Other manifestations of the cost of trust
are felt not in what we do but in what we
can’t do. Two billion people are denied
bank accounts, which locks them out of the
global economy because banks don’t trust
the records of their assets and identities.
Meanwhile, the internet of things, which
it’s hoped will have billions of interacting
autonomous devices forging new efficiencies, won’t be possible if gadget-to-gadget
microtransactions require the prohibitively
expensive intermediation of centrally controlled ledgers. There are many other examples of how this problem limits innovation.
These costs are
or analyzed by the economics profession, perhaps because practices
such as account reconciliation are assumed to
be an integral, unavoidable feature of business
(much as pre-internet
they had no option
but to pay large postal
expenses to mail out monthly bills). Might
this blind spot explain why some prominent
economists are quick to dismiss blockchain
technology? Many say they can’t see the
justification for its costs. Yet their analyses
typically don’t weigh those costs against the
far-reaching societal cost of trust that the
new models seek to overcome.
More and more people get it, however.
Since Bitcoin’s low-key release in January 2009, the ranks of its advocates have
swelled from libertarian-minded radicals to include former Wall Street professionals, Silicon Valley tech mavens, and
development and aid experts from bodies such as the World Bank. Many see the
technology’s rise as a vital new phase in
the internet economy—one that is, arguably, even more transformative than the
first. Whereas the first wave of online disruption saw brick-and-mortar businesses
displaced by leaner digital intermediaries,
this movement challenges the whole idea
of for-profit middlemen altogether.
The need for trust, the cost of it, and the
dependence on middlemen to provide it is
one reason why behemoths such as Google,
Facebook, and Amazon turn economies of
scale and network-e;ect advantages into
de facto monopolies. These giants are, in
e;ect, centralized ledger keepers, building
vast records of “transactions” in what is,
arguably, the most important “currency”
in the world: our digital data. In controlling those records, they control us.
The potential promise of overturning this entrenched, centralized system
is an important factor behind the gold-rush-like scene in the
with its soaring yet
volatile prices. No doubt many—perhaps
most—investors are merely hoping to get
rich quick and give little thought to why
the technology matters. But manias like
this, as irrational as they become, don’t
spring out of nowhere. As with the arrival
of past transformative platform technologies—railroads, for example, or electricity—rampant speculation is almost
inevitable. That’s because when a big new
idea comes along, investors have no framework for estimating how much value it will
create or destroy, or for deciding which
enterprises will win or lose.
Although there are still major obstacles to overcome before blockchains can
fulfill the promise of a more robust system for recording and storing objective
truth, these concepts are already being
tested in the field.
Companies such as IBM and Foxconn
are exploiting the idea of immutability in
projects that seek to unlock trade finance
and make supply chains more transparent.
Such transparency could also give con-
sumers better information on the sources
of what they buy—whether a T-shirt was
made with sweatshop labor, for example.
Another important new idea is that of a
digital asset. Before Bitcoin, nobody could
own an asset in the digital realm. Since
copying digital content is easy to do and
difficult to stop, providers of digital products such as MP3 audio files or e-books
never give customers outright ownership of
the content, but instead lease it and define
what users can do with it in a license, with
sti; legal penalties if the license is broken.
This is why you can make a 14-day loan of
your Amazon Kindle book to a friend, but
you can’t sell it or give it as a gift, as you
might a paper book.
Bitcoin showed that an item of value
could be both digital and verifiably unique.
Since nobody can alter the ledger and
“double-spend,” or duplicate, a bitcoin, it
can be conceived of as a unique “thing” or
asset. That means we can now represent
any form of value—a property title or a
music track, for example—as an entry in
a blockchain transaction. And by digitizing di;erent forms of value in this way,
we can introduce software for managing
the economy that operates around them.
As software-based items, these new
digital assets can be given certain “If X,
then Y” properties. In other words, money
can become programmable. For example,
you could pay to hire an electric vehicle
using digital tokens that also serve to activate or disable its engine, thus fulfilling
the encoded terms of a smart contract. It’s
quite di;erent from analog tokens such as
banknotes or metal coins, which are agnostic about what they’re used for.
We now have the capacity to assign digital
representation to any store of value, including
creative content, physical property, and