How Blockchains Will Reduce the Scope of Government

Thursday, March 8, 2018
Blockchain technology offers sustainable voluntary alternatives to "public goods" now controlled by governments. (rawpixel)

A key tenet of mainstream political economy in the post-Soviet world is that markets provide goods and services more efficiently than states, except in a few cases. So-called public goods are the last stronghold for those who want to keep some part of the economy under government control.

For decades, free-market economists could point to historical instances of private provision and offer theoretical models, but a serious practical challenge to the status quo was not politically or technologically available.

Then bitcoin happened. It was the first time that private digital money, a long dream of the cypherpunk movement during the early days of the internet, became a reality. Millions across the globe have joined the cryptocurrency movement since.

The breakthrough that made bitcoin thrive instead of fail like its predecessors was the blockchain, the missing piece introduced by Satoshi Nakamoto in 2009 to solve the trust puzzle that comes with open, decentralized networks. Blockchain technology combines peer-to-peer networks, private-key cryptography, and common protocols to create distributed ledgers extremely resistant to data modification.

Offshoot projects began to emerge as entrepreneurs realized it could be applied to other areas besides money where a central authority concentrates trust and thus risk: contracts, notaries, and land and title registries—services usually entrusted to governments.

What this means is that, as these services crystallize into viable alternatives, intermediaries will cease to be necessary. Just as Uber and Airbnb disrupted transportation and accommodation by bypassing taxis and hotels, blockchain solutions have the potential to render several government services obsolete.

"The Blockchain and Increasing Cooperative Efficacy," a paper by Malavika Nair and Daniel Sutter in the Independent Review, makes the economic case for this future. They argue that blockchain applications can reduce the scope of government through three "mechanisms of trust" that facilitate voluntary collective action.

First, the information on the network is public, hence verifiable and transparent. Second, it has low barriers to entry to ensure its decentralized nature, which is also possible due to the third mechanism: the blockchain’s open source code and decision-making process.

Therefore, blockchain platforms allow trustful interactions without the need for a third party safeguarding assets or mediating relationships, the usual role of government officials.

The authors recognize that these innovations will not necessarily reduce the scope of states right away, because the actors who benefit from monopolies and legal privileges could try to block these efforts. However, to the extent that these new proposals inspire confidence, people would prefer to use highly secure, open, and transparent platforms rather than keep relying on annoying red tape, unreliable officials, and poor public services.

Nair and Sutter analyze voluntary alternatives to government regulation and provision of public goods in seven fields: digital currency, contract enforcement, automated contracts, regulations of corporations, assurance contracts, dispute resolution, and property-title registry. In all of them, blockchain-based applications offer automatization, greater protection and trust, lower costs, and more decision-making capacity for users relative to state-run services.

Although the blockchain is not exempt from risks, its design makes it a very resilient technology. For instance, low entry barriers to bitcoin mining ensure that no individual or organization can get 51 percent of blockchain power and control the platform. It is still theoretically possible that a coalition of miners could attempt a 51 percent attack, but it would “likely be short-lived,” and the encrypted information would remain untouched in the ledger.

Another possible problem is that mining coalitions could execute “predatory practices against other miners… [or] impose differential transaction fees for certain users.” However, these practices are against their own interest, since they undermine trust and credibility in the distributed-ledger system and hamper its development.

As with all disruptive technology, blockchains challenge our understanding of many aspects of how society functions today, but they are the response to unmet needs. Blockchain-based bitcoin, for example, emerged as an alternative to government-backed currencies that are vulnerable to devaluation and political manipulation—not to mention cryptocurrency potential for immediate, cheap global transactions.

While it is true that governments could implement blockchains to streamline and improve their own services, competition from market actors would improve overall efficiency.

These services are just the beginning. Entrepreneurs are bound to keep finding other ways to offer and eventually replace many government functions. The blockchain genie is out of the bottle, and no state, unless it's willing to shut down the entire internet, can put it back.

Daniel Duarte contributed to this article.

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Paz Gómez

Paz Gómez has been a contributor to the AIER blog since September 2017, and she is a policy analyst with Antigua Report. She is also the cofounder and academic coordinator of Libre Razón, a think tank in Quito, Ecuador. Follow @PazenLibertad.