Trust is at the core of human relationships. If we do not trust each other, it makes it difficult for us to cooperate and ‘build’ something together. Thus, progress does not happen (or it takes much longer for it to materialize). In the context of economic transactions, maintaining trust takes time and is costly as it requires the build-up a complex system of ‘middlemen’. By creating a secure, digital, distributed and decentralized database, blockchain is simply the latest, and most efficient, bearer of trust in an evolutionary cycle.
In the past when humans lived in small communities, trust was ‘easier’ to maintain as people knew each other well. For example, if I was luckier hunting than you one day, I could ‘afford’ to give some of my kill to your family trusting that you would do the same when a similar opportunity arises another time.
(Moreover, there was no upside to keep it all for oneself as, most likely, it would have rotten. In a sense, amidst the scarcity prevalent in these primitive societies, there was a momentary ‘lapse’ of abundance which possibly was at the base of people being so generous and cooperative in the first place. This simple observation raises profound questions about our human nature but this is not the time for such a philosophical diversion).
In this transaction, there was an exchange of real goods against the ‘unwritten’ promise of the opposite transaction at some point in the future. In essence, the lucky hunter was ‘gifting’ his unused part of the kill to the other party. Trust in this case worked because 1) we, cumulatively, remembered about the past transaction; 2) there was a huge cost of no-cooperation and thus loss of trust.
As the tribe expanded, these two conditions could easily be broken as our memory is fragile by nature. If in the past, the transaction simply took place between two people, now that was not possible without a third party, a middleman, ‘guaranteeing’ its credibility. The chief of tribe, for example, by the mere existence of his (it was mostly a male!) status was such a trust holder/verifier in those early days. But he could also forget and he could also intentionally misrepresent the past (scarcity of resources opened up the possibility of corruption).
One way around that was to start keeping track of the past transactions, the original ledger: that could be done either in physical format (sticks in a corner) or ‘written’ format (tallies in the dirt). This process did not last long as people, of course, figured ways to tamper with these early ledgers. The next natural step, therefore, was to find a more solid ‘ledger’, one which was more difficult to alter: what if we use very heavy, unmovable/undeletable objects instead? The Yap stones are a good example of this early form of trust.
As ‘society’ evolved, people branched out of their tribes and encountered others from foreign places with whom they wanted to interact. It was increasingly more difficult, however, to establish and maintain trust between two strangers: the transaction ‘ledgers’ they kept could have been different; the heavy, unmovable objects they could have used to record/‘verify’ their transaction, hugely impractical for people on the move. That is probably how the concept of ‘money’ as an exchange first appeared: when strangers meet and the risk of lost trust is great, we needed a revamp of the traditional exchange system. Debt and gifts require reciprocity which is not easy with strangers.
To paraphrase, it is much more pertinent to think of ‘evil’ as the source of all money, rather than the other way around.
Thus, the need for standardization arose as the concept of value became much more subjective. It was at this point that precious metals picked up the baton of trust holders/ledger keepers. “Precious” as in the sense of scarce, difficult or impossible to forge and easy to carry around. This gold system lasted for centuries supported by a framework of trust bearers, the kings and queens, breaking only temporarily a few times in history (i.e. under the Roman Republic and the Ming dynasty in China). Noteworthy is the set-up experimented in a few Italian city states during the Renaissance, which put in place the beginnings of the modern accounting system and the possibility of trust resting entirely on an institutional framework devoid of gold. This became a permanent feature, eventually, in the 1970s after the break-up of the Bretton Woods system.
Thereafter, economic trust has been maintained entirely by institutions like central banks. This trust was put in question after the 2008 financial crisis. This is when blockchain came into existence and has since slowly been establishing itself as the next bearer of trust in the cycle. Therefore, we could say, it is less revolutionary than evolutionary. By converting dispersed analogue information in a ‘all-in’ digital format, blockchain allows for the creation of a massive encrypted and secure database. Blockchain increases the efficiency of the trust system disproportionally to any other previous set-up.
At the moment, we may not trust the data we have been presented with in a transaction and would need middlemen to verify it by double-checking existing information. By storing all previous transactions, and the data that goes with them, in a distributed and decentralized database (without a central authority, tampering with it becomes more complicated), the blockchain mechanism, in effect, gets rid of these middlemen. For example, once all the information on a house is on the blockchain (has been verified once), it does not need to be verified every single time the house is sold/bought in the future. In addition, only new, incremental information needs to be verified.
Blockchain standardizes trust. It is interesting how recent commentators have compared Bitcoin with gold. Indeed, they both carry ‘information’ we can trust without question (especially when we transact with ‘strangers’ – which is now everybody in this time and age). Yes, blockchain is the same as the gold of the past – easy to ‘carry on’ and secure to exchange between two strangers from different ‘tribes’. Unlike gold, though, this trust is based not on physical properties (scarce, unmalleable, etc.) but on the evolution of our institutions which have allowed the technological progress we have experienced.
The digital world has no boundaries (for now). While we are questioning the merits of globalization at the moment, and whether this process is in reversal, such digital standardization in one country can easily spread across the world. Blockchain could thus actually speed up globalization and, therefore, substantially improve the prospects of some developing countries. Emerging markets assets have generally traded at a discount to their equivalents in the developed world, partially because of the huge institutional gap between the two.
Intrinsic value is indeed subjective but given certain assumptions can be modelled. The issue is that in emerging markets the assumptions can change literally overnight. In addition, there is the question of legal ownership, etc. For example, engaging in an exchange in a country with inadequate legal or executive system, where information is not readily available or cannot be trusted, is prone to be much more difficult and thus would require a substantial margin of safety. If indeed blockchain transforms the institutional framework of the emerging market world, it would not only raise asset prices there but, in the process, it could also accomplish what numerous NGOs and millions of financial aid money have failed to do in the past: make people accountable and subsequently raise everyone’s living standards.
Moreover, the lack of such trust legacy systems (fewer vested interests) in those countries may actually prove to be a positive development, as it could make it easier for some emerging markets to adopt the blockchain faster than developed markets. After all, there are plenty of examples where some developing countries leapfrog the developed world in adopting new technologies (i.e. skipping the evolutionary cycle completely – for example, mobile phones without first going through fixed phone lines; mobile banking without a bank account, etc.). In this sense, while in the developed world the trust system is slowly being updated through blockchain, this same process could be truly revolutionary in the developing world.