Strategically, Blockchain is less about a technology story and more about an idiosyncratic rift between the forces of Centralisation Vs. Decentralization – Asmar Atif (June 02, 2019)
The Gaijin Complex – Unfamiliarity breeds Resistance
When the polish first landed on the shores of Japan in the early twentieth century, most Japanese troops could not stop laughing, looking at them. Why? Simply because they had never seen those ‘kind’ of men – Caucasian, Blond, Blue-eyed. So, what they did, they killed all of them except one and sent him back to Europe with a message. Do not ever come back!
I always wondered if there was more to that collective ‘laughter’ than just mockery. With a bit of study, I could develop a better sense of that incident. It was less of a mockery and more of a lack of understanding and exposure to that ‘kind’ of personal interaction. The Japanese who saw those ‘kind’ of men for the first time, could not understand if they existed, saw them as a threat, and their natural defensive instinct kicked in and manifested its denial in the form of their execution. We might relate that to some of our observations in life too, albeit differ from culture to culture – “what we do not understand” at times kicks in an automatic denial mode; mockery and cackling.
The Cryptocurrency Gamut
Here is an anecdote, I remember when I first heard of Bitcoin, the most popular cryptocurrency today, I laughed at the notion of people buying and selling something so digitally opaque, probably partly due to the lack of my understanding and partly due to the lack of my knowledge. Even though it was many years ago, I never gave the topic any serious thought. It was until recently when I attended the AI and Blockchain summit in Malta, where I initially thought I got trapped among so many Blockchain and cryptocurrency enthusiasts, it changed my perspective. Hence, this blog is written more from a personal perspective, sharing intent rather than trying to convince others otherwise. The canvas now has gotten even bigger to ponder upon, much bigger than just seeing Bitcoin as a hoax and as an unsecured gambling instrument. Alternatively, for that matter, seeing Blockchain just as a means of providing a platform for secure financial transactions only.
Centralisation Vs. Decentralisation
The canvas has not only gotten bigger but more in-depth in terms of the potentially disruptive impact that we all mostly talk about. Like any disruption in history, we always used to have utopian and dystopian, protagonist and antagonist perspectives. So, should we classify different forces at play behind the advent of Blockchain as one of them? There is probably a better classification available at hand; the forces of centralization and decentralization are definitely at play. To understand them better, let us look at how we have organized societies in known history. It is the forces of centralization that, in the medieval ages, were represented by powerful empires led by emperors and empresses which were then followed by kingdoms, of kings and queens, and that got transformed into modern-day governments led by Presidents and Prime Ministers as the concept of nation-states evolved. It is those very forces that after the second world war, and rightly so, needed a hegemon to lead the war-torn world and the rest is history in terms of the post-war world order. Seventy years on, the forces of centralization have successfully consolidated into two societal segments at the macro level; firstly, governments that lead and represent the global financial system based on capitalism and liberal western values based on democracy, freedom, liberty, and human rights.
Secondly, corporations, fortune 1000 which have successfully delivered fruits of the free market economy, free movement of labor and capital hence globalization, built industrialized economies G5 and G20 and have taken millions out of poverty in both the East and the West. At the micro-level, the history of firms suggests the same story behind how enterprises have been organized over the last 70 odd years; around centralization and control.
The Motivation behind the 2008 Financial Crises
When the internet was born, both governments and corporates – the forces of centralization saw a great opportunity. Internet 1.0, which was about communication in the ’90s, provided these forces with an enormous advantage in terms of disseminating their agenda and narrative both in their respective domains quite quickly and at a low cost. Governments used it to expand their influence and corporates extended outreach to consumers marketing their brand. This continued until the global financial crisis of 2008 and the collapse of Lehman Brothers that also led to the demise of people’s trust in governments and big corporates. It was the height of over-centralization that led to the housing crises in the United States spurred from the mortgage-backed securities bubble that only a few expected would burst. Post-2008, the internet entered into phase 2.0 with the social media boom and democratization of free speech and free expression. It was at a scale never witnessed before. People trusting each other more than the narrative of governments and corporates. This caused quite a fair bit of “unease” among the forces of centralization.
Interestingly enough, as Lehman Brothers collapsed in September 2008, a month later, the first white paper came out on Bitcoin, Blockchain.
Another Spoiler on the Move?
Today, the future of the internet led by social media is quite uncertain. Will Internet 3.0 profoundly change its application reserved only for communication and information exchange? Will the internet be broken, or it may already have been, and be replaced by Blockchain? Do forces of centralization and control see ‘more regulation’ as a solution to what we see today as a new problem, ‘fake news? Is it getting harder and harder for the centralists to sell their narrative using social media and the internet and Blockchain is another spoiler on the move? Will governments backed by corporates break social media eventually by overregulating it? The answers are hard to answer as of today. However, that is one side of the story so far. The other side is the forces of decentralization which is also at play and probably has been more effective in recent years in creating ripples in the status quo. Forces of decentralization are manifesting themselves in multiple ways using many different channels, which are quasi-independent and digitally distributed.
Challenging the Status Quo or Just a Millennial Fad
Blockchain, which is an open public ledger that stores information of any transaction in blocks is chained together over a distributed network. It was once seen from the financial transaction perspective only. Now, that is increasingly becoming a tsunami wave on which decentralists are riding and challenging the opposite side. The asymmetric nature of the challenge makes it unique and unprecedentedly difficult for the centralists to fully comprehend its magnitude and devise any coherent strategy to snub it out.
Hence, the lack of understanding of its impact has generated two responses,
firstly, ‘we do not care because it is a bubble, and it will die down with time’
and secondly, ‘it is so independent, decentralized and distributed, we need to regulate it at some point’.
Both responses show quite clearly a lack of visionary approach; instead of adopting a more profound strategic approach, most centralists are just trying to dismiss it as a millennial fad.
Reestablishing Trust through Transparency
The ideological push by decentralists addresses the same issue at a much deeper level, changing the way we see ‘Trust’ – that got cracked after the 2008 GFC and still could not be mended. The new definition of trust is based on ‘transparency’, and ‘consent‘, and the way transparency is redefined through Blockchain application is revolutionary.
Everything regarding every transaction will be visible to everyone on this planet, something unimaginable for those on the other side of the fence. The sixteen-word key which will act as a unique identifier would represent one’s digital identity, and all transactions and activities on Blockchain will be immutable and undeletable forever. Imagine, we are posting somebody a text message, buying a new car, paying our private bills, everything that we can imagine going on a public ledger visible to every other person on this planet. Imagine, how would it be like for those who carry out corrupt practices, plagiarism, engineer fake news, fake transactions, indulge in malpractices related to any exchange among humans or entities; “when anything that is done by anyone is visible to everyone”. That is what transparency means to the decentralists and how it will re-establish and nurture trust.
Protecting Intellectual Property
Similarly, the definition of consent is also rapidly rekindled, anything we say or write on any media, social or otherwise, cannot be put on sale without seeking prior consent. The notion that one’s comments or public speeches are no more one’s property is no more valid, especially when media, social or otherwise, try to put it up for sale and make money out of it without the owner’s consent. Simply putting things on social media does not make social media the owner of the data, the same logic as giving birth to a baby in a hospital does not automatically make the hospital owner of the newborn. So, consent before selling one’s data also fosters trust.
Bitcoin Vs. Gold – Which has more Intrinsic Value?
There is a third element, often less talked about in terms of Blockchain, that is ‘value’ and more notably ‘intrinsic value’. To understand that, we need to break the most popular myth about the first known Blockchain, i.e. Bitcoin. The biggest myth around Bitcoin is that it has no intrinsic value. Alternatively, gold, as we know, is generally said to have the highest intrinsic value. If we agree for a collegial debate that it is valid for gold, let us unpack the mystery behind gold’s intrinsic value that is acclaimed to be very high.
Moreover, to understand that we need to know two things, (1) how gold is produced or created, i.e. the mining process of gold, and (2) how it is put in use, i.e. the utility aspect. The standard definition of value around something is the utility and usage of that thing, the greater the utility, the higher is its value. Applying that to gold, we see only 15% of the world’s gold is used in semiconductors, not more. So, mere usage should not be the only determinant of the source of value; there must be something else. Maybe that is the minting process which requires a nuclear fission reaction to create gold. It is because of this very reason it is too hard to create gold and has a higher intrinsic value. With all put together, still, the utility is only 15%, so the rest of the value of gold is predominantly speculative, i.e. 85% of gold’s value is speculative. If we apply the same principle to Bitcoin, it is tough to factor prime numbers, and only a limited number of miners will be able to produce only a limited number of Bitcoins in a specific period. If Bitcoin had the same speculative value, it would have been around $300,000 per Bitcoin today instead of around $7,000 per Bitcoin.
Hedging your bets
Let us take the discussion of intrinsic value away from the traditional notion of utility and creation. To redefine intrinsic value for the digital age, let us look at it from a different perspective. We all know, and as said by Bill Gates too, it is just a matter of when not if, we will have another global financial crisis. The present system will collapse come what may and will take down any traces of trust left in the global financial system.
For example, let us Imagine, there is a beam, and one is standing on that beam on top of a high-rise building which one knows with certainty is bound to collapse. What is the intrinsic value of having an alternative beam that may or may not collapse? Of course, the answer is, ‘priceless’. So, the intrinsic value, in this case, is necessarily a hedging function against something whose probability of collapse is 100 % hence whose Net-Present-Value is zero. Whether digital assets like Bitcoin which may still be an evolving cryptocurrency, provide that alternative beam or not, that remains to be seen. Will the new concept of ‘tokenization‘ totally change the way we view digital assets or for that matter any tangible or physical asset and their value? Even though the most in-use technology in the world today is still paper, will tokenizing every asset starting from stocks in NASDAQ change the way we trade equities and debt and do IPOs? Will, the internet of things, soon be renamed as the internet of value where an exchange of value via tokens over Blockchain replace every other means practiced today?
Tokenization – The Fifth Industrial Revolution
I do not have the answers with certainty however recent research conducted by PwC estimated the total wealth of the world to be USD 550 trillion which includes the entire equity, debt, financial instruments, derivatives, and the entire real estate on this planet. If that estimate is even close to being accurate, the ‘tokenization’ of every single piece of asset that exists is probably going to be the fifth industrial revolution, and the underlying technology will be Blockchain.
What all this could mean for governments and corporates is as follows: people independently, decentrally trading, and exchanging things of value possibly without a central regulatory authority, that we know today as a central bank. People having their exchanges all tokenized replacing any IPOs (initial public offering) with ICOs (initial coin offering) and ITOs (initial token offerings), stocks, equities, and debt/bonds and T-bills all traded decentrally without any financial intermediaries via digital-tokens. The concept of money that is a store of value and means of exchange would evolve to include newer digital assets represented by tokens traded on decentralized digital exchanges in a distributed marketplace thus creating an economy that is practically decentralized, physically distributed, high unregulatable, and plausibly trustworthy – open, visible and accessible to all.
Are we headed to that future or will the forces of centralization strike back with new regulatory measures to stall this advancement?
Only time will tell…