Economist have been exploring people's behaviour for years, how we make decisions(personally and as a group), how we exchange value etc. They've studied institutions that facilitates our trade like legal system, corporations and marketplaces.
But there's a new technological institution that will fundamentally change how we exchange value and its called Blockchain.
While the blockchain technology is relatively new, it's also a continuation of the human story. As humans we find ways to lower the uncertainties about one another, so we can exchange values.
Douglass North was one of the first people to really explore institution as a tool in economics to lower our uncertainties about one another in order to do trade.
North pioneered what he called New institution economics. What he meant by institution were really just formal rules like constitutions and informal constraints like bribery.
his institutions are the grease that allows our economic wheels to function.
If we go back to the early days of doing trade, many years back we only traded within our village structures. As our society grew more complex and our trade routes grew more distant.
We built up more formal institutions, institutions like banks for currency, government, corporations.
These institutions helped us manage our trade as the uncertainty and the complexity grew and our personal control was much lower. Eventually with the internet, we were able to put this institution online and build platform marketplaces like eBay, Alibaba and Amazon etc.These are just faster institutions that act as middle man to facilitate human economic activities.
I believe we are now entering a further and radical evolution of how we interact and trade because for the first time we can lower uncertainty not just with political and economic institutions like banks, our governments, but we can do it with technology alone.
SO WHAT IS THE BLOCKCHAIN?
Blockchain technology is a decentralized database that stores the registry of assets and transactions across a peer to peer network, it's basically a public registry of who owns what and who transacts what. The transactions are secured through cryptography and over time these transactions history gets locked in blocks of data that are cryptographically linked together and secured. This creates an unforgeable record of all transactions across this network, this record is then replicated on every computer that uses the network.
HOW DOES BLOCKCHAIN LOWER UNCERTAINTY AND PROMISE TO TRANSFORM OUR ECONOMY IN RADICAL WAYS?
Uncertainty is a key factor in our daily activities.
I'll go through 3 forms of it we face in our daily activities where blockchain can be the solution.
- IDENTITY MANAGEMENT (Uncertainties like not knowing who we are dealing with) :
Let's say I want to buy a mobile phone from eBay. The first thing I'd do is look up who I'm buying from, reviews, ratings, check marks etc. But the problem is there are very fragmented, think about how many profiles you'll have to go through.
Blockchain allows for us to create an open global platform on which to store any attestation of any individual from any source. This allows us to create a user controlled portable identity. This means we can do all kinds of human trade in a whole new way.
- ASSET TRACKING(Not having visibility into the transactions) : say you'll be mailing me that mobile phone I bought earlier, I'd like some degree of transparency, I wanna be sure the product I bought is the same with what was mailed to me. The problem with this is all these companies don't use the same database so it's difficult to see transparently all suppliers.
Using the Blockchain we can create a shared reality across non trusting entities, by this I mean all this users on the network needn't know or trust each other because they each have the ability to monitor and validate the chain for themselves. This is a whole new world in terms our visibility.
- RENEGING ON DEALS(Not having recourse if things go wrong) :what if you don't send me the mobile phone can I get back my money?
Blockchain allows us to write code binding contracts between individuals guaranteeing that those contracts will bare out without a third party enforcer. You can think of it like an escrow, you are financing the phone but you don't release the funds till all conditions of the phone is met.
I think what will flaw Douglass North about the use of this technology is that the very thing that makes it work is our mutual distrust and uncertainty. Rather than our uncertainties slowing us down and requiring institutions like banks, government etc.
There are a lot of people working on this from financial institutions to technological companies, universities etc, that's because this is not just an economic evolution its also and innovation in science. Blockchain gives us a way go recording our various translations and it does this in a decentralized way, it does these from all our uncertainties. So brace up and let's prepare ourselves for what is coming.
I'm excited already!!