Satoshi Nakamoto’s message to financial institutions was: you are the problem and Bitcoin will disintermediate you out of existence. Yet today, financial institutions and other big businesses are making multi-million dollar investments in the blockchain technology originally aimed at nothing less than their destruction. Can the anarchist and the pragmatist strains of blockchain coexist?
Keith Ferrazzi and World50 recently hosted a blockchain-focused meeting that would best be described as a clash of civilizations. It was warm and cordial, and, as these get-togethers over 60-year old wines do, generated friendships and collaborations. But that didn’t change the big rupture in the room:
- Pragmatists: On one side were a range of traditional enterprise technologists and business operators trying to make sense of blockchain as one recent buzz-worthy innovation alongside AI / machine learning, voice applications, robotic process automation, and the like. Some were beginners; some had deployed active projects; but none probably expected what they got from the blockchain purists that were invited to bring a different perspective.
- Anarchists: The other small but vocal group was full of ICO operators and investors, and builders of not just appcoins riding the wave, but whole new platforms redefining the nature of online communication. They saw the future as blockchain-based community-governed markets without intermediaries – and many of the established enterprises in the room as doomed artifacts of a disappearing era with the same sense of inevitability that die-hard Marxists feel about the coming death throes of capitalism.
Neither side was the caricature you expect. Many of the bomb-throwing anarchists of blockchain purity were anything but wide-eyed idealists, some with lengthy enterprise resumes and others with nine-figure start-up exits under their belts. Nor were most of the traditionalists stodgy, closed-minded, or selling the technology short – the idea of “disrupt or be disrupted” was part of every conversation, and some were already deploying real-world applications.
The core difference was in whether the blockchain is an awesome technology with an ideological movement building around it, or a rethinking of how people interact and collaborate with each other supported, but by no means defined by, an as-yet immature technology.
A Historical Detour: Adam Smith, Ronald Coase, and Satoshi Nakamoto
That statement might bear a bit of an explanation – or a small side-track into why corporations exist. It seems intuitive that they do – they have since the dawn of free markets. Yet by the very precepts laid out in the Wealth of Nations, they shouldn’t. Here’s why:
Most of us are believers that free markets have significant virtues. They give us crowd-sourced knowledge about what products and services people value most – knowledge that the most advanced technologies of planned socialist economies failed to achieve. They allocate resources efficiently, and generally reward cooperative behavior. There are a number of asterisks you can put on those statements depending on your political leanings, but the core of it has largely become accepted knowledge since Adam Smith’s day, especially after the fall of the USSR.
But if free markets are so great, why isn’t everything decided by the free market? Why did I get up this morning, and rather than bidding my services out to a new buyer, work for RampRate again as I have for the last 14 years? Why isn’t every link in the assembly line its own company, competing with parallel links? In short, why do we have companies, which may have some market mechanisms internally, but are primarily governed by people giving orders – much like a planned economy, but on a smaller scale.
In 1937, Ronald Coase set out to answer just this question. His Theory of the Firm suggested that rather than people preferring to work under a boss instead of under market forces or consumers preferring to buy from a vertically integrated organization, the more important reason was friction – transaction costs in finding, hiring, overseeing, and firing people for products and services you need every day. If every task within your day to day job required a bidding process, you would spend most of your time on managing that bidding process, and not doing the productive work you’re paid for.
That underlying reason – the high costs of market friction – is now changing. And the blockchain is not the first part of that change. It started with the Internet reducing the costs of supply chains and communication. It continued with the gig economy companies like Uber / Lyft, Upwork, AirBnB, Etsy, and so on – each competing with large enterprises using an army of individual contractors. But it found its ideological compass and future banner in the blockchain, and its anonymous founder bearing the pseudonym of Satoshi Nakamoto.
The Anarchist Cookbook 2.0: Bitcoin White Paper
It’s an interesting quirk of blockchain initiatives that they’re not kicked off with a presentation or a vision statement, but a white paper, often, though not always, laden with complex mathematics, proofs of Byzantine fault tolerance, and theoretical benchmarks. It all goes back to the foundation of Bitcoin in an 8-page white paper, which is 80% mathematical proofs, and 20% political manifesto. And that manifesto is that intermediaries (i.e. banks) are a major source of friction in financial markets – and with blockchain technology, we don’t need them.
The core of the argument is that banks provide only one irreplaceable service – trust among parties that don’t trust each other. If you can replicate that with technology, then the other trappings of financial institutions are worth little to nothing. In short, bitcoin is a gun pointed at financial institutions and daring them to prove they have value beyond that which is inherently delivered by the blockchain.
Give the Anarchist a Cigarette – or at Least the Benefit of the Doubt
Now let’s say that argument was right. Financial services are about 17% of the world economy – just a bit smaller than the role of the United States in world GDP. Taking them out would be a big deal in itself. But they are not the only intermediaries out there. Real estate, technology, identity, supply chains, and dozens of other industries have billions in market cap in firms whose role is primarily in instilling trust among people who don’t know each other. Ironically, the recent innovators in the gig economy like Uber and AirBnB also fall into that category, themselves being in danger of disruption so soon after disrupting the long-standing status quo.
What replaces these top-down hierarchies? Free markets that are orders of magnitude more effective, self-governing, and employ no one. Instead of bylaws, we have constitutions. Instead of boards of directors in bed with the management they’re supposed to oversee, we have every stakeholder wielding their individual informed vote to change policy ranging from the % of the transaction that goes into system maintenance and R&D to the rewards given to the founders and overseers of the system.
Since these systems are markets, they cannot run without a currency. Bad actors are punished by losing value; good behavior is rewarded by creating it. And if the market is to be free, that currency can’t be controlled by an external entity like a government or a corporation. Thus the need for a token as the fundamental measure of value – both of the blockchain project to its community, and individual actors to the blockchain project.
From that perspective, corporate-led blockchain initiatives, typically permissioned ones without a true currency, seem like they’re missing the point completely. Without the transformation in how we coordinate our effort, the blockchain is just a really awkward and slow way to run a database.
The Pragmatist POV: Idealism Is Paid for by Security or Scalability
It would take a strong person to withstand someone saying “my job is to make not just your job or your firm, but your entire industry obsolete” – if they took it seriously, that is.
For many enterprise folks in the room, the idea that banks would be obsoleted seemed like a far-fetched one. They still control the world’s money supply. The anarchists don’t even have a scalable technology platform yet – and the idea of bitcoin reducing transaction costs and friction seems completely laughable when transaction fees spike to $30+ (granted they’ve been reduced to less than $1 now, but that is still far more than many other centralized mechanisms) and it can take days, if not weeks, to start trading cryptocurrencies.
Of course everyone realizes that individual companies fall prey to technological disruption that they fall behind in adopting. But the forward-thinking firm, the thinking goes, rides the crest of innovation to new heights. That is precisely why we send our best and brightest to these private events – to separate the kernels of insight and incubate them in our labs outside of the vagaries of the markets and ensure that innovation happens on our terms, not the terms of the upstarts.
From that vantage point, there is something in the technology itself, but the overhead of dealing with decentralized governance, and custom currencies that have to go into your accounting somehow, are the unnecessary overhead. We can deploy the same technology, but rather than investing in the decentralization angle of the decentralization-security-scalability trilemma that Vitalik Buterin posed, we’ll build more scalable and more secure networks that are good at doing business, not changing the world.
It seems like the two strains of blockchain are destined to develop in parallel for now. Although this event helped open some eyes to the other point of view, the anarchist and pragmatist perspectives are in many ways as incommensurable as any two paradigms Kuhn ever described. And while there will be collaboration on a technical level, it’s been a long while since any CIO or even CTO had the organizational power to rethink the very nature of a business, so even if the audience on the front line sees the industry-changing potential, they may not be able to communicate it. Or it might all blow over in the face of the all-powerful trilemma that dictates that as much as we like decentralization, when push comes to shove it’s a nice-to-have, while security and speed are the must-haves.
From my vantage point, the revolution is desirable but stasis is the null hypothesis.
14+ years in buying IT has given me a front row seat to stagnation, risk-aversion, and in some cases corruption of enterprise decision-making. Internal politics, not data, guide the majority of choices made by any organization with over a thousand employees. Shattering that mold with a non-corporate, market-based blockchain approach would be a breath of fresh air and something that should be tried until its limits are found (and they will be found – just as we have found the limitations of democracy in the age of big money in politics and industrial-scale propaganda machines).
However, decentralization has a cost. It may not be Coase’s transaction costs anymore, but either speed or security or both have to be scaled down. And in a hyper-competitive market where people care about results more than process, even small sacrifices on that front may prove costly. Would you really take a decentralized Uber / Lyft that makes you feel a bit less safe late at night to stick it to the man? Would you take a 10 second load time for your daily social network fix or your search engine in exchange for not being the product, rather than the customer, of a Facebook or Google?
If the world answers “no” then the burden on blockchain ventures will be not just innovating in decentralization, but also being brilliant enough technologists to come from behind on the other core dimensions of value and the type of businesspeople that can outmaneuver industry veterans in marketing, regulatory capture, and the full recipe book of dirty tricks that’s deployed to stop any disruptive innovation. In short, we will need the next Jobs, Gates, Brin/ Page, Zuckerberg, Musk, etc. to be a blockchain purist. The good news is that nothing else I’ve been a part of has ever attracted this much intellectual firepower. The bad news is that intellectual brilliance is no guarantee against being dead wrong.
What do you think? Is the future creative anarchy, controlled evolution, or none of the above?