the global economy greatly expanding their opportunities for economic development. The blockchain has many applications for enabling the global economy of exchange including its capacity to establish property rights where there were none, in enabling supply chain provenance, in business collaboration across industries and in enabling peer-to-peer platforms for commerce and trade.
The first component in enabling economic exchange and development is the capacity to define and enforce property rights. In this respect, Hernando de Soto has been a prominent economist in highlighting the importance of ownership in development. The main message of de Soto’s work is that no nation can have a strong market economy without adequate participation in an information framework that records ownership of property and other economic assets. Unrecorded economic activity results in many small entrepreneurs who lack legal ownership of their property, making it difficult for them to obtain credit, sell the business, or expand. They cannot seek legal remedies to business conflicts in court since they do not have legal ownership. Lack of information on income prevents governments from collecting taxes and acting for the public welfare. As he writes. The existence of such massive exclusion generates two parallel economies, legal and extralegal. An elite minority enjoys the economic benefits of the law and globalization, while 5/6 of humanity are stuck in poverty without property rights and access to formal agreements to enable exchange.
Traditional top-down attempts have been both costly to implement on a large scale and have been unsuccessful at increasing global property enfranchisement. A bottom-up approach instead follows a process wherein claims are made by individuals, verified by those affected, aggregated by the community, and then brought to the legal authority. The blockchain user monitored digital registry is the kind of tool that allows communities to serve themselves in the face of unresponsive governments. As one example of this we can take Honduras, a country with nearly sixty percent of its land undocumented and an antiquated artisanal land registry that has allowed bureaucrats to oversee land seizures for their personal use with a total lack of accountability. Under foreign pressure, a digital registry for the country using blockchain technology is being built in the coming years which will enable the people of Honduras to switch over to a system with the self-verification features of the blockchain.
Supply chains are one of the primary areas that the blockchain has found application in largely due to the fact that they involve many different organizations. Here it works to improve collaboration by creating a single database and source of true, it can reduce fraud and corruption, automate manual processes, and control for issues of authentication and trust, making obscure supply chains transparent and visible to end users. With the blockchain, we can get a much more granular view of the complete supply chain. We could record things like all the manufacturing data for an aircraft assembly, where the elements are or the subsystem has been in its journey from the original manufacturer all the way through to integration into the final aircraft. The hashing and timestamping capacity of the blockchain mean we can record exactly who’s done what to the asset over its lifecycle and with all parties being able to have access to and trust this data.
Currently, supply chains for many organizations are very complex and opaque given the fact that they have many tiers to them. When something goes wrong, like a supermarket discovering food contamination, it can take weeks for them to dig through the complicated layers to find where exactly that issue came from, with the blockchain registry you could know this information almost immediately. A London-based company called Everledger has put more than 1.6 million diamonds on a blockchain. Entries on the digital record include dozens of attributes for each diamond, including the color, carat, and certificate number, which can be inscribed by laser on the crown or girdle of the stone. They do this to make sure that there’s no false diamonds, synthetic diamonds or blood diamonds getting into the supply chain, so effectively the retailer can be sure of the complete audit trail or provenance of the diamond that they’re buying and hence increasing the net value of that diamond through the improvement of trust.
There are many more examples of supply chain use cases across product based industries as the advantages for business are clear. The trust between parties goes up because everyone knows who’s done what to each asset as it goes through its lifecycle. Everyone including the end user can know who’s owned each asset where it’s been geographically and hence the whole supply chain becomes much more efficient and transparent. Likewise, many regulatory activities along the value chain that are currently time-consuming and costly can be automated. For example, in order to move containers through a shipping port you need a paper document called a letter of credit. The processing of this document, from issuing to approval, usually takes between seven and 10 days, a shipment from Africa to Europe can require a small pile of paper documents. The shipping company Maersk has been participating in a proof of concept, with the University of Copenhagen, to digitize the bill of lading, enabling the transaction time to be reduced to less than four hours.
At the end of the supply chain process, in commerce, blockchain can enable frictionless exchanges of value peer-to-peer. Blockchain commerce platforms like OpenBazaar connects people directly via a peer to peer network, it does not require middlemen, which means no platform fees and payments are cleared via bitcoin. Data is distributed across the network instead of storing it in a central database. Each user contributes to the network equally and is in control of their own store and private data. Setting up an OpenBazaar store is simple you just download the program, run the installer, and you can have your items listed in minutes. Likewise, the network has a fraud protection system via a distributed escrow system a Multi-signature escrow. where buyers and sellers agree to a mutually trusted third party to hold the funds.
The applications of blockchain technology to finance are many, here we will just touch on the subject of payments clearance. The incumbent banks have spent centuries building a physical structure of distribution of finance in paper form that’s focused on buildings and humans and then they apply technology on top of this, the back end remains hugely over complicated. Clearing a simple credit card transaction or the purchase of a security requires bouncing it around through half a dozen intermediaries, takes days and is costly. To achieve a very simple activity of paying someone a whole pile of complicated things have to happen often at different points on the planet. Global credit card payments account for 7.7 trillion dollars with users paying hundreds of billions of dollars in fees, at the same time many remain locked outside of the formal financial system.
For the first time in human history, two or more parties, be they businesses or individuals who may not even know each other, can forge agreements, make transactions and build value without relying on intermediaries. In a world where payments can happen peer-to-peer as simply as sending an email, with the trust and transactions being handled automatically, transferring money is as simple as updating two records in the blockchain. As payments go digital in the coming decades no one pays for anything anymore, it is just around them as digital debits and credits on distributed ledgers. The applications of blockchain to finance a numerous, in providing a framework for supporting capital markets, to a new model of venture capital in the form of Initial coin offerings, to prediction markets, but going into this would be the subject of another whole course.
Just as the Web leveled the playing field for information exchange and communications so that now the same band width of connectivity enters the financial center in london as the East coast of Africa, the president of America has the same iphone as the migrant worker in south China, so too by adding a layer of automated trust and building market platforms, blockchain technology offers the real possibility like never before to really reach out to what has previously been the edges of the global economy and directly connect them into the same platforms of exchange as everyone else. Just as using the blockchain to expand the accounting systems of our global economy to incorporate natural capital is critical to enabling environmental sustainability, using the blockchain as an infrastructure to expand the opportunities of the global market economy to all is critical to enabling social sustainability through inclusion. Online blockchain enabled platforms could provide the tool to take us from a world of trickle-down economics to a world of trickle up economics.