Blockchains Warrant Skepticism But Keep an Open Mind

(Bloomberg View) -- Many people, when they hear the word “blockchain,” think of Bitcoin and other cryptocurrencies. Yet there is another feature of the blockchain afoot, one which promises to bring a new and radical decentralization to technology, including social media. Or as it was reported on Twitter: “Silicon Valley used to be a counterculture. It’s not anymore. It is the establishment. The crypto community is the new counterculture.”

Let’s work through one scenario to see what might be at stake.

The basic idea of a blockchain, in its purest form, is to set up a record-keeper and adjudicator that does not rely on any specific third party or outside institution. The details are complex, and I will put aside the cryptographic elements of the mechanism, but imagine paying caretakers who update or validate a public ledger for recording who owns what. 

In theory, the caretakers could coordinate and organize a majority vote to overturn all the records and claim the funds for themselves, but in practice they will find it easier to agree on the truth. To date blockchains have proved highly reliable. Bitcoins and many other cryptocurrencies are means of payment, programmed into the original software, to reward institutions that keep the blockchain ledger in good working order.

To drive the point home, a blockchain is actually a form of governance and that is what makes it such a potentially radical idea. We’ve had families, and businesses, and governments, all as methods for making decisions.  Now we have blockchains. That could be huge, but is it going to take off? 

Other than using blockchains to organize cryptocurrencies, imagine using them to record and decide who can store information about you. The blockchain is thus a potential substitute for some functions of Facebook, a corporation. Or imagine using the blockchain to allocate rights to your attention in cyberspace, who can send you ads, and who can send you an actionable email or induce you to complete a task, the latter an idea from Balaji Srinivasan of Coinbase. 

No, you don’t have to sit down and personally bid on all of these decisions, but your AI bots can use micropayments and trade with other AI bots, based on your initial instructions. This new method of governance holds out the promise of using market mechanisms to order your life online, rather than relying on monopolies to do it for you.

Or, say, virtual reality worlds come to pass, where people plug in to relax, to take an exciting one-hour trip to Paris from their sofa, or to have cybersex. The property rights in those worlds might be allocated by blockchains and cryptocurrencies, again assisted by AI.  That would create a parallel economy and indeed parallel legal systems, and those might spring up more rapidly than current administrative law will handle those new situations. In these new economies and legal systems that spring from blockchains, competition and rapid experimentation would be the norm.

Now here’s the catch, sad for some of you: I don’t actually think this is going to happen. We haven’t figured out a way to process enough cryptocurrency transactions smoothly at a rapid clip, and running a blockchain can involve high energy costs and thus pollution (“mining”). Blockchains do not always interact seamlessly with already existing regulations and laws, which are not about to vanish. Or perhaps these new systems will be prone to monopolies of other kinds. 

Furthermore, blockchains have been around for only about 10 years, and they may have vulnerabilities we don’t understand yet. On some days, I’m happy if my Skype calls aren’t dropped, and so I wonder just how rapidly we can add on this additional complexity.

That all said, I have more important news yet: I am not sure this cannot happen. In fact, I give it at least a 5 percent chance of taking place in some form, even if not exactly as I have outlined. 

At public conferences, I typically play the role of blockchain skeptic, because that is indeed my view, and also I am put off by a lot of the uncritical blockchain boosterism and maybe even hucksterism out there. But I also know that only a few years ago, I had absolutely no clue that such scenarios were possible at all, even as imagined science fiction. 

So should I be so quick today to dismiss improvements in blockchains, and other possible forthcoming revolutions, just because I cannot personally figure out all the details of how they might work? I am humbled by the realization that my own profession of economics promotes the idea of “mechanism design,” yet we have had virtually nothing to do with the rise of the blockchain concept, the most important advance in mechanism design in some while.

Will the next generation of tech be done by legal systems and corporations or by blockchains? Or some combination of those? That’s the new intellectual battlefield, and the fact that skepticism is more plausible than enthusiasm should not put it out of your mind.

Tyler Cowen is a Bloomberg View columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include “The Complacent Class: The Self-Defeating Quest for the American Dream.”

To contact the author of this story: Tyler Cowen at tcowen2@bloomberg.net.

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