Blockchain use case #2 - techno-accountable development
New Series of posts to bring in 2018
1 of 5 part series of thoughts on development, healthcare, and investing
We need to let the air out of the blockchain hype machine...
Blockchain boosterism is reaching a fever pitch as we come into 2018, besides the usual techno-evangelists preaching the gospel of governmentless societies, there’s a significant number of early-stage investor types contributing to this positive feedback-loop echo chamber. My assumption is as they begin to feel the tightening noose of rising interest rates and the doldrums of the late-stage business cycle growth, they’ll try to inflate anything. The exotic and quasi-mythical nature of blockchain has proven to be delightfully expandable.
Blockchain has significant implications for companies,?but if we were still in the go-go time for new platform plays a few years ago, blockchain-enabled technologies would get about as much attention as the transition from DES to AES encryption standards, or the switch from IPv4 to IPv6. There’s little competitive advantage being a blockchain native startup in an already established industry.
Blockchain will be the new standard database protocol because it offers superior security against data breaches and hacks. For the vast majority of humanity, the transition will be undetectable and uninvestable. Coding a blockchain database doesn’t require forbidden knowledge, the same individuals who programmed a company’s last database infrastructure will perform the upgrade to the new standard.
For the transaction and payments based blockchain models, there’s a misunderstanding about the difficulty of adoption. Anyone familiar with the clashing of titans in the Indian payments and telecoms spaces is painfully aware customer acquisition has been an expensive and brutal war of attrition. Where is this war chest of cash going to come from to disrupt incumbents? If you’re curious how Visa and Mastercard have been faring, they’re crushing it.
It’s also a misnomer to say public blockchain models “cut out the middleman,” the new middleman is the individual who verifies and processes the transaction onto the blockchain. That this middleman is an anonymous entity doesn’t change the fact someone has to be rewarded for verification. Why would I want to pay a third-party for verification when this anonymous entity does not have any legal obligations or provide any of the additional vetting services a traditional middleman would? This severely limits the potential for market making or honest broker activities. The disadvantage is exacerbated in the specific instance people think the value proposition of blockchain is highest -- across international jurisdictions.
For this same reason, a mistaken transaction is not fully reversible, there’s leakage because someone also needs to be paid to verify the return to status quo. Who doesn’t like to be double charged for erroneous transactions?
There’s also been much ballyhoo about the immutable nature of blockchains, which is in direct opposition to current consumer trends. In Europe, the “right to be forgotten” is already an established legal principle. If Snapchat has taught us anything, it’s that people strongly value the ability to have control of their digital activity, including the option to erase it.
… so let’s focus on what’s shovel ready now
There are two specific areas where blockchain can have an enormous impact right now. The first is the ability to unlock scaling for the original “distributed” business model, cooperatives. Cooperatives have always been based on a high degree of trust between members, and the maintenance cost of trust grows at an exponential rate with each new addition. Blockchain all but eliminates this cost, allowing for cooperative models to more easily reach economies of scale and access network effects.
The second is viewing blockchain as a tool for transparency in governance. While savvy governments such as Estonia are recognizing the value of blockchain for security purposes, there would be much larger effects in countries that lack accountability to their citizens. Of the top twenty most corrupt countries on Transparency International’s Corruption Perception Index (CPI), seventeen receive developmental aid from just the United States alone (North Korea, Eritrea, Congo do not).
There’s a reason why an increasing CPI score is strongly correlated with decreasing GDP per capita, and government level corruption sets the tone for private sector business practices as well. I once talked with an ex-Nigerian investor who pulled out of the country not because they no longer believed in the long-term potential, but because the continual need for “gift outlays” for routine transactions wore down their initial enthusiasm.
The 20th-century development models of resource extraction and industrialization could create growth in those environments, but the IP and content-creation based 21st-century models are much more delicate. Is it reasonable to believe countries in this era will achieve sustainable growth without either first or simultaneously promoting better governance?
While it’s clear transparency is a foundational component for future growth, there’s a misalignment between this goal and existing institutions of power as they are the benefactors of the status quo. Blockchain technologies provide an alternative to either waiting for enlightenment or hoping citizenries are able to overcome systemic oppression to push for reforms.
In this techno-paternalistic approach, aid is provided on the condition of overhauling government systems with blockchain-based ones. The move to blockchain for budgeting, accounting, tax collecting, and contracting would be a great leap forward in transparency. This would allow for real-time automated auditing and variance analysis of spending patterns. An independent “blockchain paymaster” department could conduct vetting of third-party contractors creating a single transparency focal point that would be much easier for external aid entities to monitor than the typical hundreds of bureaucratic departments and divisions.
This beachhead of transparency could be expanded with add-ons to the blockchain infrastructure, such as health records, property rights, vendor bidding for project finance, and elections. Parts of it could be made open for private sector entities to also take advantage of this island of stability. Once the blockchain is created, it would take on a life of its own, an immutable record of a government’s ongoings that could never be erased.?
Blockchain is a powerful tool for increasing government accountability but is something many ruling parties would not adopt without incentivization. We should encourage this transition with every means available.
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