How blockchain can fundamentally transform the economy

Editor's note: Bettina Warburg is a blockchain entrepreneur, researcher, and educator. She is passionate about the intersection of politics and technology. This article is a Chinese translation of Warburg's TED talk on blockchain.

Economists have studied human behavior for hundreds of years: how we make decisions, how we act individually, how we act in groups, and how we exchange value. They have studied the institutions that facilitate our transactions, such as legal systems, companies, and markets. However, there is now a new technological institution that can fundamentally change the way we exchange value: blockchain technology.

That's a pretty bold statement, but what I actually want you to remember in this speech is that although blockchain is a fairly new technology, it is actually a continuation of a human story, which is to find ways to reduce mutual uncertainty to achieve value exchange.

The idea of ​​institutions as a tool to reduce mutual uncertainty and enable transactions was first explored by the Nobel Prize-winning economist Douglass North, who died in late 2015. North promoted what he called the "new institutional economics," in which institutions are formal rules like constitutions and informal constraints like bribes. These institutions are like the oil that keeps the wheels of the economy turning, and we see this throughout human history.

In the ancient hunter-gatherer economy, we traded within the village, and we had some informal constraints, but these trades were influenced by violence and social status. As our society became more complex and traded more widely, we established formal institutions, such as banks, governments, and companies. These institutions helped us complete transactions in an environment of increasing uncertainty and complexity, but our own control was decreasing. Finally, in the Internet age, we moved these institutions online. We created online market platforms, such as Amazon, eBay, and Alibaba, which are still intermediary institutions that facilitate human economic activities, but they are just faster.

As Douglas understood it, institutions are tools for reducing uncertainty, helping people communicate in society and exchange value of all kinds. I think the way we interact and transact is evolving at an accelerated pace because for the first time we can reduce uncertainty through technology, without having to rely on political and economic institutions like banks, companies, and governments.

So what is blockchain? Blockchain technology is a decentralized database that stores information about assets and transactions on a peer-to-peer network. It is basically a public registry that records who owns what and what has been traded. These transactions are secured using cryptography, and over time, these transaction histories are packaged into blocks that are linked together using cryptographic principles to secure them. These transaction records cannot be tampered with or forged, and are distributed and stored in this network. Every computer in the network has a backup of this historical record.

It's not an app, it's not a company. I think of it a little like Wikipedia . We can see everything on Wikipedia. It's a comprehensive view that's constantly changing and constantly updating. We can track these changes over time on Wikipedia, and we can also create our own entries because at their core they are a data construct. Wikipedia is an open platform that stores text, images, and change data. You can think of the blockchain as an open architecture that stores various assets. It stores the history of changes in management positions, the location and ownership of assets (like the digital currency Bitcoin), and can also store other digital assets (such as IP ownership certificates). The information stored can be a certificate, a contract, and information about real-world items, or even personal identity information. There are of course some other technical details of the blockchain, but at its core, this is how it works. It is a public registry that stores transaction records and is backed up in this network, so it is very secure and difficult to tamper with.

I think this feature of blockchain will reduce uncertainty and fundamentally change our economic system. Uncertainty is an important concept in economics. I would like to cite three forms of uncertainty that we encounter every day when we conduct transactions, and this is also the scenario where blockchain can play a role. The uncertainties we face are: we don’t know who we are trading with, there is no visibility of the transaction, and if something goes wrong, it cannot be recovered.

Let's look at the first form, where we don't know who we are trading with. For example, if I want to buy a used smartphone on eBay, first of all, I want to see who the seller is. Is their reputation high? Are the reviews and evaluations of the product good? Do they have store information? Reputation, reviews, ratings, inspection marks, etc. At present, we rely on collecting such information to reduce uncertainty and understand our trading partners, but the problem is that they are very fragmented. Think about how many files you will have. Blockchain can create an open global platform for us to store identification information of any individual. We can use it to create user-controlled portable ID cards. Not only files, it also allows you to selectively display your own information to facilitate transactions and interactions. For example, the government issues you such an ID card, which can prove that you are over 21 years old by showing cryptographic evidence. Having such an ID card in the physical and digital world means that we can conduct all transactions in a completely new way.

We talked about how blockchain can reduce the uncertainty of our transaction objects. The second uncertainty we often face is the opacity of interaction. For example, if you want to mail me the smartphone I bought, I need a certain degree of transparency. I want to make sure that the product I bought is the same as the one mailed to me, and there is a mail tracking record. It's not just mobile phones, but also many products or data, such as medicines and luxury goods. We don't want all data or products to be tampered with or replaced.

Many companies, especially those that make complex products like smartphones, manage supply chains made up of suppliers in different locations. These suppliers involved in production use different databases and different infrastructure, so it is difficult for them to keep up with the speed of product evolution.

Using blockchain technology, we can create a shared reality between trustless entities. What I mean by that is that all the nodes in this network don't have to know each other or trust each other because they have the ability to monitor and verify each other on the chain. If we think back to Wikipedia, it's a shared database, even though it has multiple readers and multiple authors at the same time, it only shows a single correct information. We can use blockchain technology to create such a database. We can create a decentralized database that has the efficiency of a monopoly system, but there is no centralized authority. So, all suppliers, all companies can use such a database to interact with each other without trusting each other. For consumers, we can get more transparency. When a real-world object is in logistics, we can see its digital certificate moving in the blockchain, which increases the value of this item. We have entered a whole new level of visibility.

I've talked about how blockchain can reduce uncertainty about our identities, change transparency in remote transactions, and change transparency in complex transactions in supply chains. The last form of uncertainty we often encounter is the most ubiquitous, and it is default. What if you don't deliver the smartphone I bought to me in the mail? Can I get my money back? In the blockchain, we can write code and write binding contracts for participants to ensure that these contracts are fulfilled, and this function does not require the involvement of third-party enforcers. If we look at the example of the smartphone, you may think of third-party payment. You pay for the phone, but you don't confirm receipt and payment until you verify that the product meets your expectations before receiving it.

The way blockchain reduces uncertainty is the most exciting because it means that we can abandon the system and its enforcement departments to some extent, which means that many economic activities of people can be guaranteed and completed automatically, and a lot of human intervention can be transferred from the real world to the blockchain.

I think what puzzled Douglas North about this technology is that it is people's distrust of each other that makes the blockchain work, keeps the blockchain secure, keeps the blockchain verified. So it's not that all the uncertainty is making us less efficient, so that we need institutions like banks, governments, and companies, but that we can harness this uncertainty, we can use it to cooperate, to exchange faster, more, and more openly.

I don’t want you to think that blockchain can solve all problems, like some media have said, it can end poverty around the world, solve the problem of counterfeit drugs, and possibly save the rainforest. However, the fact is that this technology is still in its infancy, we need more experiments, and may even fail before we fully understand its application scenarios in the economy. However, many people are working on this, from financial institutions to technology companies, startups, and university campuses. One reason these people are involved is that it is not only an economic solution, but also a computer science innovation.

Blockchain gives us the ability to create records of human transactions, currency exchanges, and all kinds of digital and physical asset records. It can even record personal files. This is a completely new way of recording. To some extent, this will become a technical system that has many advantages of the traditional system, but it is implemented in a decentralized way. This technical system turns many of our uncertainties into certainties.

So, I think we should start preparing ourselves because we are going to face a new world, a world where distributed autonomous systems play a big role.

Bruno asked: I understand that this world is coming, it has a lot of potential possibilities, it is complex. What do you think of the current penetration rate?

Bettina answered: My lab is focusing on the enterprise and government route because, in reality, blockchain is a complex technology. Although few people understand how the Internet works, we use it every day. So, we agree with John Sculley's technology philosophy that technology should be invisible or beautiful. At present, blockchain is neither invisible nor beautiful, so it is more suitable for those early users who can discover it, modify it, and find suitable use cases, such as ID cards, asset tracking or smart contracts, which can be adopted by units at the enterprise and government levels.