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Friday, September 29, 2017

Blockchain is Making Society More Productive

The blockchain fundamentally allows unknown individuals to trust each other without the need for middlemen.

Productivity growth is fueled by technological innovation. Today, it is at the lowest point today since the early 1900s. Blockchain is the technology most likely to push forward the productivity of our world in coming decades.

The late 19th century brought us electricity, the internal combustion engine, chemicals, and telecommunications. These inventions laid the groundwork for ‘the golden age of productivity’ in the USA — post-war period from 1948–1973. The end of the 1960’s also saw the seeds of the IT revolution, with inventions like the database and personal computer taking root. The Internet supplemented these in 1989.

However, productivity gains have not yet been fully realized. In fact, this US business cycle has seen the lowest labor productivity grown since the 1948 post-war period began. This low rate signifies a struggle for our economy to increase the output produced for every hour we are working. It means our companies, government, and people must get by with less than if our society was growing more productively.

Blockchain technologies have the potential to make an outsized impact on productivity growth for developed and developing societies. There are numerous fundamental characteristics of blockchain technology which make this possible, enumerated further below. The story begins with trust.

Meet Priya. She is an up and coming fashion designer in the United States. In her business, she is working with manufacturers in India and selling her products to a worldwide audience. She needs to pay these manufacturers and receive payment from her customers.

Today, upon reaching India, she incurs a transaction fee for exchanging her US dollars into Indian rupees before meeting with her manufacturer. She pays the manufacturer, and the clothes begin shipping to her customers. 

As the business gets off the ground, Priya isn’t always in India. When needed, she simply makes an order with her manufacturer and conducts a wire transfer to their bank. Her bank, however, has the following fees for moving money: 

For her next $1,000 order, she has to pay $35 (or a 3.5% fee), on the total order. She deals with it and writes it off as a cost of doing business. Instead of putting that $35 back into her business, it is fed into the world of financial institutions.

Priya’s business, in the meantime, is taking off. She’s using Shopify to launch her online store, and purchases are coming in for the Indo-Western clothing line she has been marketing. She’s really enjoying the Shopify, and has found it to be the best of many options for launching an online business. Even still — Shopify users aren’t immune to fees on money coming into the business.

She uses the normal Shopify plan for now, and has gotten 100 orders so far, totaling $5,000 in sales. Assuming each sale was $50, she pays $1.60 to the credit card companies right off the bat. On 100 orders, that’s $160. This money again, enters the world of financial institutions instead of making it back into Priya’s business.

The technology world has yet to reach its full potential.

What can Priya do, though? She doesn’t know these people who are buying her products personally, so accepting any other form of payment seems pretty sketchy. It seems reasonable to pay the credit card companies, because they are doing something invaluable. They are creating trust. In general, these institutions have allowed her to do something she couldn’t otherwise.

If there was a better way to do it though, she could create more cool products — which really is her main goal.

Stunted Productivity, Bitcoin, and the Blockchain 

The technology world has yet to reach its full potential. Data piles onto company servers, unable to communicate with data being collected down the street. Sending an e-mail across the globe is nearly costless; yet sending a dollar is, as we’ve seen, complicated. Our systems are closed to outside audit.

The biggest pain-point is the timely, cost-efficient movement of money. Even in today’s developed society, moving money from point A to point B takes time — three business days would make you lucky. Invoicing customers, paying employees, and sending payments to suppliers requires you to send money through a bank — after which it touches an unknown number of hands before making it to a final destination.

Our money flows slowly, bottlenecking our businesses and people. In the developing world, conditions are even worse. Our companies are unable to effectively communicate data, internally or externally. Our political system suffers from misinformation and distrust — not helped by US paper ballot voting system.

Enter Bitcoin in 2009— see video below.

Bitcoin builds on decades of research in cryptography, computer science, economics, and distributed systems. It completely transformed the way we think about moving money. High transaction fees from intermediaries could be a thing of the past, sooner than later, similarly to how e-mail reduced the cost of sending information across the world 30 years ago.

Blockchain is what allows digital currencies like Bitcoin and Ethereum to exist.

Eight years after the original Bitcoin white paper, it has become clear that Bitcoin is just the start. The blockchain underpinning Bitcoin, first introduced in the white-paper, is the all-encompassing innovation.

A blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.”Simply put — the blockchain ensures any transaction which occurs is inputted in a shared database, where it is validated and thereafter completely resistant to change from adversaries of any kind.

“Blockchain…is the biggest innovation in computer science — the idea of a distributed database where trust is established through mass collaboration and clever code rather than through a powerful institution that does the authentication and the settlement.” — Don Tapscott, The Blockchain Revolution

Blockchain is what allows digital currencies like Bitcoin and Ethereum to exist — each public, distributed networks, separate from existing businesses. Private blockchains within a business are also possible — and a number of companies are experimenting today. The difference between the two is highlighted by IBM, below.

The blockchain fundamentally allows unknown individuals to trust each other without the need for middlemen. Thereby, blockchain helps decrease the number of inputs needed to derive the same output, and increases productivity.

This public ledger will unlock a variety of cases which will change the way business and society operates. Productivity gains are already bearing fruits in the blockchain economy — literally.

A Step Back in Time: Productivity & Technology

In modern-day England, if you took a time machine from 1200 to 1700, you would see little change in the technologies people used and the things people did. From Our World In Data:

Incomes remained almost unchanged over a period of several centuries when compared to the increase in incomes over the last 2 centuries. Life too changed remarkably little. What people used as shelter, food, clothing, energy supply, their light source stayed very similar for a very long time. Almost all that ordinary people used and consumed in the 17th century would have been very familiar to people living a thousand or even a couple of thousand years earlier. 

Productivity growth was stagnant. If you just went 150 years further, there were exponential gains in productivity. Why?

Technological advances in the following areas led the charge:

First Industrial Revolution

Results: Society broke out of the Malthusian trap, life expectancy rose 10 years (in the US), food costs lowered, population and per capita income simultaneously increased for the first time in history.

Second Industrial Revolution

Results: The period of largest economic growth in world history. Living standards skyrocketed, prices of goods fell dramatically. Large swaths of people were left unemployed, as machines and factories took over jobs.

A primary indicator of the health of a society is how well it uses inputs to create outputs.

At the end of this whirlwind of innovation, most of the world would be unrecognizable to even our most recent ancestors. The productivity gains simply came down to better technologies. These productivity gains were furthermore, more than cool gadgets. The Industrial Revolution was correlated with the improvement of life expectancy, quality of life, and human well-being all around.

A primary indicator of the health of a society is how well it uses inputs to create outputs. These outputs should a) serves the broader community and b) trickle down prosperity to governments, businesses and most importantly — the people. 

Zooming in on the IT Revolution

Over the past few decades, the largest portion of productivity gains has come from the information technology sector. Blockchain technology has the potential to continue to drive forth productivity of companies, governments, and society — building on innovations of the past decades.

The IT Revolution began about 50 years ago — standing directly on the shoulders of electrification and telecommunication innovations. From this point onward, productivity gains in first-world societies have largely been driven by improvements in IT.

The initial huge wins for the community were the database and the personal computer, two innovations that simultaneously have shaped the way most humans operate in the world today.

However, the real shaping was not possible until about 1990, when the World Wide Web brought the ability to connect the world’s computers into a system of interoperable machines. From a productivity perspective, the gains associated with each of these technologies have driven most of our productivity growth since the 1980s. 

The Productivity Drivers of Blockchain

Today, our world is more information based than ever before. Only 3–8% (depending on sources) of the world’s money supply is in bills and coins. The rest is digital. The blockchain aims to improve the way 90+% of the world’s wealth and information is circulated — and some clear ways that can happen have begun to emerge. Let us identify by name the specific facets of blockchain most likely to be key productivity drivers. 

A Public, Secure Database

The blockchain is literally a chain of blocks which house information in a publicly available, unchangeable fashion. How? Read more here. Use cases today include:

Asset management: Keeping track of your physical assets is vastly important for companies and governments alike. For companies, improved asset management can lead to operational efficiencies. For governments, helping the public track their assets (property title, land registration).

A global, digital identity: One of the immediate applications of this is a ‘global identity’, which has utility in pulling together a full digital identity for an individual. This would in turn, lay the groundwork for individuals and companies to clearly interact with each other. This could be accomplished within an organization, or publicly shared to the world.

The ‘ownership’ of data: Shifts from the companies that collect it, to the people who contribute it to the world. This freedom changes how such data can interact within society, and the broader world.

Today, the way forward is no longer sitting back; it is about experimenting with the blockchain.

A Mechanism for Swift Transfer of Money

Near Zero Transaction Costs: A fundamental gain of utilizing blockchain as a trust mechanism is lower transaction costs to move money from one place to another. Whether across banks, across borders, the blockchain foretells a future of moving money at the click of a button.

Globalization Of Money: Sending money from country to country (currency to currency) will be easier than ever before. Transaction costs lowering results in an increased economic incentive to interact with global counter-parties.

Smart Contracts

Smart contracts are essentially code intended to facilitate, verify, or enforce the performance of a contract. These contracts can now be run via blockchain technologies — most notably, Ethereum.

Today, smart contracts may be the mechanism to enable better communication and coordination between separate businesses. Like SMTP once allowed separate e-mail servers to send e-mails to each other, perhaps a Facebook user could pay any LinkedIn user, even if they are on separate platforms. Across industries, a variety of use cases are coming together.

Conclusions and Recommendations

The technology underlying the blockchain is growing swiftly on one hand, and slowly on the other. We still sit in the early days of a technology set up to have great impacts. In order to capitalize, governments, businesses, and fledgling entrepreneurs all have a part to play.

  1. Governments need to carefully consider blockchain regulation in order to safely support innovative, technologies
  2. Existing companies should consider the ways blockchains can immediately make an impact on their business, and consider how it is likely to shape their future
  3. New entities, unencumbered by bounds of past governance, should consider which aspects of blockchain technologies to immediately incorporate as they launch into the world 

Today, the way forward is no longer sitting back. It is about experimenting with the blockchain in ways which can set your business apart, open up new ways of creating value, and allow for a more productive allocation of capital. The collaborative nature of the blockchain has the potential to improve our productivity worldwide. How much — and how soon — is up to us.

Reprinted from Medium.