The blockchain is one of the most intriguing inventions of this century. I believe we have barely started to scratch the surface of the potential application of blockchain technology. Many people closely associate the blockchain with Bitcoin and cryptocurrency. Bitcoin is a cryptocurrency that utilises blockchain technology (e.g. ledger for transactions). However, the blockchain can be used for far more than just a decentralised ledger for transactions.
What is the Blockchain?
I find one of the best ways to explore a topic is to begin with a definition. I have taken the definition of ‘blockchain’ from several online dictionaries; see below:
A blockchain is a system used to make a digital record of all the occasions a cryptocurrency (= a digital currency such as bitcoin) is bought or sold, and that is constantly growing as more blocks are added (Cambridege Dictionary).
A blockchain is a system for storing records of transactions using digital currencies, that can be accessed by linked computers (Collins Dictionary).
A blockchain is a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network (Merriam-Webster).
Blockchain is digitized, decentralized and continuously growing public ledger that consist of records called blocks, which are linked and secured using cryptography (Urban Dictionary).
A blockchain is a type of decentralized database system based on linking together previous records in secure blocks of information (Dictionary.com).
The blockchain is designed to store data. This data can be viewed publicly. Once the data has been included in a block, it is permanently stored. No single entity or organisation is intended to control the blockchain; this can be ensured if governance and distribution of coins are decentralised. There are various mechanisms used to create decentralisation such as proof-of-work (i.e. block production based on cryptography), proof-of-stake (i.e. block production based on percentage of stake held), and delegated proof-of-stake (i.e. block production based on nomination of delegates based on stake based voting).
My First Experience with the Blockchain
The Steem blockchain was my first experience and exposure to the blockchain. In June 2017, I joined Steem (i.e. social media blockchain) to post my content (written posts and links to videos). I did not know anything about blockchains when I joined. I did not know anything about blockchains for at least my first six months as a Steem user. I was more focused on creating content. Steemit was the main platform and my posts were paid out in the cryptocurrency Steem (i.e. Steem Power and Steem Blockchain Dollars). Steem was also the name of the blockchain but it did not catch my attention as it was behind the scenes. As I became more invested in Steem in both time and money, I started paying attention to the Steem Blockchain. There were two websites in particular that showed the operations taking place on the blockchain; these were steemd.com and steemdb.com. From these two websites, we can observe all the data stored on the blockchain. Such data includes the following:
- Account balances
- Coin and token claim
- Posts and comments (text only)
- Following and followers
- Profile updates
- Upvotes and downvotes
- Resource Credits
- Voting Mana
- Witness votes and data
- Pending account claims
- Data from Dapps
- Recovery Account
Anything that can be expressed in text could be saved to the blockchain; that opens up almost endless possibilities. To unlock the capabilities of the blockchain fully requires user interfaces and applications. User interfaces enables users to enter data into the blockchain easily.
What is the Blockchain Economy?
We need to define what we mean by blockchain economy. The amount of literature discussing or even defining the blockchain economy is very limited. Below is a definition I found on the internet.
The blockchain economy is a scenario and potential future environment in which cryptocurrency replaces current monetary systems, potentially on a global basis (Tech Target Network).
There is also a book titled Understanding the blockchain economy, which may shed more light on what the blockchain economy could be about.
I believe the blockchain economy has the potential to replace many elements of existing economic systems. I believe the blockchain economy will go far behind just replacing Central Bank issued fiat currency with decentralised cryptocurrency. I believe the blockchain can replace large areas of Government.
What is wrong the existing economic system?
An existing system is replaced when it is not or no longer adequately fulfilling its role or if a superior system emerges. I believe both instances are true of the existing system. In short, the existing economic systems rely on a combination of the market and Government intervention and involvement. Some countries lean more towards the former and others to the latter.
When buyers and sellers are the only people affected by production and consumption, free markets are good at determining what should be produced and how it should be produced. When there are far ranging spill over affects (i.e. externalities), either positive or negative, goods and are either overproduced (i.e. demerit goods), underproduced (i.e. merit goods), or not produced at all (i.e. market failure when demand supply do not meet). Government intervenes to regulate the market or produce the goods and services themselves. Government intervention is often only partially effective at creating socially efficient output levels. Government intervention often distorts the market response, which creates long-run inefficiencies. Government run businesses are generally inefficient.
How can the blockchain help?
Free markets serve a very important role in the economy; however, an economy completely reliant on free markets is flawed. Government responses to these flaws has been ineffective. The blockchain could address the flaws of capitalism that Government is incapable of doing. Government has many weaknesses that, so far, no political system has been able to address. Some of these weaknesses are as follows:
- Decisions are based on the judgement of a few people.
- Those in Government face limited accountability.
- There is lack of incentive to perform, as effectiveness and efficiency are not rewarded.
- Leadership positions are obtained through political connections rather than merit.
- Those in positions of power lack incentive to change the status quo, as the existing system works for them.
A blockchain approach could be less hampered by these problems. If the blockchain operates as intended, the blockcahin would address the above weaknesses of Government as follows:
- Decisions are made based on consensus and not individuals or small groups.
- All users share accountability.
- There is incentive to perform, as users and stakeholders have something to lose from bad decisions.
- Leadership is provided by consensus.
- There is incentive to change the status quo when required, as those leading the changes represent the community as they are from the community.
What are some of the possible applications of the blockchain?
The potential application of the blockchain is enormous. In regards to a blockchain economy, a few areas stand out to me.
- Allocation of new supply of cryptocurrency
- Decision-making (broad)
- Decision-making (specialised)
- Journals and publications
Finance is the most obvious application. Cryptocurrencies can replace Central Bank issued fiat currencies. Central Bank issued fiat currencies will become an inferior form of money, to a cryptocurrency that has achieved mass adoption based on its ability to perform the three key functions of money (i.e. medium of exchange, store of value, and unit of account). People and businesses can transfer money to each other seamlessly without the need for intermediaries. Smart contracts can be used to replace many of the services offered by banks. For example, someone could obtain a mortgage to buy their home using smart contracts and not need to rely on banks and lawyers.
A key advantage decentralised cryptocurrencies have over Central Bank issued fiat money is that trust is not required.
Elections and Referendums
Elections and referendums, if they are still required, could be run on the blockchain. People could register on a blockchain and be provided with an anonymous identifier. Each person would only be able to register once and vote once. People would be given a period in which they could cast their vote on the blockchain using an application. At the end of the voting period, all votes would be added to the blockchain. The result of the election or referendum would be available automatically without requiring any vote counters. People could verify their own votes by checking the vote cast by their anonymous identifier, which would be publicly available.
Allocation of new supply of cryprocurrency
Allocating the new supply of cryptocurrency is a possible method of funding initiatives. Improving technology, efficiency and productivity renders any currency that is not increasing in supply to be highly deflationary. Increasing the supply of the currency is necessary to prevent deflation. However, an excessive increase in supply can cause inflation. The supply increase of a cryptocurrency follows a particular path defined by code. The increase in supply could be aligned with the long-run productivity increase of the community or country the cryptocurrency supports.
How would the new supply of cryptocurrency be distributed? Existing systems such as proof-of-work, proof-of-stake, and delegated proof-of-stake would not work well for an economy. New methods of distributing the cryptocurrency would be required, for example:
- Proof-of-citizenship or proof-of-residency
- Proof-of-brain (currently used by Hive Blockchain)
Note: all the above are vague ideas used to encourage further discussion.
The blockchain can be used as a tool to help in any form of decision-making. Discussions and arguments can be presented and saved for all to see. People can vote on what they support and believe in. This can be done for topics that require general public consensus, where everyone can have an equal weighted vote. It can also be done for topics that require expertise, where experts’ votes are more heavily weighted. Level of expertise in particular areas can also be determined through the blockchain based on accomplishments.
Media and social media can find its home on the blockchain. Blockchains such as Hive, Steem, Blurt, and EOS have social media applications utilising their blockchains. Blockchains are ideal for social media as they are censorship resistant. Photographs and videos are normally stored off-chain and the links to the storage are included in the blockchain. However, it should become possible to store backups of photographs directly to the blockchain by converting the photographs into text, which can be decoded by applications. This may even be possible for videos or audio files if the size can be significantly reduced.
Journals and Publications
The blockchain is an ideal location for journal articles to be permanently published. Journals can create applications to display journal articles published on the blockchain. The journal can choose to display only articles that align with their theme or are deemed to be of a particular quality. Articles published on the blockchain could be published by several different journals thus giving the article’s authors greater exposure. Journals could still charge subscription fees even though the articles are available free on the blockchain, as the journal adds value by determining and selecting, which articles are most valuable to their readers.
There are many more possible applications of the blockchain. We are only limited by our imagination.
Challenges the Blockchain Economy will need to overcome
The biggest problem is obtaining mass adoption. Governments, banks, and some of the largest companies can be expected to resist a shift from fiat currency to a cryptocurrency. This is because they have the most to lose from mass adoption. Governments could potentially loss much of their power if decisions bypass them through the blockchain. Many of the functions of banks could be replaced by the blockchain, therefore greatly affecting their profitability. Companies can be expected to have a mixed reaction to the blockchain. Companies that can increase their profitability will be in favour of accepting payment in cryptocurrency. However, many large companies are entrenched in the existing system where they are both profitable as well as have political powerful. As popularity of cryptocurrency grows, I expect more companies to accept cryptocurrency. There should reach a point of critical mass where mass adoption will occur.
Another problem is achieving or maintaining decentralisation. This problem could be solved by mass adoption. The more people that hold a cryptocurrency, the more decentralised it becomes. This is true in terms of distribution and governance. However, until mass adoption is achieved, blockchains still need to be decentralised. Proof-of-work, proof-of-stake, and delegated proof-of-stake all have their weaknesses in achieving and maintaining decentralisation.
Mining coins through proof-of-work helps distribute coins to miners and to other people when these coins are sold. The number of miners could increase as the price of the cryptocurrency increases, which would further help decentralisation. The number of miners could also decrease when the increase in supply of coins decreases. For example, Bitcoin decreases (i.e. halves) the rate coins are produced approximately every four years. Mining also favours people or organisations that have access to the best equipment and have low energy costs to run this equipment. It is quite possible that all the newly mined coins will end up with just a few miners thus reducing decentralisation.
Delegated proof-of-stake may face problems with decentralisation if one entity has or acquires a very large stake. This was the case when ownership of Steemit (major Steem stakeholder) changed hands. The new ownership decided to use the larger stake acquired to control the blockchain completely. Steem was no longer operating as a decentralised blockchain. If a blockchain is no longer decentralised, the most important advantages of the blockchain are lost. In the case of Steem, the lack of decentralisation resulted in millions of coins being removed from stakeholders wallets (Mickey).
I believe a combination of the blockchain and elements of existing capitalism will form the blockchain economy. Capitalism and the blockchain complement each other. The blockchain can enhance how capitalism meets private needs and wants. The blockchain can also greatly contribute to meeting social needs and wants without the need of third party intervention (Government). It is possible that some form of Government could remain but they would serve more of an administration role rather than a decision-making or a leadership role.
The greatest resistance to the blockchain economy can be expected to come from Government and banks. These parties have the most to lose from the wide scale implementation of the blockchain. I would expect them to restrict the growth of cryptocurrency and blockchain influence as much as possible. However, I also believe that if mass adoption occurs, the blockchain will be difficult to stop. Governments that persist to resist it will see businesses shift to operate in countries that do not resist it. Eventually, most Governments will be forced to embrace the blockchain economy.
If you want to read any of my other posts, you can click on the links below. These links will lead you to posts containing my collection of works. These 'Collection of Works' posts have been updated to contain links to the Hive versions of my posts.
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