Economics professor Jason Potts is co-director of Blockchain Innovation Hub at RMIT University. He sees blockchain technology as a fundamental institutional technology revolution, comparable to the emergence of companies and the Internet – perhaps even as world-changing as the invention of electricity.
What was the last major technological shift that had the same impact that you think blockchain will have?
I think the obvious is the internet, which was a profound revolution that merged digital communication networks and computers to basically cut the cost of communication and coordination to zero. But it basically didn’t change the economic infrastructure.
You still had to use money in the real world, you still had to use real world companies to broker, and you still had to use contracts that were not digitally native. This completes the revolution started with the internet by bringing the rest of the economy online natively digitally.
Before that, the electrification of the economy was a process that took about 50 years. It was a development of the 1860s and 1870s, but it wasn’t until the 1920s and 30s that we saw their full impact with electric motors and anything that just disappeared beneath the surface of the economy.
So, I think it’s of that kind of class.
Why is blockchain a fundamental change in infrastructure and not just another technology?
Most of the technologies we have are industrial technologies for making things: cars, steel or whatever. Blockchain is an institutional technology. Instead of organizing matter, energy and things, it is a technology for coordinating people.
We have this every now and then. Invented in the late Middle Ages, the stock company was a technology for organizing people. Once we had that, the world never looked back as it fundamentally changed history and gave birth to modern capitalism.
The first were actually in the 16th century when the kings and queens of Spain and the Netherlands set up these charter companies to take these trips around the world, establish colonies, and so on. The original use of corporations was to build empires.
And then, little by little, we realized that we could use them for all kinds of things. We can use them to build railways and we can use them to build steel companies, steel mills, etc. Today we use companies for almost everything.
So a company is an institutional technology. Another example is clocks and synchronized time, and that gives us the ability to have schedules. And when we have timetables, we can start planning and have public transport systems that allow us factory days.
These new institutional technologies are relatively rare, but when they emerge they enable millions and millions of people to coordinate their actions and the economy.
Blockchain is exactly the same. It enables us to coordinate common information and truths, and we can all use this technology to find out who owns a thing, what the basic truth is about ownership, who has agreed to buy something, or the identity of who owns it What is important for the establishment is reputation and rights to such things or simply everything else for which we need a mutual consent to information.
This fundamental institutional technology that enables us to trust information also enables us to build a global digital economy on top of that.
This was the key understanding we came to. Not only is blockchain technology the next generation of the internet, it is a fundamental way of reaching a common agreement on the types of facts that underlie a modern economy and presenting them in purely digital form.
Of course we could. The difference is that you don’t have a central point telling you these things.
This is the breakthrough. We could always do that with a company if it was big enough, we can always do that with some sort of centralized government register, especially if that register were big enough, but none of those things are transferable to the level of the whole world. Any centralized solution to this problem gives tremendous power to whoever controls that registry.
This is the breakthrough that blockchain technology is bringing. It provides a distributed, decentralized way of trusting this information that may be open to anyone but can be fully distributed.
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– Jason Potts (@profjasonpotts) August 16, 2021
What possibilities does the infrastructure offer?
Over the past 200 years, we have had enormous opportunities for automation, research and development, and innovation and development in all industrial sectors of the economy. However, it came with very little evolution in the underlying institutional register.
The tremendous opportunity we have is based on a lot of administrative costs and infrastructure costs that were just incurred so that people could check everyone else’s work and verify that someone has the right to sell what they want to sell and check this. that someone is what they say.
All of this type of administration, which is very costly in a modern economy, has the potential to be automated and then pushed towards R&D and technological change in what we see as a great opportunity.
By that we mean an institutional technology or an infrastructural revolution.
They have done some research that puts the economy at $ 29 trillion just to enable us to trust that certain things have happened or that information is correct.
At the Blockchain Innovation Hub, we tried to estimate the cost of trusting the modern economy. If everyone were completely trustworthy, all statements were true, and all contracts were easily enforced, what work should we not be doing?
We went through every single profession in the US and basically classified them based on duration, percentage of each job, and confidence building. For example, an accountant basically only exists because one party does not trust the numbers. Much of the leadership work is simply monitoring and verifying that someone did what they promised. The number we got to was about 35% which was incredibly high. About a third of the economy is simply devoted to peer reviewing work.
We argued that the importance of blockchain is a technology that has industrialized trust. That is the potential productivity gain, especially when we can industrialize and automate this process to trust and verify the information provided to you.
Right now, 1/3 of the entire global economy is being spent doing something we may not need to do anymore. It won’t go to zero. But it was just the same with industrial technologies like electric and gasoline engines, which replaced the agricultural labor of animals and humans. In the past 90% of the economy was active in agriculture, today it is 3%.
That was a huge source of wealth in the 20th century. People moved from the farms to the cities to free up all these resources for other things. That was the industrialization of work. We now have the same chance with the industrialization of trust.
How long do you see this take? Like electricity, will the transformation take 50 years?
It seems to be accelerating. All previous infrastructural technological changes – the big ones: electricity, communication networks and so on – were transitions over several generations.
It is amazing how quickly this transformation has already taken place. There are a number of reasons for this, but mostly the internet has already spread to most of the economy and large parts of the economy are already digitized. Blockchain can only go where digitization has already advanced. I think these conditions are very, very right for it to go quickly. We have been in a process for 10 years that I think will likely be a 20 year process.
Another consequence of this revolution that you predict is that, thanks to the advent of the blockchain as a coordinating force, we will see fewer large companies going forward. Can you explain the theory there?
A company is a large hierarchical structure. It has relatively high overheads in managing and running the organization. But everyone within the company can, in principle, trust everyone else. We can make very inexpensive agreements within companies. But when you’re doing big projects, companies have to be very, very big.
What we have seen over the past 100 years is this gradual increase in the size of businesses to do certain things, be it banking systems, mining operations, or others.
This world of ever-growing companies has all sorts of implications and consequences for society. We have to grapple with the fact that they will amass not only tremendous power, but almost as much wealth. We need very strong economic, social and political counter-forces in order to be able to live in a world with global and very large hierarchical organizations.
Blockchain disrupts the efficiency of very large organizations. It enables people to do business, enter into contracts with one another, and enter into collaboration agreements to get things done using distributed peer-to-peer blockchain technologies.
We have found a new way for large numbers of people to work together, be it to balance risks, insure one another, or to channel savings, investments and loans.
That means we don’t need such big companies. When businesses don’t have to be that big, we can spend a lot less time worrying about controlling them. And all sorts of political implications follow from this.
I remember very strongly from the early days of the internet, that we all thought it was going to be some magical utopia of happiness and wonder – and it got a total mess. What are the negative things that blockchain and cryptocurrency could bring with them?
The reason utopia collapsed was because we still didn’t have digital money or companies to provide all of these things. We ended up importing big companies back into space, which is what caused most of the problems we deal with. How do we control Facebook? How do we deal with the power of these big platforms?
I think the main topic this time around will be privacy and the question of whether we can successfully achieve pseudonymity.
There are other issues with censorship resistance and the ability of actors, platforms, corporations or governments – or just coalitions of other people – to censor and control individuals in this area.
The Chinese government seems to love blockchain and doesn’t like things that they can’t control. So it seems like Big Brother could go anywhere.
Yes. This is a very telling example because I think we are going to the point where the global blockchain economy is splitting into two parts: there is more or less a China version and then the all other version. Just like the internet has already done.
I think the next version of our goal will be the same logic, only extended to the digital economy. That scares me now. I do not like it. This is not the promise of a free, open world economy and a society based on open source platforms. This is not the promise that many of the crypto and blockchain pioneers of the Cypherpunks had in mind two decades ago.
I worry that we’ll end up in a bipolar or multipolar world where there is essentially – I hesitate to use the word empires – but it feels like it’s going back inside. The potential downside to this is that we end up having Balkanized global digital empires again.
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– Jason Potts (@profjasonpotts) August 17, 2021
Tell me about the RMIT Blockchain Hub in Melbourne
When we started in 2017, we were the world’s first social science research center on the blockchain. There were many other computer science courses, but we were the first to really emerge from a business school. Four of us started it. Me, Chris Berg, Sinclair Davidson and Darcy Allen.
As a group of economists, lawyers and business school types, we have come together to really investigate this question: What influences blockchain as an infrastructure technology and does it have an impact on business models? How would it bother different sectors? How will it affect jobs, businesses, firms, etc.?
That was always the idea: This is an enormously important and disruptive technology. Let’s try to understand this from the perspective of a business school.
Jason Potts is also editor of the Journal of Institutional Economics and author of numerous books on blockchain and contributes to the Mint and Burn podcast.