Michael J. Casey is chairman of CoinDesk’s advisory board and a senior advisor of blockchain research at MIT’s Digital Currency Initiative.
Every year at the World Economic Forum, a handful of timely, hot-button issues overshadow the myriad other topics consuming the chatter of the attending businessmen, government officials, development professionals, celebrities, journalists and multiple other breeds of wannabe “Davos men.”
This year, as with last, a guy called Trump was on everyone’s mind. But that was hardly unexpected.
What was truly remarkable, at least for anyone who has been interested in blockchain technology since its relative obscurity only a few years ago, was the degree to which it became one of the uber-themes of #WEF2018.
In the wake of last year’s huge price surge for bitcoin, ether and many other digital tokens, and amid high-profile media coverage of the “crypto boom,” everyone wanted to know what all the fuss was about.
The newly curious trudged through piles of fresh snow to the various “blockchain lounges” set up outside the security perimeter of the main conference by outfits such as the Global Business Blockchain Council and ConsenSys.
There, they were served valuable insights into how this technology works but also, perhaps, a realization that blockchain technology’s promises of decentralized record-sharing and disintermediated trust have sweeping implications for everything from payments, international development and financial markets to the Internet of Things, energy, environmental management and identity.
But while light bulbs went off in some people’s heads, there were equally strong signs in the lead-up to and during the World Economic Forum that these concepts are still far from wide acceptance among the broad financial, economic and political establishment.
The many recent instances of people from the economic powers-that-be dismissing this technology’s relevance and over-emphasizing its risks over its potential are a reminder that those of us who believe in it still have work to do to get these influential people into the comfort zone.
Krugman’s myopia
In an interview with Bloomberg in Davos, U.K. Prime Minister Theresa May said she was looking “very seriously” at taking action against cryptocurrencies “precisely because of the way they are used, particularly by criminals.” In South Korea that same week, the government announced new rules requiring cryptocurrency traders to identify themselves.
But what struck me most was a pre-Davos tweet storm by Paul Krugman, one of a triumvirate of high-profile Nobel laureate economists who’ve been highly critical of cryptocurrencies and blockchain technology, the others being Joseph Stiglitz and Robert Shiller.
Responding to what I thought was a very enlightening cover piece in The New York Times Magazine, Krugman laid out what he thought the technology was all about and then came to this conclusion:
So the blockchain in interesting, but not yet clear whether it’s useful for anything. And investing in Bitcoin still looks a lot less reasonable than investing in cold fusion 12/
— Paul Krugman (@paulkrugman) January 21, 2018
Predictably, the crypto community immediately dismissed the economist as an ignorant dinosaur. The favorite put-down was to remind him of his now notorious 1998 prediction that the “Internet’s impact on the economy [would be] no greater than the fax machine’s.”
Let’s make one thing clear: Paul Krugman is no idiot. Let’s forego the ad hominem. I think it’s more constructive to think about the ingrained mindset of otherwise intelligent mainstream economists that leads people like him to misunderstand the new social structures created by open-source communities, distributed consensus models and programmable tokenized incentive systems.
Krugman and his cohort are trapped by a rigid worldview, one that remains entrenched within the economics fraternity, despite the crisis of 2008, which painfully revealed the deep flaws of the profession’s quasi-scientific models of “rational” human behavior.
When it comes to understanding the value proposition of blockchain technology and drawing conclusions that “it’s not useful for anything,” the biggest problem of this blinkered mindset is that it fails to recognize the cost of trust.
Let me explain what I mean by that, because I think it’s key to getting skeptics to see why these ideas are so important. A few of us in the crypto community started playing with this logic in Davos. See if it works for you.
Hidden cost of trust
First, Krugman is right to say that expensive mining and the need to retain multiple copies of the same transaction record across distributed networks are “clunky” and “costly” aspects of blockchain technology. One answer to that is to say that innovations such as the Lightning Network will eventually fix the problem, but I think the better rejoinder is: “Compared to what?”
The “what” in this case is defined as the explicit and implicit costs that organizations pay to resolve shortfalls of trust. It turns out that that the cost of trust, which is passed onto consumers via higher prices and access restrictions, is very high indeed.
I don’t have a dollar number for it, but just think about the world’s skyscrapers, each filled with accountants doing endless checks and audits of other companies’ invoices, purchase orders and financial reports, and you get the idea.
They’re all trying to reconcile across each other’s separate, centralized ledgers, and all because they don’t trust each other’s records. That’s a cost of trust.
The cost of trust can also be conceived of via the old adage about electricity blackouts: that the highest cost of energy is the energy you can’t access. There are all sorts of potentially enriching transactions that we aren’t able to conduct because we can’t resolve the trust problem.
We can’t yet do peer-to-peer microtransactions between devices on the internet of things, for example, without passing them through some gatekeeping institution, be it a bank or a major cloud-service company like Google or Amazon. That not only adds costs and friction, it also constrains innovation.
And if you step outside the bubble of the developed world and consider the pervasive financial exclusion of the developing world, the cost of trust for 2 billion “unbanked” is especially high. (This is where Krugman is at his most myopic. Unable to leave the developed-world bubble, he claims that the only reason you would want to conduct electronic transactions in cryptocurrencies rather than via a bank account or some other third-party-trusted tool such as a debit card or PayPal is if “you’re buying drugs, assassinations, etc.”)
The perfect moment?
But the developed world is not at all immune from trust shortfalls.
The results of public relations firm Edelman’s “Trust Barometer,” which were released during the World Economic Forum, were scary, at least for Americans.
This annual survey showed that trust in the U.S. among the general population plunged 9 points, the largest-ever fall in the survey’s history, and by 23 points for the so-called “informed public” to post the lowest level of all 28 countries surveyed, below even Russia and South Africa.
As for what this means, let’s go to Breitbart, which many liberal Americans might argue is partly responsible for this breakdown.
It cited the PR firm’s CEO, Richard Edelman, as saying that the main factor behind the drop in trust was that “we lack common facts and have a fundamental difference of interpretation of facts.”
Common facts requires a common record of truth. I know a technology that can help with that….
Champagne image via Shutterstock.
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