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How blockchain will fundamentally change the economy

This is a transcript of Bettina Warburg’s excellent description of blockchain and its impact on the world economy at the June 2016 TEDSummit.

For hundreds of years, economists have explored how people behave: how we make decisions, how we act individually and collectively, how we exchange value. Theirs also examines how to facilitate transactional institutions such as legal systems, corporations, trading markets. But there is a new transaction technology that will fundamentally change the way we exchange value, and it’s called “blockchain.”

Now, that’s a pretty bold statement, but if you take nothing else from this talk, I want you to remember that while blockchain technology is relatively new, it’s also a continuation of a very human story , that’s the story. As humans, we find ways to reduce uncertainty among each other so that we can exchange value.

Now, that’s a pretty bold statement, but if you didn’t understand anything from this talk, I want you to remember that while blockchain technology is relatively new, it’s also a continuation of our human story. As humans, we will find ways to reduce uncertainty about each other so we can trade.

So far, one of the first to explore the use of institutions as an economic tool to reduce our uncertainty about each other and to be able to transact is the Nobel economist Douglas North. North died in late 2015, but he pioneered what he calls “the new institutional economics.” The system he speaks of is just formal rules like a constitution, and informal constraints like bribery. These institutions are the lubricant that keeps the wheels of our economy spinning, as we can see in the course of human history.

If we think back to the days of our hunter-gatherer economy, we just traded within our village structure. We have some informal restrictions, but we use violence or social repercussions to enforce all our transactions. As our society became more complex and our transaction routes became more distant, we created more formal institutions such as money banks, governments and corporations. These institutions help us manage our transactions when uncertainty and complexity increase, when our grip declines. Eventually, with the Internet, we put these same institutions online. We built platform marketplaces like Amazon, eBay, and Alibaba, just faster institutions that act as middlemen to facilitate human economic activity.

As Douglas North saw it, institutions are tools for reducing uncertainty so that we can connect and exchange values ​​in society. I believe that we are entering a further, fundamental change in the way we interact and trade because, for the first time, we can not only go through political and economic institutions like our banks, our companies and our governments, To reduce uncertainty, we can also do this through technology.

So what is blockchain? Blockchain technology is a decentralized database, which is a peer-to-peer network to store user assets and transaction information. It’s basically a public system of record of who owns what and who trades what. Transactions are cryptographically secured, and over time, the transaction history is locked in blocks of data, which are then cryptographically linked together and secured. This will create a never-tampered, unforgeable record of all transactions that go through this network, and this record will be replicated on every computer using the network.

It’s not an app and it’s not a company. I think its description is closest to Wikipedia where we can see everything. It is a composite face that is constantly changing and updating. We can also track these changes on Wikipedia, and we can also create our own wikis, since they are essentially just a data infrastructure. Wikipedia, which is an open platform that stores text and images and updates to these data over time. You can think of blockchain as an open infrastructure for storing multiple assets. It stores the custody history, ownership and location of assets such as the digital currency Bitcoin and other digital assets such as intellectual property ownership. It can be certificates, contracts, real-world objects, or even personally identifiable information. Of course, there are other technical details of blockchain, but at its core, this is how it works. It is this public information center that stores transactions in the network and replicates them, so it is very secure and hard to tamper with.

This leads me to the point of how blockchains can reduce uncertainty and how they promise to fundamentally change our economic system. So uncertainty is an important term in economics, but I want to think that through three forms of uncertainty, blockchain can play a role in almost all of our day-to-day transactions. We face uncertainty like not knowing who we are dealing with, not understanding a deal, and having no recourse if things go wrong.

Let’s look at the first example, not knowing who we are facing. Say I want to buy a used smartphone on eBay. The first thing I do is check out who I’m buying from. Are they super users? Do they have high ratings and ratings, or do they have no profile at all? Comments, ratings, flags: these are all proofs about our identities that we now piece together to lower our suspicions about who we are dealing with Uncertainty, but the problem is they are very fragmented, think about how many profiles you have. Blockchain allows us to create an open global platform on which to store any certification from any individual, from any source. This allows us to create a user-controlled portable identity. This is not just a personal data, it means that you can selectively disclose different attributes of yourself to facilitate trade or interaction, for example, by disclosing encrypted proof that these details exist and sign, the government issued you an ID card, Or you are over 21 years old. Having this portable identity in the physical and digital world means we can conduct all kinds of human transactions in a whole new way.

I’ve talked about how blockchain can reduce uncertainty about who we’re transacting with. The second uncertainty we often face is the lack of transparency in our interactions. Say you’re going to send me that smartphone, and I want some level of transparency. I want to know that the product I bought is the same product that was mailed to me and have a record of how it got to me. This applies not only to electronic products such as smartphones, but also to many kinds of goods and data, such as medicines, luxury goods, and any data or products that we do not want to be tampered with.

The problem for many companies, especially those that make complex products like smartphones, is that they manage all these different suppliers in one horizontal supply chain. All these people who make products, don’t have the same database. They don’t use the same infrastructure, so it’s difficult to transparently see how the product evolves over time.

Using blockchain, we can create a shared reality between entities that do not trust each other. I mean, all these nodes in the network don’t need to know or trust each other because they can monitor and verify the chain individually. Recall that Wikipedia is a shared database, and even though it has multiple readers and multiple authors at the same time, it has only one truth. So we can use the blockchain to create it, we can create a decentralized database that has the same efficiency as a monopoly without really creating a central authority. All these suppliers, all types of companies, can interact using the same database without trusting each other. For consumers, it means we can have more transparency. As a real-world object moves, we can see its digital certificates or tokens flowing on the blockchain, adding value. It’s a whole new world in terms of our visibility.

I’ve talked about how blockchains can reduce uncertainty about our identity and how they can change our understanding of the transparency of long-distance and complex transactions, such as in supply chains. The last uncertainty we often face is the most open, and that is breaking promises. What if you don’t send me your smartphone? Can I get my money back? Blockchain allows us to write code and binding contracts between individuals, and then guarantee that those contracts will be executed without a third party enforcer case confirmed. If we look at the smartphone example, you probably think of escrow. But you do not need to pay in advance until you can verify that all conditions are met.

I think this is one of the most exciting ways that blockchain can reduce uncertainty because it means that in a way, we can destroy institutions and their execution. This means that many human economic activities can be mortgaged and automated, and pushes a lot of human intervention to the edge, i.e. the transfer of information from the real world to the blockchain.

I think what might disappoint Douglas North about the use of this technology is that what makes it work, what makes the blockchain secure and verified, is our mutual distrust. So instead of letting all this uncertainty slow us down and asking institutions like banks, governments, and corporations, we can navigate all this collective uncertainty and use it to collaborate and communicate more quickly and openly.

Now, I don’t want you to think that blockchain can solve everything, even though the media says it can end world poverty, it can also solve the problem of counterfeit medicines, and it might even save rain forests. The truth is that this technology is still in its infancy, and we need to see a lot of experimentation happen and possibly fail before we can truly understand all the use cases for our economy. But there are many people doing it, from financial institutions to tech companies, startups and universities. One reason is that this is not just an economic evolution, it is also an innovation in computer science.

Blockchain gives us the technological ability to create records of human transactions, monetary transactions, various digital and physical assets, and even our own personal attributes in a whole new way. So in a way, they become a technological institution that has a lot of the benefits of traditional institutions that we are used to in society, but it does it in a decentralized way. It does this by turning many of our uncertainties into certainties.

So I think we need to start getting ready because what we’re going to face is a decentralized, self-governing institution playing an important role in the world.