In my final chapter I want to look at possible scenarios where the crypto space might be heading towards. I’d recommend reading the other 3 chapters first, so you know about the basics, monetary policy and potential risks of Bitcoin itself. We will now expand many of those concepts into broader applications and concepts. Personally, I believe that blockchains represent the biggest paradigm shift since the launch of the internet, and in this post we will see why. As a teaser, here is a quote by Naval Ravikant summing up the point I’m trying to make in this post:
My goal is to present a broader vision of the crypto space and connect a few of the dots we have been exploring.
This approach should tell you far more than simple price prediction, as you can evaluate progress in the space yourself and decide whether the premise of the technology becomes a reality. Needless to say, this is not intended as investment advice but should spark your curiosity.
Bitcoin’s future will be determined by the raise of blockchain technology in general and crypto assets in particular. No technology should be seen as a standalone solution, but in context of the environment and times it operates in. For example, the car was a great innovation in its time, but only few realised that it would ultimately enable drive-in restaurants like McDonald’s and big parts of today’s hospitality industry. Henry Ford famously introduced the free weekend to his employees, so they could enjoy driving around their cars. I’m certain that many of the second level effects blockchains will enable are barely visibly to us nowadays.
If you have made it this far in my series on Bitcoin, thanks a lot for sticking with me. It was a lot of fun, and I hope you have enjoyed my writing. As this series comes to an end, I want to ask you a favor in case you found it useful: Please share my series of posts, so that other people can also find out about the world of crypto too!
Motivation
As already stated, in my view blockchains will be the biggest paradigm shift since the introduction of the internet.
The reason is simple: the internet is the most universal communication layer known, where everyone can exchange any information for close to zero cost. In contrast, the blockchain is going to be the most universal layer of trust, where everyone will be able to transact securely and transparently (see also immutability in chapter 1).
Those transactions won’t only be limited to money, as we will see in the following paragraphs. But first, let’s take a steps back and see how blockchains matter in the grander scheme of things.
The jump to universality
I want to start off referencing a fascinating book I’m currently reading: David Deutsch’s “Beginning Of Infinity”.
In chapter 6, David is analysing human inventions which are considered the biggest breakthroughs: the alphabet, numbers, printing, the computer, and a few more. His argument - simplified - is, that every major breakthrough has to do with universality. I want to illustrate this concept with the alphabet.
Millenia ago, people used pictograms for written communication: simple, small drawings of the things people wanted to write about.
For example, the sign of a crown represented the king, or the symbol of a few trees next to each other a wood. Every time something new became known, someone would have to draw a representation of it. This system worked well for regional communication and knowledge preservation.
However, for communication beyond regional borders it quickly became a problem. Consider the pictograms from the image above. How did everyone know what certain symbols meant? Therefore communication across countries and cultures was nearly impossible. There were different styles in drawings, different grammar rules and different meanings in symbols.
The breakthrough David calls “the jump to universality” happened, when someone had the genius idea to codify every sound human voices are able to produce into symbols. Whenever a new object came into existence, people could simply express it by rearranging those symbols (which we obviously call letters).
This sounds so trivial, but the implications are massive! Suddenly communication across borders and cultures became possible. Negotiations could be held on a commonly agreed basis, as one tribe could learn the language of another. Knowledge could be passed along. People didn’t need to guess what certain pictograms meant, but only had to learn the universal building blocks of words: letters.
Universal Blockchains
My argument for the adoption of blockchains is a similar one. Blockchains enable trust-less transactions on the internet, which will allow us to coordinate human efforts across borders and regions as well.
Think of it this way: To achieve wealth creation and progress, we have to coordinate in ever increasing numbers of people. The limiting factor for doing that is our brains. The maximum amount of relationships a human can maintain is around 150 (the famous “Dunbar’s number”).
As humans, we have always been creative in pushing this boundary. We invented different institutions like tribes, villages, countries, religions and companies (and many more) to align our intentions. The reason those organisations made us successful is that they ensure mutual trust. Take religions as a simple example: When you meet a fellow on the other side of the world, you can be sure that they share the same moral values as you. Therefore, you have an easier time trusting them in their friendly intentions and vice versa.
This capacity to coordinate is what ultimately sets us apart from any other living being we know of, and is what ultimately allows human progress.
Rethinking transactions
One of the main premises of blockchain technology is rethinking transactions by abstracting trust.
In our classical analog world we transact money via cash transactions, business transactions are handled via written contracts and information is exchanged via written text or phone calls.
The internet has transformed the latter completely: we now have social media, email, blogs, Youtube, podcasts, Zoom and so on. However, validating business contracts or money transactions have puzzled computer scientists for decades. It’s simply been too easy to copy, paste or manipulate digital documents. For example, if I “own” a digital dollar and send it to you, how do you make sure it’s “deleted” from my computer?
Blockchains solve this problem, allowing for fungibility (single owner of a scarce digital good), immutability (nobody can interfere with transactions, see chapter 1) and automatic contract enforcement (i.e. smart contracts).
It’s easy to write those words, but again hard to express how fundamental of a paradigm shift this is: Blockchain technology allows coordination and transactions across borders, cultures and laws without the goodwill of a single entity.
We are already living in a heavily globalised economy, and blockchains will ultimately speed up this process even more by enabling trust- and frictionless transactions across borders.
Sooner or later any value transaction will move onto blockchains. We already covered digital money with Bitcoin, but this is about to be extended to financial services, collectibles (so called “Non-fungible tokens” for eg. artworks, music,…), business contracts, insurances and so on. To take this even further, one could imagine tokenising a bigger investment and letting other join in.
In such a world, Bitcoin will be the foundation of transacting monetary value, Ethereum (and others) will be the platform capable of executing contracts, a data oracle (eg. Chainlink) will be providing the necessary (trusted) data to evaluate those contracts, and so on.
Trust will move to the internet, enforced via mathematical equations at lightning speed and impossible to manipulate by a single entity.
So, how would a blockchain based world like this look like?
I want to attempt providing an example from the real world, fully aware that I’m probably wrong by a long shot. As explained earlier, many blockchains applications are probably not invented yet.
My grandpa was a medium sized farmer, and we’ll take this relatively simple business as a proxy for businesses in general.
For my grandpa it was essential to mitigate risk in many ways: He would insure his crops against droughts and catastrophe, share his machinery with 5 other farmers and sell his crops on the market. Each of those transactions require serious trust in other people and institutions. Insurances don’t always make claims easy, shared machinery is subject to mishandling and destruction and when selling crops you have to trust the counter-party to pay you fairly and promptly.
In a blockchain based world, all those contracts are executed fully automatically. For example, a data chain would provide your smart insurance with trusted weather data. If you insure your crops against a drought, and the amount of rain during the critical season would fall below a certain threshold, an automated contract would be paying you the exact amount you were insured for.
Due to smart contracts, shared machinery can be used beyond the core use cases. Let’s say 5 farmers purchase a harvester together. In our blockchain based world they could tokenise the machine. That means that its ownership get split into 5, so every farmer could hold their stake in it.
However, the big deal with blockchains is, that this works on a global scale. So in case the farmers can not afford the harvester by themselves, they could get an outside investor into the deal. The investor would not need to be afraid of being screwed over, and every month he is paid a small fee for his investment.
This way you could for example imagine farmers in 3rd world countries getting access capital and to better equipment, boosting their productivity.
We are only scratching the surface with those applications of course. The list of things that will be fully automated goes on: accounting, settling a market price, quality of the crops, supply chain tracking… Anything that was only possibly on the scale of a small community is possible on a global scale with blockchain technology.
Those innovations will take a while to be fully accessible to anyone. However, what used to require notaries, lawyers, banks, insurances and police will be executed as transparent, autonomous and automated digital contracts.
Bitcoin as the reserve currency
So far, so good - but what does this mean for Bitcoin?
First of all, Bitcoin resolves a massive trust issue and incentive misalignment between the issuer (usually a central bank) and its users. In chapter 2 we discussed how governments bail out their economies by printing more money. This has happened over and over again, and has left the average person to deal with the fallout.
Bitcoin provides everyone a way out of this system. Why would anyone want to deal with a currency that gets devalued over time, instead of owning an asset that has close to no inflation at all?
Second, even with all headwinds and issues we are facing nowadays, the global economy and wealth creation will continue to accelerate. As outlined above, I’m certain most business transactions will move to the blockchain, as there is no other way to align incentives in an efficient and transparent way globally.
This part of the blockchain space is currently in flux. The incumbent Ethereum, the dominant smart contract platform, is about to launch a complete overhaul of the technology in 2021. There are many interesting challengers in the space, like Cordano and Polkadot. It’s possible that certain blockchains will “win” certain domains and use cases.
While Bitcoin is going stable and steady for years, the other platforms continue to figure out the best way of scaling and solving their main use cases efficiently. They tinker around with their monetary policy, implement different mechanisms to validate transactions and so on.
This is why I’m certain Bitcoin will continue being the reserve currency of the digital space, as it provides the most stable asset.
Conclusion
This concludes the final chapter of this series on Bitcoin and blockchain technology. I hope I could spark your interest in the space. Things are moving incredibly fast and new developments and ideas are born, implemented and launched almost by the day.
I’d be inclined to write one of these articles once in a while, so if you are interested in certain topic you would like me to write about, please let me know on Twitter or LinkedIn (—> @bbleimschein).
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