How blockchain can fix our broken economy
Unless you grew up several hundred years ago – you’re likely no stranger to the concepts of recession and national debt. Every other day we hear about the economy and how it needs to be ‘managed’, ‘stimulated’, or how this that or the other isn’t good for it.
But it wasn’t always this way. Economic hardship is a relatively new paradigm. Several thousand years ago, goods and services were traded by barter. If you had something of value to trade with your neighbor, you’d negotiate a straight swap for something they owned or could provide as a service. They had different problems like plague, crop famine, or war, but the economy ‘crashing’ was never something they had to worry about in any broad sense.
But it’s no secret that barter was an inefficient process. If the person you were trading with had nothing of immediate value to you, you either had to miss out on the opportunity, and deprive them of the thing they needed, or take on something you had no use for in the hope you’d be able to trade it for something else at a later date. Imagine getting your paycheck in goats and iron ore, and then having to trade that with your ISP to pay your internet bill. It just wouldn’t work.
That’s where the concept of money comes in. Having a ‘token of value’ allowed producers and patrons alike to trade goods and services with relatively little friction. Trades and businesses became easier to manage, and the first commercial economies were born.
The problem
Unfortunately, with this new paradigm shift came a whole host of new problems. One of the biggest issues with a currency-based economy was that it was suddenly far easier to ‘hoard’ wealth. In a barter-based economy, ‘hoarding’ wealth would be inefficient. Sure, kings would have treasure rooms of precious metals and jewellery, but hoarding hallways of food and miscellaneous doo-hickeys would prove impractical. With this new ‘token of value’, you could collect as much as you want with relatively little inconvenience.
Decentralization fixes what inflation couldn’t
In the early 20th century, central governments invented the concept of quantitative easing. Essentially, you’d print more money out of thin air, suddenly introducing billions more dollars, rupees, or monopoly money into the economy. If there’s more money in the economy, then spending will go up, and the economy will ‘boom’, right?
Well, kind of (not really). The problem with this method is that the currency in question — let’s use the US dollar as an example — has very little fundamental value. The currency itself isn’t worth that much, it’s what it represents that has value: the ability to trade it for goods and services. Even if there’s more currency in the economy, there’s not suddenly more value, so each dollar decreases in purchasing power and is suddenly worth less. In practice, all you’ve achieved is to shift wealth from some people to others. Usually, it’s the bankers and financial institutions that benefit from this transfer of wealth, and everyone else is left out of pocket. Consumers have less disposable wealth, spending goes back down again, and the cycle continues. Quantitative easing only treats the symptoms of a weak economy, not the cause — an unsustainably unequal distribution of wealth.
The imbalance between wealth and value
The problem with today’s economy is that there’s an unsustainable imbalance between the collection of wealth and fundamental value generation. The ultimate end goal of a thriving economy is to have enough money to support every individual to a high quality of life, without sacrificing the freedom and opportunities available for an individual to succeed personally. For an economy to thrive, it should give weight to practices that produce real and sustained fundamental value to society, and that’s where we’re currently falling short.
In an economy where 1% of the population own almost half the world’s wealth, the available wealth to the everyday person is scarcer and thus the generation of wealth becomes a priority. Some argue that this drives people to succeed, to create successful and prosperous businesses, and ‘stimulate’ the economy. While there is certainly some truth to this concept, it’s also somewhat flawed:
When wealth is so scarce but so fundamentally necessary for survival, it becomes a priority. Wealth generation becomes the bias of society over the production of genuine value: food, science, technology, public services, art and culture. New industries that are built entirely around the basis of wealth generation and management develop; financial industries, sales and marketing, gambling, accountancy. While these industries do certainly have a role in the modern world, they receive a disproportionate amount of wealth compared with the inherent value they produce to society as a whole. As these industries expand, they consume more resources, leaving less people, time, and money to produce resources of fundamental value. Herein lies the problem.
How blockchain can help
What if we were to unlock a large portion of that wealth and reintroduce it into the production economy?
Decentralized platforms offer alternatives to these industries whereby everything is handled by a self-sufficient ecosystem that belongs to no-one. Rather than siphoning right up into a CEO’s bank account, the surplus wealth is distributed amongst the individuals who collectively produced the value. The available wealth to any individual goes up, as does spending, and the economy thrives.
Individuals own their interest
Let’s give an example. If you had a spare $1000 lying about that you don’t need in any immediate timeframe, the wisest thing to do would be to put the money to work by investing it. With traditional finance, you’d deposit it into a ‘high-interest’ savings account. The money would then be invested in a variety of commodities, assets, stocks, bonds and loans to gain interest. Most of this interest would go to the bank for facilitating the exchange and management of your wealth, and you’d be lucky to get an interest rate that exceeds the rate of inflation (as of 2020, the average interest rate for a savings account in the US is 0.04% APY).
In a decentralized, peer-to-peer lending network, an individual could take that same $1000, add it to a ‘liquidity pool’ which is then loaned out for an interest rate. A small fee is paid to nodes on the network for processing the transaction, but you get most of that interest back, earning up to double digit annual interest rates on your invested capital. Not only does it give lenders better returns, but it makes for cheaper loans for borrowers too. And guess what? Affordable loans make it easier for businesses to thrive, which creates jobs and — you guessed it — stimulates the economy.
They own their data too
Blue chip companies like Facebook and Google make billions from the personal data they keep on their users. ‘Big Data’ companies collect thousands of terabytes of data on all matter of subjects to analyze and sell off to the highest bidder. With decentralized protocols like Phala Network and Streamr, people can anonymize their data, and provide it for data marketplaces to earn their own income from it. They can even help accelerate innovations in science, engineering, or medicine in the process. Again, removing the middle man and increasing the wealth available to consumers to spend within the economy.
These are just two of the use-cases already in operation in the world of blockchain, and we’re only just getting started. Other applications that are currently in operation include decentralized cloud computing (one of the world’s fastest-growing industries), mobile data networking (telecoms), AI marketplaces, and civil governance (what better way to eliminate election fraud than via an unhackable, decentralized network?).
Removing the economic biases attributed to wealth-generation industries and injecting those resources back into industries that produce fundamental value could be the key to eliminating economic turndown, wealth inequality, and poverty. If that’s the case, the autonomous, decentralized networks that blockchain can facilitate might just be the key to a brighter economic future.
