Centralization and Decentralization — blockchain and Kindleberger

We’ve seen a change in sentiment in the mainstream media around the centralization of power amongst the big tech firms. In response, a lot of the discussion in the hacker communities has been about the power of the blockchain and Bitcoin to shake up the current establishment and decentralize everything.

In this week’s Notes by Ada note, I share my skepticism of the purist utopian vision for the blockchain. I think the technology is without doubt ground breaking. Here’s an example of why I’m bullish about the technology –

  • Imagine you are a refugee in a new country. You have no official ID or financial history in the country — so, banks aren’t exactly queuing up to give you an account.
  • But, as a refugee, the government would like to give you some aid to get you started. However, they’d also like to keep tabs on that money to make sure you are spending it responsibly.
  • Without easy access to money, you could be stuck in bureaucratic hell for a long time.
  • Enter Moni — a prepaid mastercard service that links your mastercard to the blockchain.
  • Your prepaid card doesn’t need any bank. The government directly adds credit and knows they can track any issues in your spending via an incorruptible database on the blockchain.
  • Assuming you have good intentions, you use this money to get your life started, get a job and are hopefully on your way to building a better life.

This is not fiction. The Finnish government is already testing this with asylum seekers and the United Nations is exploring using this technology for one billion people worldwide who have no legal identification. Powerful stuff.

But, we often confuse the technology breakthrough with its potential second order implications.

Technology breakthrough: A blockchain is a decentralized network with information. The breakthrough in the blockchain is in the ability to have a decentralized database that is not owned by anyone. This was not possible before and means we can now have shared incorruptible databases.

First order implication of the technology breakthrough: Databases controlled by middle people (e.g. banks) were sources of trust for various transactions in the economy. Now, you don’t need to have these middle people. Instead, you could, for example, execute a pre-agreed contract via the Ethereum blockchain. As long as certain conditions are met (e.g. money is transferred to account B), ownership can be transferred too.

Example question about its second order socio-economic implication: Blockchains could render important pillars of our financial system obsolete. Maybe this will remove the need for banks, central banks and governments?

In the many discussions about blockchains, I see people mixing the technology breakthrough and its potential second order implications. Here’s the deal — the breakthrough and its first order implications are here to stay. But, all of the implications being dreamed up right now are not necessarily going to pan out the way many of the purists imagine it.

More on Medium or LinkedIn. Medium says it is a 13 minute read – so you have fair warning. :-)