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Humans have evolved successfully for a number of reasons, but one of the core attributes that has enabled us to thrive is our ability to spot patterns. Trading on the basis of financial charts, following trends in leading economic indicators, and connecting the dots between progressive qualitative events represent just a few of the ways in which economists harness and capitalize upon the existence of patterns. Patterns are ubiquitous throughout daily life, extend far beyond the economic/financial world, and influence the lives of countless individuals every day.
Individuals and organizations alike continuously seek out patterns across data sets, often seeking to establish a narrative (or dispel one). The tendency to do so arises even if no overarching narrative yet exists, and that in turn highlights one of the most important facets of how new value is created: the inclination to capitalize upon uncertainties.
Human beings have survived, evolved, and flourished beyond essentially all other life on this planet owing in no small part to our ability to detect and anticipate patterns. But while that unique ability provided the foundations for agriculture, settlement, metalworking, mining, commerce, medicine, technological development, and a host of other activities that are unique to humankind, it also leaves us with a distinct blind spot where regularities either aren’t present or lead us to narratives different from what is in fact unfolding. (Apophenia describes a condition whereby patterns are derived from unrelated objects or information; pareidolia refers to obscure or uncertain information or data being viewed as clear or definitive.)
Some ideas, not least of which are some of the most important ones, seem particularly immune to pattern analysis.
Innovation Breaks the Pattern
The idea of innovation or disruptive innovation (creative destruction) is so widely repeated that it has literally become a cliche, but even with this repetition many organizations struggle to consistently harness innovation. Although Clayton Christensen is often credited with (or blamed for) searing the necessity of innovation into the minds of management teams across the world, innovation nevertheless arises that resists distinct, discernable patterns.
There is a scene in The Social Network (2011) that depicts early discussions among founders regarding what would ultimately become Facebook. In one, whether or not to pursue advertising is debated on the grounds that it may sterilize or cheapen the user experience. Whether or not that exchange actually took place, the answer from the more experienced tech mentor — “You don’t even know what the thing is yet” — is a revealing insight that even many innovators don’t anticipate. A product or service may, even in its minimum viable product form, display or embody a degree of nagging ambiguity.
Many products that are now household names were originally invented for different — sometimes very different — purposes: Coca-Cola, Listerine, Play-Doh, bubble wrap, the microwave, Rogaine, and perhaps most famously, Viagra. The simple truth is that there is no crystal ball available to any product-development specialist, scientist, or marketer that can predict just what use cases will be embraced by the marketplace. Additionally, even long-established innovations continue to find applications far beyond their original intent or focus.
While looking backward provides foundation and context, it is equally important to look forward; and nowhere is this truer at present than in the rapidly changing blockchain and cryptoasset sector, which continues to experience growing pains and rising skepticism.
The Blockchain Innovation
Blockchain and cryptocurrencies may be occupying the tech business (and, owing to the Libra initiative, political) headlines, but it is highly likely that we are nowhere near the end state or full realization of the use of these technologies. It is fundamentally impossible to forecast with any accuracy which of a myriad of known, unknown, and possibly unknowable use cases will rise to the surface as the crypto ecosystem (and, critically, the world around it) develops. Stepping back from the seemingly endless debates between maximalists, competitionists, and proponents of increased centralization provides much-needed context. Blockchain only entered the lexicon in 2008; authoritative prognosticating as to its fate would be as fraught with futility as attempting to definitively forecast the next 35 years of personal computing back in 1985.
The evolution of Bitcoin and other cryptocurrencies has seized the narrative among market participants, institutional investors, and newer innovators because these currencies conform to the patterns and cycles of disruptive innovation and bear similarities to historically established frameworks. The idea that crypto will improve and possibly disrupt fiat currency with a purportedly superior technological solution is drawn from the narrative of the author of the original white paper and most, if not all, of the early adopters and users; and indeed, new products and services that improve upon incumbents often result in disruption. Yet as comforting as that assessment may be, its simplicity is its undoing.
Cryptoassets may be the blockchain application that most frequently comes to mind, but there are several other facets of the technology that potentially could have a larger impact. Crypto wallets (hot, cold, or paper) were designed with the storage of cryptocurrencies in mind, but that is not predictive of what use case will ultimately prevail. Securely storing data is not limited to crypto-related data; health care records, property information, and credit card and other financial information represent just a few of the digital treasure troves in need of more secure and decentralized storage. It would be a fascinating (and not an unprecedented) twist to look forward years or decades to find that cryptocurrencies were only the sideshow in what was (is) an unintended, largely undetected evolutionary process toward better and more decentralized data storage and sharing apps.
Taking it a step further, is it too far-fetched to see a future in which creators, aggregators, and users of digital media or information are compensated? Strange though this might seem, that is exactly what the Brave browser is attempting with a combination of blockchain and native platform tokens. Intellectual property has taken many forms with the rise of YouTube and other distributors, but the monetization of original content normally still remains under the control of a central host or platform. What if a blockchain-augmented social platform and network could enable the compensation of creators directly without the restrictions, limits, and bureaucracy of a centralized entity? Google (which owns and controls YouTube) has a plan to start charging for previously free content that is illustrative of how centralized control over content and data manifests.
Forecasts of demise or supremacy, whether in the blockchain/crypto space or any other, are essentially always premature and miss both the nuance and randomness of the innovation and adoption process. Innovation rarely follows a straight path, and more often it follows no distinct pathway at all. The uses (intended and unintended), successes, and failures of ideas are determined step-by-step via the individuals and organizations that develop, disseminate, and use the products; and that, despite parallels drawn to historical examples, tends strongly toward unconscious, methodless, and at times counterintuitive advancement.
Innovation rarely (and despite all appearances) follows a pre-ordained path, but rather it progresses in fits and starts, inevitably and invariably bending to the feedback and the will of the marketplace; and we are all better off for it.
Sean Stein Smith is a Visiting Research Fellow at the American Institute for Economic Research, focusing on blockchain, cryptoassets, and the economic impact of these technologies. He is an Assistant Professor at the City University of New York (Lehman College), serves on the Advisory Board of Wall Street Blockchain Alliance, where he also chairs the Accounting Working Group, and chairs the Emerging Technology Interest Group of the New Jersey Society of CPAs. His research has been quoted in dozens of scholarly and practitioner publications, and he is a regular speaker at accounting and technology conferences. Follow him on Twitter.
Peter C. Earle is an economist and writer who joined AIER in 2018 and prior to that spent over 20 years as a trader and analyst in global financial markets on Wall Street. His research focuses on financial markets, monetary issues, and economic history. He has been quoted in the Wall Street Journal, Reuters, NPR, and in numerous other publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point. Follow him on Twitter.