Blockchain: Innovating Our Way to Economic Freedom?

Those who dream of a world with greater economic freedom have traditionally relied on the pen, the ballot box, and sometimes the sword to effect change. But a relatively new technology called blockchain may make the computer a potent tool to achieve greater liberty.

A blockchain is a type of database that is distributed to all users without a centrally managed hub and that stores unalterable digital records. It is most commonly known today as the technology underlying bitcoin, keeping records of the cryptocurrency’s ownership and allowing ownership to be transferred. This may only be the beginning, as some observers predict blockchain will be as important an advance for transactions and record-keeping as the internet has been for communication and information.

This article will explain the basic attributes that make blockchain important, discuss some applications both proposed and already in use, and explain why anyone who cares about economic freedom should be very interested in the technology. While a full-on technological revolution may take a long time, many economists, technologists, and computer scientists do see one on the horizon.

What is blockchain?
It’s easy to get bogged down in the computing details of blockchain, so this article will focus instead on the attributes that distinguish this technology. As a first approximation, think of blockchain as an unalterable digital “paper trail.” Don and Alex Tapscott, authors of “The Blockchain Revolution,” provide a good summary: “At its most basic, blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information but anything of value – money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes – can be moved and stored securely and privately. On the blockchain, trust is established, not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever code. Blockchains ensure integrity and trust between strangers. They make it difficult to cheat.”

Observers often discuss five key attributes of blockchain:

Universal access – A blockchain is a distributed database, meaning that each user, no matter how big or small, has equal access to the entire database and its real-time changes.

Peer-to-peer transmission – There is no central storage hub or manager of a blockchain. Changes or transactions (i.e., blocks) get transmitted peer-to-peer, and the constantly updated database is stored in the multitudes of distributed copies rather than in a central home.

Pseudonymity – Each user has a unique alphanumeric address of at least 30 characters; users can be anonymous or choose to provide their identity to others.

Irreversibility – Records are chronologically linked in a chain and unalterable, due to both the “clever code” mentioned above and the lack of central storage, meaning that even if a hacker succeeded in changing one copy, the overwhelming majority of copies would maintain their accuracy.

Algorithms – Users can set up “smart contracts” that automatically transfer assets and clear under specific conditions. For example, such contracts could automatically nullify themselves if assets are not transferred on a certain date or other terms are violated.

What can blockchain do?
Many observers note how long it took for some of the most revolutionary internet-based applications we take for granted today to even be conceptualized. Similarly, they theorize, we are only scratching the surface of what blockchain can do. With that in mind, here are just a few of the technology’s current uses:

Currency – The TCP/IP protocol that enables the internet involves users sending and receiving copies of data. This system is great for communication and transmission of information but not for money. The best TCP/IP can do is send orders to transfer money to a central clearinghouse, like the bank that provides your credit card. Because of the five attributes discussed above, blockchain can instead transfer digital representations of the real thing, impossible to copy. This is what allowed bitcoin to be the first cryptocurrency to solve the so-called double-spending problem. But blockchains can go beyond abstractions such as bitcoin and enable transactions with actual gold-backed currency. As economist Thorsten Polleit explains, one can purchase gold, get a unique certificate of ownership, and make transactions with a blockchain in a manner essentially the same as bitcoin. In November, the U.K. Royal Mint announced plans to launch such a blockchain-backed offering.

Record keeping – Physical records must be stored and are subject to damage or loss. Anyone who’s lost a birth certificate or Social Security card is all too aware of the hoops you have to jump through to replace it. On the other hand, current digital records usually require a centralized location and a good deal of technological infrastructure to protect them from hacking. With blockchain, unique unalterable records can be kept digitally and can even transferred to another owner. What if the title of your car was safely kept digitally and could be transferred in a sale in real time? Similarly, blockchain offers corporations a more efficient solution to keep and protect records.

Financial services – When investors buy stocks, derivatives, or syndicated loans, the transaction may feel like it happens in almost real time. But as Bloomberg Markets says, the actual settlement of trades in our current system involves several layers of archaic processes: “When investors buy and sell syndicated loans or derivatives or move money around the world, they must cope with opaque and clunky back-office processes that rely on negotiated contracts between buyers and sellers, lots of phone calls, lots of lawyers, and even the occasional fax. It still takes almost 20 days, on average, to settle syndicated loan trades.” With blockchain, actual ownership of a financial asset, rather than a promise of ownership, can be transferred in real time. In addition, blockchain technology may facilitate regulation that is both more effective and less cumbersome, since all transactions are memorialized and market participants can agree (or be required) to turn over data to a regulator.

Blockchain and economic freedom
Core tenets of economic liberty include property rights, lack of reliance on central authorities, privacy, and equality of opportunity. Blockchain can advance each of these principles:

Property rights – As discussed above, blockchain can enable the safe digital storage and transfer of titles of ownership of virtually any asset. The permanence of record-keeping provides a kind of guarantee that may be completely novel in some parts of the world. In places that are particularly susceptible to government seizure of assets, a blockchain-based record keeping system leaves the possibility that wrongs can be righted. Imagine a dictator launches a successful coup in a small country, burning the physical records of land ownership and forcing people off their land and redistributing it to his cronies. If that regime falls, sorting out who owns what could lead to chaos or even war. But if those records had been kept in a blockchain, it would be far easier to go back and return assets to their rightful owners, who would hold their encrypted identities.

Lack of central intermediaries – Bitcoin has already provided a tantalizing view of the future for those who favor dismantling the government monopoly on issuing currency. Blockchain technology allows such a private currency to arise without a government or a private central entity to issue notes and establish trust. In fact, blockchain transactions are often called “trustless,” meaning that two parties don’t have to trust each other or a central authority to conduct a transaction. This term is something of a misnomer, however, because trust naturally emerges from the system, bottom-up rather than top-down. Users of a platform could also agree in advance to use a mediation body to settle more complex contractual disputes.

Privacy – Bitcoin has enabled anonymous transactions on the web, the dark side of which has been seen in sales of black-market goods on websites such as Silk Road, the online market best known for traffic in illegal drugs. But in a day and age when the government and corporations can see a staggering amount of data on almost any citizen, blockchain promises a new level of privacy and security. It’s worth noting that infamous bitcoin thefts have not involved any breach of the underlying blockchain but rather flawed systems built around it by exchanges. Exchanges will need to come up with better technology to address these issues if cryptocurrencies are to become a major player in world markets.

Opportunity – Many people in developing nations currently have no access to banking services, due to lack of supply or lack of verifiable identity. Blockchain provides a cheap, easy way to accomplish both from the ground up, with no redistribution of wealth. Putting these people, along with their work and ideas, on the financial map at little cost would only be positive for the global economy.

A revolution, but when?
Observers across many fields believe blockchain is a hugely important technology, but some warn not to expect massive change soon. Writing in the “Harvard Business Review,” Marco Iansiti and Karim Lakhani suggest big changes will take a long time not in spite of but because of the technology’s importance: “True blockchain-led transformation of business and government, we believe, is still many years away. That’s because blockchain is not a “disruptive” technology, which can attack a traditional business model with a lower-cost solution and overtake incumbent firms quickly. Blockchain is a foundational technology: It has the potential to create new foundations for our economic and social systems. But while the impact will be enormous, it will take decades for blockchain to seep into our economic and social infrastructure.”

During the dot-com bubble, people went overboard in their predictions of what the internet would change, but the real changes turned out to be massive. It is similarly easy for many to project their hopes and dreams onto blockchain during this early, underdeveloped phase. But given its potential enabling of bottom-up interactions and governance, it may be appropriate to dream a little about its future impact on society.

Max Gulker

Max Gulker is an economist and writer who joined AIER in 2015. His research often focuses on free markets and technology, including blockchain and cryptocurrencies, the sharing economy, and internet commerce. He is a frequent speaker at industry conferences, especially on blockchain technology. Max’s research and writing also touch on other economic topics, including governance, competition, and small businesses.
 
Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Prior to AIER, Max spent time in the private sector, consulting with large technology and financial firms on antitrust and other litigation. Follow @maxgAIER.