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Blockchain will disrupt economic interactions by establishing a deeper level of trust between transactors, and eliminating the need of a centralized financial institution to regulate trade.

Similar to Internet in the 1990’s, Blockchain is an intimidating topic to many. Blockchain represents a disruption in the way we exchange value. It is a continuation of the human innovation story that consists of trying to find ways to lower uncertainty to create more trust when engaging in the exchange of value. Today, the global economy finds trust in powerful intermediaries like banks, governments and other financial institutions to engage in transactions of value. They, however, take an asynchronous compensation for the value that they add to transactions. They are able to do this because of trust. Customers need trust when exchanging value, so they are willing to pay high fees for this added trust.

Institutions have been, for the past century, the grease that allows the economic wheels to function. Banks regulate currency. Governments set rules for corporations. All in all, institutions help us manage our trade with globalization; they facilitate daily financial transactions and other economic activities. So, institutions are essentially a tool for us to lower uncertainty, connect to each other and exchange value.

Blockchain is a giant that will disrupt they way in which we have traditionally exchanged value by taking trust to a higher, inexperienced level. It is brings an advanced evolution to our interactions. Blockchain technology lowers uncertainty not just with economic or political institutions, but also with technology alone. More specifically, it is a decentralized database that stores assets and transactions across peer-to-peer (P2P) network. It is a decentralized technology coded through cryptography in the form of blocks of data. These blocks are linked together and secured through immutable and indestructible code. Every individual engaging in a transaction has a copy of the block, as it is replicated and recorded on every computer using the Blockchain network.

One can think of Blockchain as something similar to Wikipedia where we have access to the information that is constantly being updated. In Wikipedia we have the ability to create our own wikis because at core just data infrastructure. The main difference is that Wikipedia a stores words and images, whereas Blockchain is an open infrastructure that stores a plethora of kinds of assets. Some of the assets that could potentially be stored in Blockchain are custodianship, ownership and location. A great example of a value stored in Blockchain is Bitcoin, a form of currency.

Blockchain stores the identity of peers in the form of certificate of contract or personal identifiable information. It acts like a public registry that stores transactions and is replicated so that is difficult to break apart. We talked about how Blockchain provides a new inexperienced level of trust. This is due to three key ways in which Blockchain is able to reduce uncertainty. In international trading, the two peers engaging do not know who they are dealing with and that is why they use an institutional intermediary. Blockchain solves this because P2P transactions are controlled by portable identities ingrained in the system. In fact, each peer has a complete profile and they can each selectively reveal attributes that help facilitate trade and interaction. Blockchain provides a physical identity in digital world.

The second key solution is that Blockchain provides visibility and transparency in P2P interactions. In the real world, there is no way to secure that you are getting what you ordered were it not for external regulations of financial institutions. Blockchain eliminates the need of an intermediary because each transaction has the same infrastructure. They are shared realities across non-trusting entities. The peers involved don’t need to know each other because they can monitor and validate the chain for themselves. Blockchain has the efficiency of a monopoly without creating a central authority.

Thirdly, Blockchain solves the need for recourse when things go wrong. What if the transaction does not go through? Who would enforce it? Well, an institution would traditionally intervene to enforce the transaction. Now, Blockchain solves the issue by allowing the chain codes to be seen by the public and by enforcing them without a third party. In this manner, Blockchain bypasses institutions and enforcement. Human economic activities will no longer need to be supervised by big financial institutions, as the peers themselves will have the material to look after the enforcement of their economic transaction.

Blockchain can be seen as a solution for mutual distrust. With Blockchain we do not have to let uncertainties slow us down in trading by requiring institutions. Instead, we can harness collective uncertainty and use it to transact higher values at a faster pace. We must understand, however that Blockchain is in its infancy and we will experiment a lot before understanding it. The magic of it is that Blockchain is not just an economic evolution but also a computer science innovation. It represents a whole new level of economic exchange between humans. Blockchain can hold currency, digital and physical assets, and personal attributes. By converting uncertainty into trust, Blockchain represents the advent of a world where autonomous institutions play an essential role.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.