Blockchain and the technology of decentralisation
It may be early days in the blockchain revolution, but the technology is potentially transformative for global society, not just finance, writes Mark Pascall.
I read with interest the thought provoking piece this week from Dr Olivier Jutel from Otago University, “Blockchain and the Technology of Truth”. I was mentioned and want to respond with some alternative views.
Firstly, it is important we make this subject easier for people to understand. The technology is complex, moving fast and most people (including politicians, policy makers and private sector decision makers) simply don’t have the time or inclination to understand it (and who wants to trust the crypto nerds who really understand the maths). It’s hard to form an opinion on this when you don’t understand the basics. I would recommend the introductory presentation I gave recently at the CFO conference in Auckland.
Blockchains allow us to decentralise both data and business logic or code, known as “smart contracts". That means we can make transparent systems that are theoretically unstoppable or incorruptible and without any centralised control.
In theory we have a way to fundamentally change our entire global commerce systems to one that doesn’t rely on centralised control and counterparty risks. It’s kind of like open source but with an economic model and incentive structure wrapped around it. This is why some of us are getting excited.
So why would we want to consider rebuilding our systems, potentially disrupting our companies and even governments? Things are working fine right?
Firstly, globalisation is happening whether we like it or not. The use cases for blockchain emerge when you need to traverse trust boundaries. Countries don’t trust each other. They have different values and laws. So when you need systems that traverse country boundaries then which country has the ultimate right to make or change the rules? Which laws apply? Currency is one obvious example. If we think that having a global currency is a good idea, do we want the US or Chinese government or Facebook calling the shots? The same principle could be applied to many other types of data and systems such as health records, qualifications and supply chain provenance.
Secondly, global scale disintermediation has put us in a position where mega-corporations now control our identity, our data and to a degree our rights. Lots of people now rely on platforms such as Facebook, Uber and AirBnB etc for their livelihood. Aside from the security risks of these centralised systems being hacked and our personal details appearing on the dark web (oops, too late), these entities can use this information to influence how we purchase, how we act and how we vote. This is not a good situation. Decentralised technologies give us the potential to create “self-sovereign” systems where we, as individuals, can take back control of our data, identity and rights.
Thirdly, We shouldn’t forget that many people around the world don't have the good centralised, trusted systems that we in New Zealand rely on. The most obvious being corrupt or ineffective governments or banks who are unmotivated to provide services for low income people or people without recognised identities.
Fourthly, the system isn’t actually working. We are destroying our planet. The current system means that politicians are compelled to look after their citizens and the mega-corporations are compelled to increase the wealth of their shareholders. Nobody is looking after our shared resources. This is the ultimate “Tragedy of the Commons”. The only way out of this is to create new powerful global systems or organisations that aren’t centrally controlled by any country or corporation, and are instead controlled by the citizens of planet earth.
It's early days yet
One point that often gets lost in the blockchain excitement and hype is that this is a nascent technology. Yes the bitcoin blockchain uses more electricity than small countries, yes most of the current blockchains are slow/expensive, yes there have been massive hacks on many of the centralised exchanges, yes the price of bitcoin keeps fluctuating making it pretty useless as a currency, yes massive amounts of money were raised and squandered away during the great 2017 FOMO “Initial Coin Offering” gold rush, yes the current maths to make sure the network runs (consensus mechanisms such as Proof of Work or Proof of Stake) need to be improved, and yes the user experience can often be pretty awful.
But this is irrelevant when looking at the big picture and planning for the future. It frustrates me when these issues are used to support the view that the whole thing is a bad idea. When cars first arrived they were very slow, inefficient, expensive and horses were much better. Compared to the Internet's evolution, blockchain is still on dial up.
So if we believe that decentralised systems might be the future then we can start thinking about what sort of systems can be built using the current and near future technologies. At the moment the opportunities are mostly centered around global systems that don’t require high transaction throughput. There are many examples, but probably Decentralised Finance (DeFi) is getting the most press at the moment with the emergence of the MakerDAO “stablecoin” (i.e. pegged to the US$) and numerous decentralised protocols for borrowing and earning interest. These are here now and moving fast. You can earn 6 percent on your DAI stablecoin using the Compound protocol.
Anyone in the world, without needing an “identity” or bank account, can take out a loan or earn interest on their cryptocurrency from an entity (MakerDAO is currently collatoralised at around US$320m) whose business logic is incorporated within open, transparent smart contracts on the the Ethereum blockchain. The crypto can then be converted to local currency via an NZ exchange like Easy Crypto or Dasset or spent using one of the Visa crypto debit cards. Decisions to change the rules (code) are voted on by the community of token holders (of which anybody can be a part of). Yes there are hard to quantify risks, but these are reducing over time as the systems undergo increased scrutiny and scale.
I don't agree with Oliver that “most blockchain projects remain in the realm of corporate pilot projects”.
A future of borderless governance?
Another exciting application is governance. This is about allowing groups of people anywhere in the world (and with no prior trust relationship) to come together to achieve a purpose in the form of a Decentralised Autonomous Organisation. A DAO can be truly borderless, potentially hold great wealth and can make decisions via transparent governance/voting/reputation rules encoded as smart contracts. The governance rules (for example, should I have more voting power because I own more tokens or have a bigger reputation score) within these “layer 2” DAOs are separate from the governance and consensus rules of the underlying layer 1 blockchains (mostly on Ethereum currently) that the systems are built on.
We’re seeing very fast experimentation within these communities with many New Zealanders involved. We will likely see a Darwinian evolution as they thrive or die. Again this is here and now. I’ve been a part of the Genesis DAO for over nine months.
In Jutel's article he states: “In this vision of the future, where social resources are mediated almost entirely through networks, blockchain would secure one’s identity and allow the user to bypass all mediating institutions, whether companies like Facebook or the state.”
There is one important mistake in his statement. In this future users wouldn’t be bypassing mediating institutions, they would be bypassing mediating institutions that are centralised (corporation or government controlled). Social resources would instead be mediated by open, transparent institutions controlled by anybody who chooses to join and contribute to them.
Jutel also states: “The 'solution' proposed by smart contracts is replacing democratic safeguards with self-executing code on proprietary platforms.”
I disagree. We now have the opportunity to create far more granular, transparent, efficient and effective systems for making decisions that are better suited to a global society that relies on finite resources.
The climate crisis and farcical situations that are occurring in the US and Europe, including the ease with which foreign governments can interfere with election processes, should make us all consider how effective our current systems actually are.