New York Times columnist David Brooks wrote in a recent article about the growth of peer-to-peer (p2p) networks and the evolution of trust in our economy. Brooks gets many things right, especially as it relates to how our economy has changed over the past two and a half decades since the Internet has transformed our society. Where Brooks misses the point in his analysis is on what caused the change and how our society will continue to evolve.
A New Dimension in Communication
Communication has mostly been a one-way street in human history. That is a strange thing to say because at its base, communication clearly has at least two channels. But in practice, two-way communication has been limited to proximity. If we were in the same room, I could talk to you and you could talk to me, but we couldn't talk to someone in another country. The telephone improved this, but that was still a limited, direct line. This is more akin to transporting that person into our room (in a sense) than actually broadening the scope of communication.
The only people who had a more broad scope of communication, the ones whose message actually resonated, were the ones who had control of communication. In ancient times, it was a priest or a king who spoke to a gathered throng of people all at once from high above, later it was the few who could afford a printing press and more recently, the owners of television and radio stations.
That is why we came to trust corporations and why I can name dozens of brands and logos that reside on objects littering my room, but I can't tell you what kind of tree is planted in my front yard. The elite and powerful have been controlling the message since society's inception. They could talk to all of us all at once, but we couldn't talk to each other, at least not on anything approaching a massive scale.
The internet changed all of that, and we still haven't felt the full impact on our society. Suddenly, any of us can speak to virtually everyone at the same time. I can leave a review on Yelp that tells you the “fresh fish” at a restaurant advertised on television isn't fresh at all. You are not limited to the messages put out by the few any longer; now everyone is a source of information and the only thing left for you to do is decide who to believe.
In short, communication has gained another dimension. Whereas it used to be limited to a two dimensional plane, between a person saying something to someone within ear shot. Now, each voice is reverberated in a million directions at once and is accessible by everyone in the world.
Airbnb, Uber, and other trust-based decentralized services Brooks mentions are simply a small part of a tidal wave that has not yet hit its crest. The internet may have become popular in the 1990s, but we have only been living with today's incarnation for a few years. The hyper speeds, constant connectivity and seemingly boundless power of increasingly cheaper smart phones makes today's internet nearly indistinguishable from the dial-up days of yesteryear. The coming “internet-of-things” revolution is set to expand our integration into the digital world even further.
That is what the whole “Web 2.0” term was meant to describe. When we went from a slow system with very little interaction to fast, interactive web pages where we all have our own space (Facebook, Twitter, etc.). But, the truth is, “Web 2.0” is really more like “Web 1.0” and everything before it was simply the beta. The internet wasn't really the internet until everyone was able to easily communicate to everyone else, through social media both obvious and not-so-obvious (like Yelp reviews).
But, if what we call “Web 2.0” is actually “Web 1.0” then what is “Web 2.0?” The true Web 2.0 hasn't hit us yet, but it is close. The web revolutionized communication for all the reasons I mentioned above. But for the internet to jump to another tier worthy of a “numbered update” then it needs to transform not simply communication but an entirely new medium.
It is doing that now in currency and financial markets with Bitcoin. Airbnb, Uber and the other alternative economy services Brooks mentions may continue, but what he calls the “trust-based economy” will be dwarfed by the trustless economy that blockchain-based technologies are bringing to the world. Bitcoin is the true second phase of the internet.
There is still some argument to be had on if cryptocurrencies will replace fiat currencies as the dominant means of exchange. This is not that article. This is an article for the true believers to look ahead at what our future might look like in a crypto dominated society.
Bitcoin is the real web 2.0
Bitcoin itself is going through an unofficial numbered update. Around the Bitcoin community there has been a lot of talk about Bitcoin 2.0 projects. But the truth is that we are, at best, approaching Bitcoin 1.0 (or perhaps it would be more accurate to call it blockchain 1.0).
Bitcoin has the potential to change how the world views currency, but again, looking at it through those narrow lenses blinds us to the larger issue here. Trustless systems based on the blockchain might not just change how we think about money, but how we think about markets, value and economics in general. Ultimately, it gives us a chance to design a new economic model that our brains, currently so saturated with capitalist versus communist arguments, can't even conceive of yet.
The technologies behind the so-called “Bitcoin 2.0” phase we are now entering are anything other than a pure cryptocurrency being traded on a blockchain. It started with Namecoin's decentralized domain name registration and has grown out from there. This includes physical goods (like precious metals or fiat currencies) being traded through the blockchain, companies’ assets that automatically distribute dividends and can be purchased by anyone, and distributed autonomous corporations.
These technologies, along with multi-signature wallets are seen as the future for the cryptocurrency space. Indeed, in twenty years when we look back at this time in cryptocurrency, we may talk more about the changes those technologies brought to society than the ability to send pure Bitcoins back and forth. Much like how email is just one of many major societal changes brought by the internet.
The trust-based services mentioned by Brooks may continue to exist in the markets that they best fit, but they still rely on people. Trustless systems rely on math. Math, it is fair to say, is more objective than people. That is why trustless systems will always replace trust-based systems wherever possible.
The two will blend and mix to be sure. We can see that already in ratings for escrow services and dealers on deep web markets. But if given a choice between “You will get 'X'” and “You will get 'X' if person 'Y' is honest” most people will pick the former.
Friction vs. frictionless
Communication is open. That is what makes trust-based services like Airbnb work. But the economy itself hasn't followed suit. The traditional economic system is congested and full of bottle necks and tolls. I don't simply mean the economic system as it relates to currencies either. Nearly every major financial decision, from selling a car, to buying stocks to starting a business, has to be vetted by the authorities first. Not necessarily the government, but some type of central authority.
Money travels much the same way information and communication did in the pre-internet days. The powerful few make it and distribute it (through banks) to the rest of us. Investments are also handled by the select few and passed down to the rest of us through them. Until the invention of the internet, investing without a broker was technically possible (through telephone) but in practicality it was all but impossible.
The internet opened things up considerably, but Bitcoin combined with the internet of things, will open things up to the point where investing is no more difficult than starting a blog today and I believe it will be on such a local, micro level, it will be more prevalent than Twitter.
People often talk in the Bitcoin community about getting into developing countries where people don't have access to banking systems, but I think they miss what greater opportunities are possible besides simply storing and sending money, for both blockchain-based technologies and the people in those economies.
There are US$ 25 smart phones, running FirefoxOS, built on HTML5, coming to emerging markets later this year. These phones aren't great, but with a 1Ghz CPU, they could probably run a simple wallet application. By the time Bitcoin 2.0 projects are accessible to everyone, the markets will be flooded not only with cheap Android phones, but cheap smart phones that run an alternative OS, looking to undercut even Android prices in order to make headway in the increasingly important developing markets.
A few years ago, I read an article about the mining industry in Mongolia. Companies there have discovered natural stashes of precious metals under mountains that equal out to over US$ 1,000,000 per Mongolian citizen. I thought at the time that it presented a great investment opportunity for anyone who could find a way to invest in it. Chinese companies certainly agreed, and they started pulling that stuff out of the ground as fast as possible.
The problem was, as an average American citizen with no serious financial connections, it seemed impossible and prohibitively expensive for me to somehow enter the Mongolian or Chinese market and invest in such a company. I saw an opportunity thanks to the information made available on the internet, but acting on that information was nearly impossible
In a world where companies could find investors in a p2p trustless network like the blockchain, I could have invested in them directly. What is more, thanks to math, I could invest whatever meager spending cash I had at the time, and gotten a proportional fraction or small number of stocks in return. My dividend would be proportionally small as well, but there is a lot of metal in Mongolia, and not a lot of people, so the growth potential is clearly huge.
Trying to invest in something like that in today's world would involve high minimum investment numbers, entry into the Chinese stock market and dealing with strange investment rules and different classification of stocks for foreigners. The internet, again, made this possible, but it is still impractical.
Brooks fittingly finished his article:
“As mechanisms to establish private trust become more efficient, government plays a smaller role.”
The only small adjustment I would make to that is to add giant corporations to the list of things playing a smaller role in the future.
With the blockchain, I would simply have to find if any mining companies were selling colored coins (or whatever asset exchange system takes off) to raise capital, and I could spend US$ 20 on the decentralized exchange to buy a small number or fraction of (what is essentially) a stock in the company. Even if no one was looking to sell only twenty dollars worth, my bid could be pooled with other bids from around the world and I wouldn't have to worry about exchange rates, market regulation, entry points, tariffs or anything like that. They need money, and I want to lend it to them. End of story.
But, the potential for change goes much deeper than people investing into random opportunities they read about online. The real change will come from investment on a local level. This is where third-world countries have a chance to be transformed despite colonial pressure and incompetent leadership. This is the clearest path to fulfill Bill Gates' prediction that there won't be poor countries by 2035.
Keeping it local
Imagine for a second that you live in a crowded city. In this city, you have to walk twelve blocks to the nearest subway, and along the way you pass by several street food venders. They all serve the same kind of food, but there is one that does it just a bit better than the others. His stall is actually off of your path to the subway and walking to it adds significant travel time to your commute. But, whenever you get the chance, you get breakfast at his stall.
There is just something about the way that he spices his food that makes it taste better than the rest. It must be a family recipe because when his son-in-law runs the booth, the food still tastes delicious. It isn't just you that has noticed this either, he always has a longer line than his competitors and no other food stall can survive on his street for more than a month. Despite their large volume of customers, the owner and his son-in-law always greet customers with a smile.
One day, after waiting for ten minutes because of an abnormally long line, you pay in Bitcoin using your smart phone as usual; only this time you receive a contextual alert. This isn't completely out of the ordinary, location based advertisements are common in the future, but what is strange is that it is coming from the food stall you just visited.
The owner is trying to open a second location, and has put out his own coin. The second location will be run by his brother-in-law, who will be bringing along the same recipe and cooking technique. You know the food is good because you eat it, you can see the demand every time you wait in line, and even better, the new location is closer to your route to work.
You can own a part of it, simply by purchasing his coin with Bitcoin, through your app, on your 25 dollar smart phone. You receive a relatively large dividend until the loan is repaid and then you can either keep receiving a smaller dividend into perpetuity or sell it back to him (or someone else who wants it).
This is true trickle-up economics, where investing is frictionless and no longer limited to those with piles of money. Rather than needing a few large investors, companies can turn to the people who believe in them the most and then reward those people for their faith, which in turn encourages more investment from the masses. It would be Kickstarter on steroids.
I'm not the first person to envision such a future. At the Bitcoin in the Beltway conference in Washington DC, Blake Anderson talked about the potential of crowdfunded investing. He brought up the Oculus Rift and how much more beneficial it would have been for the original backers to own part of the company when Facebook purchased it, rather than a physical good, like a now out-of-date developers kit.
The Future 99%
Conservatives in America refer to the rich as “job creators” and use that term to paint corporate owners as benevolent leaders simply waiting for one more tax break before they turn around the economy by hiring with every spare dollar they have.
But if those “job creators” could instead be the crowd, the 99 %, then there might be something to it. Once the 99 % starts investing in itself, rather than hoping for investment from the 1 % and can do so in a way that the no one, including the 1 % can skim off the top; then we get to see what frictionless capitalism can truly do.
Brooks wonders if trust-based economies will sit in a “gray zone” in between the regulated and unregulated market. He is probably right about that, but what he misses is the coming mass of trustless organizations that are ruled by math instead of governments or reviews. Governments will, as he says, become “less important,” but so will centralized centers of banking, corporations and trust. People often say that the internet is going to continue to change the world in ways we cannot yet understand. Frictionless, trustless and decentralized systems are poised to become the next real incarnation of that.
Bitcoin isn't the beginning, but it is the second crucial step.
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