Economics Professor Jason Potts is co-director of the 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’s the last big technological change that had the same sort of impact that you believe blockchain will have?
I think the obvious one is the internet, which was a profound revolution stringing together digital communication networks and computers to basically send the cost of communication and coordination to zero. But, it fundamentally didn’t change any of the economic infrastructures.
You still had to use money in the real world, you still had to use companies in the real world to intermediate and you still had to use contracts that were non digitally native. This is completing the revolution that was started with the internet by bringing the rest of the economy natively digitally online.
Before that, electrification of the economy was a process that took about 50 years. It was an 1860s and 1870s development, but it wasn’t really until, you know, the 1920s and ‘30s before we saw the full impact of it with electric motors and everything that just disappeared beneath the surface of the economy.
So, I think it is of that kind of class.
Why is blockchain a fundamental infrastructure change rather than just another technology?
Most technologies that we have are industrial technologies for producing things: cars, steel, or whatever. Blockchain is an institutional technology. Instead of organizing matter, energy and things, it’s a technology for coordinating people.
We have these come along every so often. The joint-stock company invented back in the late Middle Ages was technology for organizing people. Once we had that, the world never looked back, as it fundamentally changed history and gave rise to modern capitalism.
The first ones were actually in the 16th century when the kings and queens of Spain and the Netherlands created these charter companies to go on these voyages around the world, to set up colonies and so on. The original use of companies was empire-building.
And then, we gradually realized that we could use them for all sorts of things. We can use them for building railways and we can use them for building steel companies, steel plants, and so on. Now, 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 timetables. And if we’ve got timetables, we can start scheduling, enabling us to have public transport systems that enable us to have factory days.
These new institutional technologies are relatively rare, but when they happen, they enable millions and millions of people to start to coordinate their actions and the economy.
Blockchain is exactly the same thing. It enables us to coordinate on shared information and truth, and we can all use this technology to figure out who owns a thing, what is the fundamental truth about ownership, who has agreed to buy something, or about identity, which is important for establishing reputation and rights to such things, or just anything else where we need shared agreement about information.
This fundamental institutional technology to enable us to trust information enables us to build a global digital economy on top of that.
This was the key understanding we arrived at. Blockchain technology isn’t just the next generation of the internet, it’s a fundamental way to create shared agreement about the sorts of facts that underpin a modern economy and to represent those in a purely digital form.
We could already do that, of course. The difference is you don’t have a centralized body telling you those things.
This is the breakthrough. We could always do that with a company if it got big enough, we can always do that with a sort of centralized government registry, especially if that registry was big enough, but none of those things scale to the level of the entire world. Any centralized solution to that problem gives whoever or whatever controls that registry an enormous amount of power.
This is the breakthrough that blockchain technology brings. It provides a distributed decentralized way of having that information be trusted, potentially open to anyone but able to be fully distributed.
As for infrastructure, what possibilities does it open up?
We’ve had huge opportunities for automation, R&D and innovation and development in all the industrial parts of the economy over the last 200 years. But, it came with very little development in the underlying institutional registry.
The huge opportunity that we have is based upon a whole lot of administrative costs and infrastructural costs that have just simply been around so people can check everyone else’s work, verifying that someone has the right to sell the thing they’re trying to sell and verifying that someone is who they say.
All of that sort of administration, which has significant costs in a modern economy, has the opportunity to be automated, and then to be driven toward R&D and technological change into that domain that we see as a huge opportunity.
That’s what we mean by this is an institutional technology or an infrastructural revolution.
You’ve done some research into this that estimates about $29 trillion worth of the economy is there simply to enable us to trust that certain things have happened, or that information is accurate.
At the Blockchain Innovation Hub, we tried to estimate the cost of trust in the modern economy. If everyone was perfectly trustworthy, all statements were true and all contracts were effortlessly enforced, what work wouldn’t we need to do?
We went through and just basically classified every single occupation in the U.S. for the amount of time, the percentage of each job and who is involved in creating trust. So, for example, an accountant basically only exists because one party doesn’t trust the numbers. A lot of managerial work is simply monitoring and verifying that someone did what they promised to do. The number we came to was about 35%, which was incredibly high. About a third of the economy is just simply devoted to checking each other’s work.
We argued that the significance of blockchain is a technology that has industrialized trust. That’s the productivity gain that is potentially there to be had, especially if we can industrialize and automate that process of being able to trust and verify the information that’s given to you.
At the moment, 1/3 of the entire global economy is spent doing something that we might not need to do anymore. It’s not going to go to zero. However, it was exactly the same with industrial technologies such as electric motors and petrol engines that replaced agricultural work that was being performed by animals and humans. Once upon a time, 90% of the economy worked in agriculture, and now it’s 3%.
That was a huge source of wealth in the 20th century. People moved off farms and into the cities, freeing up all those resources to do other things. That was the industrialization of work. We’ve got the same opportunity now with the industrialization of trust.
How long do you see this taking? Will the transformation take 50 years like electricity did?
It seems to be speeding up. All previous infrastructural technological changes — the big ones: electricity, communications networks and so on — were multi-generational transitions.
What has been amazing is how fast this transformation has already happened. There’s a number of reasons for that, but mainly, the internet has spread to most of the economy already and large amounts of the economy have already been digitized. Blockchain can only go where digitization has already gone. So, I think those conditions are very, very right for it to be rapid. We’re 10 years into what I think is probably going to be a 20-year process.
Another ramification of this revolution that you’re predicting is that we’ll see fewer big corporations in the future thanks to the emergence of blockchain as a coordinating force. Can you explain the theory there?
A firm is a large hierarchical structure. It has relatively high overhead costs in administration and running the organization. But, anyone inside the firm can, in principle, trust anyone else. We can make very low-cost agreements inside firms. But, when you’re undertaking large projects, firms have to be very, very large.
What we’ve seen over the past few 100 years is this gradual increase in the size of firms in order to do particular things, whether it’s banking systems, mining operations, or others.
That world of ever-increasing sized firms has all sorts of implications and consequences for society. We have to deal with the fact that they will accumulate not just enormous power but almost as enormous wealth. We have to have very strong countervailing economic, social and political forces to enable us to live in a world with global and very large hierarchical organizations.
Blockchain disrupts the efficiency of very large organizations. It enables people to make deals, contract with each other and form cooperative agreements to do things using peer-to-peer distributed blockchain technologies.
We’ve got a new way for large numbers of people to come together to cooperate, whether it’s really to offset risk, provide insurance for each other, or to sort of channel savings, investments and loans.
It means that we don’t need firms to be as big. If firms don’t need to be as big, then we can spend a lot less time worrying about controlling them. And all sorts of political implications follow from that.
I recall very strongly from the early days of the internet that we all thought it was going to be a magical utopia of happiness and wonder — and it turned into a total mess. What are the negative things that blockchain and cryptocurrency could bring about?
The reason that utopia collapsed was because we still didn’t have digital money or companies to provide all of these things. We ended up importing large companies back into the space, which has caused most of the problems that we’re dealing with. How do we control Facebook? How do we deal with the power of those large platforms?
I think the main issue, this time, will be around privacy and the question of whether we can successfully get to pseudonymity.
There are other issues with censorship resistance and the ability of actors, platforms, companies, or governments — or just coalitions of other people — to censor and control individuals in this space.
The Chinese government seems to love blockchain and they don’t like things they can’t control. So, it seems like it could just turn into Big Brother everywhere.
Yeah. That’s a very illuminating example because where I think we’re headed, is that the global blockchain economy splits into two: There’s more or less a China version and then the everything else version. In the same way that the internet has already done that.
I think that the next version of where we’re headed is that same logic, just extended out to digital economies. Now, that scares me. I don’t like that. That’s not the promise of a free open global economy and a society built on open source platforms. That’s not the promise that a lot of crypto and blockchain pioneers in the cypherpunks had in mind two decades ago.
I worry that we will end up in a bipolar or multipolar world where there’s essentially — I hesitate to use the word empires — but it does feel like it’s getting back into that. The potential downside to this is that we end up with balkanized global digital empires again.
Tell me about the RMIT Blockchain Hub in Melbourne
Back in 2017, when we started, we were the world’s first Social Science Research Center on the blockchain. There were lots of other computer science ones but we were the first ones that really grew out of a business school. Four of us started it. I, Chris Berg, Sinclair Davidson and Darcy Allen.
We came together as a group of economists, lawyers and business-school types to really look at this question: What impacts blockchain as an infrastructural technology, and does it have any effects on business models? How would it disrupt different sectors? How is it going to affect jobs, businesses, firms and so on?
That was always the idea: This is a massively important and disruptive technology. We want to try and understand this from the perspective of a business school.
Jason Potts is also the editor of the Journal of Institutional Economics and the author of numerous books about blockchain and contributes to the Mint and Burn podcast.