I don’t intend to talk about the underlying technology in detail, or even why it is secure and essentially ‘unhackable’, there are great books out there doing just that.
What I will attempt to do is make sense of the blockchain and its meaning for business users and ultimately even for how we design firms and organise ourselves.
Years ago I struggled with an idea of how to liberate workers to become boundary-less and to contribute their effort in ways that rewarded them directly for their contribution to the success of an organisation.
Imagine a world where anyone can choose what to work on based on what they think will have the highest impact, where what they have contributed will then be directly measured by the market, and where they then get a share of the profits proportional to their contribution.
This is a world without managers, a world where organisations self-form and where responses to market needs are faster and more robust than any hierarchical management structure could ever achieve. It is the ultimate meritocracy, the ultimate ‘agile’ organisation.
It is also a world which requires distributed trust, as interactions between co-workers are no longer mediated by management and the firm; a world which requires recognition of contribution through some form of proof of a stake in future generated value, and a world which has to allow for the dynamic entry and exit of participants in the same way a firm now ‘hires and fires’.
I believe that the emergence of the blockchain and associated technologies will eventually allow for this type of organisation, and once the core challenges are overcome an organisation structured in this way will rapidly outcompete current hierarchical organisations.
These series of blogs will therefore document my emerging understanding of the blockchain, distributed autonomous organisations, bitShares and other ‘2.0’ blockchain technologies, the organisation inherent in large open-source software projects, the mechanisms behind crowdfunding, peer-to-peer lending networks, fractional titles in real world assets, distributed escrow, and even the economic consequences of a deflationary growth in the money supply.
The purpose is to take a journey into understanding how we can organise ourselves without intermediaries disproportionally ‘taxing’ the value individuals generate.
After reading the excellent Mastering Bitcoin: Unlocking Digital Crypto-currencies by Andreas M. Antonopoulos the main puzzle I still had to answer was: why does a mathematical crypto-currency have any real world value at all? Why are there people buying and selling the bitcoin crypto-currency and assigning value to it?
A bitcoin is a number created by a network of computers ‘mining’ the blockchain. As a number created by this network, it is very similar in concept to the money created by the central bank of a country.
For bitcoin the ownership of each ‘number’ is agreed by, and secured by, competing computers on an open network. In comparison, money’s existence is created by the central bank, normally through performing open market operations on the market.
Just like with modern money no longer on the gold standard, there is no gold or other real world backing behind the bitcoin crypto-currency.
So why are these collections of numbers that we call ‘bitcoins’ collectively worth in the billions of dollars? Why have bitcoins become something that organisations will spend ‘real’ money on to create?
Why do organisations buy very powerful specialised computers and run them all day, every day, trying to mine new bitcoins?
The answer is simple, and goes back to a meaning of money as it is used today: ‘a commodity item that is trusted by the community to have value and as such can be used to denominate assets for trade and as a store of wealth’.
My definition to emphasis the trust aspect, the free dictionary definition is similar: ‘a medium that can be exchanged for goods and services and is used as a measure of their values on the market’.
For me, the importance of money is embedded in a community of people that accepts the value of money and through that acceptance has a way to ‘trust’ each other when transferring assets or storing wealth.
Even though the central bank controls how much money is in circulation, it is the trust of those in the market in the value of money that makes it ‘real’.
When I interact with you I no longer need to trust you any more, I only need to trust that you believe money has the same value as I do.
Therefore we can agree on the value of an asset by looking at what it is worth relative to our common understanding of something we agree on – the value of money.
The larger the community that shares that trust, the more I can use the money to transact. Modern national currencies mean I can go anywhere and trust that my money will have recognised value.
In truth, of course, money has no real value. Modern money (fiat money) is no longer backed by any gold or other real world commodity, its only real value is in the shared agreement within the community of what it is ‘worth’, even though it is created and its ‘supply’ managed by a central bank as the root of a fractional reserve banking system that ‘produces’ money out of nothing.
Bitcoin similarly has no real value – it is simply an agreement between a large number of participants in a network spending an enormous amount of ‘effort’ to create and maintain it (where ‘effort’ is in the electricity to power computers, and the cost to purchase those computers).
The combined effort dedicated to bitcoin creation is much higher than the power of the top 500 supercomputers in the world and is growing.
All the participants in the bitcoin blockchain network agree that:
a) Bitcoins exist and are created and transacted in a certain way through the blockchain creation process.
b) Bitcoins have ‘real’ value, enough value to spend real resources creating.
So when I buy a bitcoin what I am really buying is a share of this trust network – what I have purchased is the network agreeing that I own a share of their collective effort, and that this agreement will be secured by the network until I choose to sell my share through a transaction.
What I have really done is put my trust in others (the blockchain participants) to recognise and maintain the security of my share. My action is not fundamentally different to trusting the central bank of my country to recognise and maintain my share in the stock of ‘real’ money.
In fact, my trust should be deeper with the bitcoin blockchain as the rules around how additional bitcoins (shares) are created is built into the network and has a fixed rate of creation, whereas the central bank can theoretically ‘create’ as much money as it feels necessary.
Many central banks have done so through quantitative easing programs (and even more so with hyperinflation in places like Zimbabwe where printing money is an indirect but extreme tax on the general population).
So the value of bitcoin is a function of the size of its network of blockchain computers, and the effort expended by the participants, coupled with a known and limited supply of bitcoins.
With its network size and the huge effort of participants, and the phenomenal growth of both, my share in the value of this network feels more secure than any ‘real world’ money.
Greg Dickason is the general manager for product and information systems at CoreLogic RP Data.
