When I joined the blockchain ecosystem as a programmer in 2017, I had no idea of what a blockchain even was. I discovered this ecosystem that I thought was fundamentally about (left-wing) anarchism. Over the years it seems to me that the ideology that I’ve discovered has been progressively forgotten, and in this article I will try to explain what it was.
If all you know about blockchains comes from advertisements about cryptocurrencies exchanges that you’ve seen on TV, I think that it might interest you to know that there’s a bit more behind it.
I’ve hesitated a lot before writing this article. I’m first and foremost a programmer with no background in economics or finance or game theory. I’m not legitimate to write this article. But also, nobody else is, so why not me. Take everything explained here as an opinion, not an article written by a thought leader. In other words, I’m not ready to defend what I wrote in it and am happy to be corrected. This being clarified, let’s get started.
What’s an economy and what’s money?
Before understanding the interest behind blockchains, we need to understand a bit what an economy is.
There exists a genre of video games called management games. These video games put the player in control of a city or a colony, and the player lays down buildings . Examples include The Settlers series, the Anno series, or the Tropico series. When there is for example a shortage of wood, it is the responsibility of the player to solve this problem by building more woodcutting huts and assigning more villagers to cutting down wood. This is what is called a planned economy.
Unfortunately, a real-world economy is extremely complex, and it is in practice extremely difficult if not impossible for the planner(s) to make good decisions. Even if the planner(s) was/were incredibly smart, well-intentioned, and capable of the best rational thinking (which is rarely the case), there is a main obstacle to making good decisions: access to information. It is simply impossible to make good decisions when you don’t even know for sure what the situation is.
For this reason, it has been decided between the 17th to the 19th century in Western countries to decentralize the economical decision-making process, decision which ultimately led to liberalism. The principle is simple but elegant: having money empowers one to demand goods or services (i.e. buying them) or employing people, and one gains money by providing goods or services that the rest of society thinks are useful. This forms a positive feedback loop where society as a whole can adjust to changes and works towards producing the goods or services that are the most useful at any given time.
It is important to understand that money is nothing more than a mechanism for making decisions. Money has no purpose apart from giving you the power to demand things from the rest of society and encourage that more of these things be produced. Furthermore, money gives you power only if society collectively agrees that it is the case. As we all know, being rich is useless if you are shipwrecked and land on a desert island, but it is also interesting to note that, even if you are not alone on that desert island, being rich is useless if other people don’t recognize the power that money provides to you.
By decentralizing the economical and financial decision-making process, the decisions are now taken collectively by a crowd acting in its own interest, rather than individuals. Decisions are therefore on average more correct and are less subject to incompetence and not subject to corruption (it’s difficult or impossible to corrupt an entire crowd) or to the same human biases that a small group of people would have.
The limits of liberalism
However, giving control of the economy to a large crowd makes it subject to herd behaviors such as the bandwagon effect. If some people start panicking, the rest of the crowd will start panicking as well, which reinforces or even causes crashes. This problem, which doesn’t happen when power is centralized, seems inherent to all decentralized processes that contain feedback loops.
But maybe the biggest issue of liberalism is the fact that it inherently creates inequalities. Each actor acts in their own best interest, and their own best interest is to gain more power. Financial markets, being markets of trust, are particularly subject to these feedback loops: the more money someone has, the more power they have, and the more they can use this power to earn more money/more power. This ultimately concentrates power over time into the hands of relatively few people, which is exactly what liberalism was supposed to avoid in the first place.
After the previous attempt at liberalism ended pretty badly, more wealth redistribution has been introduced to prevent this effect, and History has shown that this wealth redistribution is necessary in order to avoid a re-centralization of the decision-making process into few hands.
An additional issue is that a market economy, while having advantages, is also extremely complex. So complex that, for example, when a market crash happens, often nobody is even really sure of what caused it. Are high-frequency trading or hedge funds bringing some value to the world, or are they merely exploiting flaws in the rules of the game? It is extremely hard to have an informed opinion about this. This complexity makes it very hard to figure out whether the economical and financial systems are even working as intended, and thus figure out whether rules should be changed.
During much of the 20th century, these two main problems were mitigated through government-enforced regulations. While it is in my opinion a better system than unregulated liberalism, doing so unfortunately requires a strong state, which leads to other issues such as the potential for corruption, abuses of power, and decreasing freedoms. Ultimately, neither the decentralized solution that is liberalism, neither regulated liberalism are satisfactory long term solutions.
What blockchains bring to the table
A blockchain can be summarized as a public database where any modification to the content of the database must follow a certain set of inviolable rules. The inviolability of the rules comes from the fact that anyone who accesses the database also always verifies that said rules have been properly enforced.
The content and rules of the database can be anything. In the case of Bitcoin, the data is simply a list of accounts and their balance, and the rules are simply that the balance of an account cannot go below 0. In the case of Polkadot, for example, the database contains a list of accounts, but also a list of active crowdfunds, a list of referendums that allow modifying the rules of the chain, a list of bounties that can be claimed (i.e. rewards for completing some actions beneficial to the blockchain), and so on.
A blockchain can combine the advantages of a decentralized system (the wisdom of the crowd and the lack of corruption) with the advantages of a centralized system (avoiding some problems such as the tragedy of the commons, thanks to its rules). It is important to highlight the word “can”. A blockchain is nothing more than a tool, and it has these advantages only if it is used the correct way. Thanks to this, a blockchain can in principle be used as a way to perform decision making and resources allocation at the economical level.
Because a blockchain can contain any type of data or rule, decision-making processes can be made much more specific than just general-purpose money and supply/demand markets. As explained earlier in this article, money is nothing more than a mean in a decision-making process, and the reason why a general-purpose money is used in practice mostly comes from the relative simplicity to administer it. This problem disappears with blockchains.
As a side note, I cannot emphasis enough how I believe that using a blockchain simply as a basic payment system (such as with Bitcoin) is the degree zero of ingenuity. Basic blockchain-based payments have no advantages over using fiat money apart from avoiding regulations. Avoiding regulations can be legitimate if you live for example in a dictatorship, but it is fundamentally a promotion of liberalism and in no way a long term path to sustainability.
Using a blockchain at the economical level also has the advantage of preventing violations of rules. Whether something is legal is no longer verified after the fact but automatically as it happens. Financial regulations, which are routinely violated (paradoxically a lot by cryptocurrencies exchanges and projects), could for example be properly enforced. Having rules written down as code also brings predictability to the system, as it is possible to know ahead of time whether something is lawful without having to employ lawyers and/or go to court, a very desirable property.
A blockchain, in principle, doesn’t require a strong state. Or rather, the state is the blockchain. Rules can be directly modified by the users of the chain. And since the rules of a blockchain are public and auditable, and that everything that happens is publicly-visible, the transparency of the system is total. Any observer is empowered to point out corruption or illegitimate actions.
Where the blockchain world is now
If you don’t know much about the blockchain industry but have paid any attention to the Internet is the last two years, you probably have a different idea of blockchains compared to the one described in this article.
When I joined the space in 2017, the general opinion shared around me was that blockchains were an ongoing research experiment that wasn’t going to be ready for prime time before a long time.
After the cryptocurrencies boom of 2018, some actors have decided to pretend that blockchains were actually ready for prime time and started promoting intellectually-boring neo-liberal-minded cryptocurrency assets under the buzzword “DeFi”. More recently, NFTs are also nothing more than traditional neo-liberal financial assets. People who promote blockchain-based assets or payment systems are in my opinion people who either directly profit from their adoption (already-rich/powerful people), or who are naive and have no understanding of finance. Every new technological wave comes with a wave of scammers trying to profit from the buzz, and blockchains are no exception.
During this period, the more legitimate blockchain companies have been stuck between the hammer and the anvil. They used the general buzz around blockchains to accumulate funding and continue developing their ideas, but not too much in order to preserve their reputation. An overall complicated situation.
The recent 2022 blockchain crash is bringing some hope, and I have the vague impression that the blockchain world might be slowly returning to its roots, but it is likely that the word “blockchain” has forever been tainted in the public’s eyes.
Why be pessimistic about a blockchain-based world
Even when ignoring the problem described in the previous section, there are still many reasons to be pessimistic about a blockchain-based society.
Writing laws as computer programs puts limits on the content of these laws. You can’t, for example, put a law on the blockchain against emitting CO2. These limitations can sometimes be overcomed by creating so-called smart markets based on incentives. This, however, makes systems even more complex than with current financial markets. The same problems as with current financial markets, namely the higher barrier to adoption and the impossibility to know whether they work properly, will probably remain.
In addition to the complexity, another major issue is the one of identity. One important piece of the puzzle in the blockchain vision is the necessity to treat all humans equally. Voting on a new rule, for example, should most likely be done through universal suffrage. In order to do this through a computer program, one would need to solve the philosophical problem of identity and answer the question “what defines a human being?”. While it is possible to prove that two identities belong to the same person, it is at the moment not possible to prove that two identities belong to two different people. This seems like a rather unsolvable problem, and it seems that having a state that manages the identities of its citizens might remain necessary in order for blockchains to function.
Even as issues are solved, it is unclear whether any other fundamental issues will arise. As far as I’m aware, no blockchain-based system has been used on a large scale yet except for simple transfers of tokens. We are still in the unknowns about the viability of the entire idea.
I must share that I’m personally not a blockchain ideologist. I wrote this article in order to share the motivation why many people (including me) haven’t left the blockchain industry despite the widespread toxicity. I understand that this ideology exists, and I’m willing to work towards it, and I do because it is interesting, but I strongly suspect that it is a dead end.
I have absolutely zero sympathy for Bitcoin supporters or for people who have promoted cryptocurrencies or NFTs as a way to get rich, but I have sympathy for people who believe that blockchains can improve our society-wide decision-making process. These people might be wrong, and maybe this blockchain ideology is a dead end, but there is some merit in trying.
Blockchains are and have always been so far an experimental technology. An active research project. They have a lot of potential. But for now that’s all they have: potential.
Thank you for reading.