It seems that every week a new fintech blockchain startup sets its sights on disrupting the entire financial system. When it comes to blockchain and cryptocurrencies, the potential for major disruption of both the technological and financial status quo is very real. I've sat through several sales pitches by crypto startups to financial institutions, and they always promise to fundamentally alter the way they do business. But then they fumble through explaining a complex and limited-scope application that only minimally leverages the disruptive potential of blockchain technology.
These startups typically promise that their blockchain solution will improve reliability and security, while reducing costs. In that sense blockchain is no different than any other incremental improvement to current technology. It allows financial institutions to continue offering their services, but using a cheaper and more reliable back-end technology.
But thinking about blockchain technology as a mere enhancement to existing technology fails to explain not just why it is so revolutionary, but also what blockchain technology actually is. Just what are blockchains and cryptocurrencies, and why should we care?
First, let's define these terms.
Cryptocurrency is a (not very good) term to describe digital assets (as general an idea as it sounds).
Blockchain is a ledger into which the ownership records of those assets are written and updated.
To make a long story short, blockchain is a way to make digital assets behave like physical assets. That's all that really matters. The technology of how this happens doesn't matter, and nobody needs to understand the intricacies of this except for the programmers.
So, why is this 'revolutionary'? Because assets are still physical things. Commodities, cash, etc. are physical objects that behave according to the laws of physical reality. We're very familiar with those laws. A thing behaves like a thing. A cow can be traded for money. A cow must be physically moved. A cow cannot disappear or be split in two (technically it can, but then it's no longer a cow).
As the volume of trading goes up and people exchange things with extreme speed, such as in financial markets, physical exchanges become very costly and complex. In the 1960s, this actually led to an 'apocalypse' of paper, called the Paperwork Crisis, in which the sheer volume of paperwork was so overwhelming that the New York Stock Exchange had to limit trading to four days a week and many brokerage firms were forced to close.
The automation of trade on computers solved that problem and today, we live in a notional financial system. We trade physical things—from agricultural products to metals to cash to stock certificates—using 'notations' that represent these things, and shuttling them around rapidly in books.
But a problem arises when you move from the physical world to the notional/informational world. Once your assets are abstracted to notations, they are no longer subject to the laws of physics. They behave weirdly and are prone to committing errors. Like splitting into two. Or disappearing altogether. For example, if I transfer a share of stock to another account, but fail to debit it from the source account, I've split a stock into two. This creates an inherently unstable notional universe.
The notation problem creates three major problems in the real world. First, tracking and fixing these errors is incredibly expensive and time-consuming. It requires frequent checks to make sure things are behaving normal. These checks are not nearly as bad as having to do physical exchange. However, given extreme volumes, it's a significant cost for financial intermediaries (banks). Second, it limits growth. It's a bottleneck to activity.
The third is a more 'political' problem, which is that we need a trusted authority to manage the books. That's where the US government comes into play. It is the most trusted authority on Earth, and so far for good reason: stability of rules and technical expertise.
To summarize what we've discussed so far:
1. the 'reality' of the economy is represented in a virtual world of accounts and ledgers.
2. these accounts and ledgers are huge and have massive numbers in them, dictating activity across the entire physical economy.
3. a huge portion of this virtual accounting is done in the United States, under the watch of the US government.
Blockchain is a method of re-imposing physical limitations on notional (i.e. digital) assets, forcing them to behave like physical assets. If I have a crypto-token that represents one cow, that token will not split apart into two cows, or disappear into zero cows. Nor will the cow accidentally teleport from one ranch into another ranch by mistake. Where the cow token is, is where it will be, until the person who owns the cow token decides to send it somewhere else.
How is that done? For the purposes of this discussion, it doesn't really matter. But to satisfy our curiosity, it uses a clever system of cryptographic limitations as a stand-in for physical limitations. For example, some blockchains use the incomputable nature of large prime numbers to represent conservation of mass.
Politically, what is interesting is that in achieving this re-imposition of physical constraints, blockchains miraculously remove the need for the ledger master, the trusted intermediary. In other words, blockchain makes the US less necessary as the world's virtual accountant.
Because if notional assets can be made to behave like physical assets, I do not need someone who is trusted to keep the notations from fucking up, splitting apart, disappearing, or teleporting. Instead, when I receive my digital asset, it's as safe as in my pocket. This is actually becoming a major political problem in the real world.
The transfer of US dollars and US treasury securities, which are de facto global currency of the world. is done almost entirely within a bank of computers owned by the Federal Reserve. This is, in some ways, a residue of an older world order when bank vault gold was used to back currencies. A huge portion of the world's gold was shipped to the Federal Reserve because it was thought to be the safest haven on Earth, especially throughout the European "world wars."
Even though gold no longer backs any sovereign currency, the US dollar (USD) has essentially replaced gold as the zero-level store of economic value in the world. And all of that is stored as notations within the books of the world monopoly supplier of USD, The Fed. This has led to major problems.
cryptographic assets and the blockchain ... take away one of the central reasons why the US and the UK retain their authoritative positions in the world economy. With blockchain, the world no longer needs a trusted accountant.
Very recently, we saw a huge violation of the 'trust' inherent to the ledger notation system owned and operated by the US. Because the US Congress decided that it did not like the Maduros government of Venezuela, it unilaterally transferred the notations to Maduro's political rival, Juan Guaido.
This should have been front page, rather Earth-shattering news, but it wasn't. It happened quietly. And that's another blow to the system: violations of trust are not immediately subject to recourse. With this incident, the rule of law in America also showed its limitations.
The same thing also recently happened in the UK, when the Bank of England refused to transfer $1B in gold to be used for Venezuela's covid-19 response to either the Maduro or the Guaido administration. The UK, despite its negligible influence as an economic power, still wields huge influence as a center of trust and London is thus the second largest ledger-maintainer in the world economy. (NYC is the largest).
This is why cryptographic assets and the blockchain are so revolutionary. They take away one of the central reasons why the US and the UK retain their authoritative positions in the world economy. With blockchain, the world no longer needs a trusted accountant.
Again, this is because blockchain turns notional assets back into physical assets, but ones that can be traded at ultra-high volumes with no error and no limitations. When I send you money, I really send it to you. It's not an IOU, it's as good as the thing itself.
This is a brilliant solution to the problem of the US becoming ever-more untrustworthy. For example, the US threatened to fuck up the ledger system for political reasons, for a beef it had with Iraq's sovereign government.
The world economy is under severe threat as the US becomes a failed state with an unstable government.
The US also threatened China, saying perhaps we should just 'cancel' some of its Treasury securities held as assets (i.e. cancel the debt). In other words, the US abused its virtual accounting power by threatening to intentionally screw up our ledger obligations to fuck over China.
You see, we can do that to little old Venezuela, but not to China. I mean, we could do that, but it would be such a gross violation of trust we're pretty sure we don't want to do that. At least not yet. But then again, anything's possible in 2020. For example, who could have imagined Trump demanding a cut of the Tik Tok deal that his own administration forced upon ByteDance and Microsoft?
The world economy is under severe threat as the US becomes a failed state with an unstable government. The leader of the "free world" is constantly threatening to fuck up the world ledger just to settle its own personal beefs.
That's why China is betting on crypto. By building a new notional economic system built on crypto, member states don't need to trust China. The world doesn't need to worry that China will go rogue and impound assets, or disappear them altogether. It would be impossible.
It's being built up slowly, in several stages over time, but the new economic order will be notated using cryptographic assets within a distributed blockchain. This system will mimic the physical limitations that the material world imposes on physical assets.
In my opinion, this is a great way to return to a more natural system of material reality, to resist the financialization of the capitalist economy. With crypto and blockchain, we can be less interested in notations and return to focusing on the real-world, tangible things the notations represent—the things that sustain and enrich human life.
You can't eat dollars.