Ledgers: Key to the Blockchain Economy
This article, written by Chris Berg, Sinclair Davidson and Jason Potts, researchers at RMIT University’s Blockchain Innovation Hub, is the final entry in Crypto Canon’s Building Blocks and Basics section. The focus on ledgers nicely wraps up our survey of basic concepts, while foreshadowing what to expect in the next sections.
We learned that ledgers store financial transactions when we surveyed the Bitcoin protocol (here and here) and that they could also store smart contracts when we surveyed Ethereum (here). This article shows, that’s only a one piece of the picture; and likely not the most important piece at that.
It’s key to realize ledgers confirm a consensus on facts. There are many facts including:
Financial transaction: Who sending whom money? How much? Who owes whom?
Ownership: Who owns this land, building, car, title, deed, share/equity or stake?
Identity: Birth certificates, marriage records, passports and social media for individual; commercial registration for businesses.
Status: Citizenship, voting rights, employment status.
Authority: Who has access to what? Who can sit in parliament? Eligibility for senate election?
Once we take this view of ledgers and the fact that ledgers can be digitally stored, distributed, and are immutable with blockchain, we realize that blockchain technology has wide ranging consequences for numerous economic and social relationships. The article traces the history of ledgers to provide context for this unique moment in time.
Governments and Firms
The discussion that highlight the role of governments and firm is the key take-away from this article. Through ledgers, governments maintain consensus on authority, privilege, responsibility and access. Through ledgers, firms/organization maintain consensus on employment, ownership and deployment of resources (human, capital, technology, IP etc.).
Currently, governments and firms are exploring private, permissioned blockchains for potential efficiency gains in their operations. And yet, public (permission-less) blockchains have massive potential to disrupt both government and firms.
This is tied to Ronald Coase and Oliver Williamson’s influential research putting contracts at the heart of economic organizations. Contract theory suggests that economic actors construct agreements based on asymmetric information (i.e., when one party has more or better information). For example, in salary negotiations, the company, armed with market data may have more information than the candidate. The asymmetric information that characterizes this relationship will shape how the salary negotiation unfolds.
A distinction is made between complete contracts and incomplete contracts. Parties to complete contracts must specify all rights and duties for every future contingency, making it nearly impossible to execute. On the other hand, incomplete contracts allow flexibility in dealing with unexpected events, but are expensive.
Previously, we explored how smart contracts allows us to execute certain functions without human intervention, through programmable logic added to transactions. What this article proposes is that smart contracts further allow economic actors to convert incomplete contracts to sufficiently complete contracts to be executed on the blockchain with one main implications: Lowering the information costs and costs associated with incomplete contracts thus expanding the scale and scope of possible economic activity.
Needless to say, government and big businesses will look very different in the new blockchain economy.
As always, I encourage you to read the original article: “The Blockchain Economy: A beginner’s guide to institutional cryptoeconomics”
#100DaysOfCrypto will continue with readings beyond the basics which will explore the following question:
What needs to happen, on and off the blockchain, to usher in this new ‘blockchain economy’?
Stay tuned to find out.
