Transactions and contracts, along with their records, are the pillars of our legal, political and economic systems.
Much has been written about how blockchain will revolutionize and completely redefine economies and businesses, giving new life to these realms. And in addition to more traditional managerial and social applications, blockchain technology is rapidly transforming the art world by helping to solve authenticity and traceability problems.
However, an increasingly popular blockchain concept called institutional cryptoeconomics offers the same benefits of data protection and organizational boundary definition, all while being more secure and private.
In this article, we will discuss the basics of institutional cryptoeconomics, along with the concept of ledgers and its eventual evolution. We will also touch the ground on the economic consequences of blockchain and the benefits it brings for society as a whole.
Ledgers: the concept and its evolution
Ledgers are capable of much more than just recording accounting transactions. Since data is stored according to a predetermined structure of rules, whenever someone needs a consensus on the facts, they can refer to a ledger.
The following are some benefits of logs:
- They help confirm ownership, whether it’s title deeds, clubs or companies.
- They help confirm authority by identifying decision makers and authorized individuals, and at the same time serve as a means of limiting unauthorized access to protect confidential data.
- They help confirm the status by clearly highlighting rights and obligations. Indeed, citizenship, and more specifically, an electoral roll, is also a ledger.
- They help confirm identity which, in turn, can trace their existence and status under tax legislation.
Today, governments and banks have become more receptive to digital currencies. The Bank of Thailand, for example, drew attention when it created a model to test real-life business use illustrations of its central bank digital currency (CBDC), but that wasn’t always the case.
Many centuries ago, instead of crunchy sheets of paper, they were baked clay tablets with a wedge-shaped inscription describing ration units, workers’ names, and taxes. The first consequential change was the invention of double-entry bookkeeping in the 14th century which recorded both debts and credits, allowing for the reconciliation of information between books. The rise of large corporations and bureaucracies marked another advance in accounting technology during the nineteenth century. But then again, the whole system works on goodwill.
Things got more digitized in the late 20th century with the introduction of databases for more complex distribution, computation, analysis, and monitoring. The database is once again based on trust, because it is only reliable as the organization that manages it and its employees. This is one of the problems that the blockchain solves.
In essence, the blockchain relies on distributed ledgers which rely on no trusted central authority for record maintenance and validation. It can also be a great alternative for giving users economic freedom and keeping transactions private.
Ownership vs Possession: How Are These Concepts Different in Records?
The difference between possession and possession is crucial and yet easy to lose. Before digitization, possession meant ownership of a specific right. While it is true that possession implies ownership, it is not ownership in the truest sense of the word.
Let’s take money, for example. Possession of a banknote token indicates ownership, giving you the right to withdraw the value of the banknote from the issuing bank. However, the fact remains that banknotes are susceptible to being stolen and counterfeited.
Fiat currencies, like the dollar, cannot be returned to the central bank for gold. But its value still depends on the social consensus on the stability of the currency and the government that issued it. In other words, an invoice is a call on a bond in the synthetic ledger, which is largely dependent on the bond. If the relationship falls apart, the same goes for the value of the account.
As you may have guessed, having banknotes isn’t exactly a foolproof way to protect your finances. One of the biggest benefits of blockchain technology is the fact that it offers much greater security and other integrations that make it a much better alternative to do business with.
The blockchain is not only inherently decentralized, it is also very secure thanks to cryptography, which means that every transaction must be signed using a private key and then verified with a public key. Additionally, there are many cloud-based backup services that make it easy to securely store software-based crypto wallets.
What is institutional cryptoeconomics?
Institutional cryptoeconomics involves studying the institutional outcomes of cryptographically secure ledgers that are difficult to predict. It also understands that the economy is made up of rules, such as laws, property rights, languages, regulations, social norms and ideologies.
These rules allow opportunistic and dispersed people to properly coordinate their activities and all while facilitating exchange. Once again, we would like to emphasize that this exchange must not be limited to the economy, but can also extend to social and political exchanges.
The economic principles and theories that justify blockchain and alternative blockchain implementations are the main focus of cryptoeconomics. Game theory and incentive design are the main influencers here as they relate to the design of the blockchain mechanism.
Neoclassical and classical economists, on the other hand, understand the purpose of economics as the study of the production and distribution of scarce resources, together with the factors that support the production and distribution of the same resources.
To put things in perspective, institutional cryptoeconomics looks at the institutional economics of cryptoeconomics and the blockchain. While the economy itself is a system for coordinating exchange, institutional cryptoeconomics prioritizes ledgers (which are essentially rule-structured data) over generalized rules. It also deals with the social, political and economic institutions that have been developed to serve these ledgers and how blockchain changes ledger patterns across society.
Since 2018, global spending on blockchain solutions has increased to $ 2.1 billion and there has been an almost 3-fold increase in blockchain-related job postings on relevant job platforms like LinkedIn. Basically, the demand and relevance of the blockchain is increasing with each passing day. So it’s safe to say that the crypto economy will become the next buzzword in all sectors.
Understanding the economic consequences of the Blockchain
Before talking about economics, in particular, we need to understand that money is only the first use case of the blockchain.
We discuss how blockchain can change our economy in more detail below:
Changing the value
For futuristic sharing concepts to be successful, each element must be well documented after proving its authenticity, assigned a current value, and secured in an effort to make the data nearly impossible to falsify. This is something blockchain can help enormously with.
This will allow users to access information regarding the item’s location, current value, and condition.
Changing responsibility
Blockchain has made the economy more open to the rental system as it records every step of the process. In the case of film equipment, for example, renting can be useful as they are very expensive (and insuring them is not easy).
Instead, people can authenticate high-value assets by placing a microchip on them and then registering them on the blockchain. This will create a link between a record of its authenticity and data on its condition, which will allow you to quickly purchase insurance.
Decentralization of ownership
The way we view property and material assets will undergo enormous changes against the backdrop of a radical sharing economy. A shift from a consumer-based materialistic mindset to an economy more focused on future sharing and decentralized ownership as a whole is very likely to occur.
This is one of the biggest trends we’ve also seen when it comes to buying and selling cryptocurrencies. Thanks to the rise of mobile computing, cloud-based trading platforms and machine learning technologies, ownership of assets such as blockchain-based currency is more decentralized than it has ever been before.
Attitudes towards ownership could change completely due to a new concept of consumerism due to the fractional ownership of property, real estate and art. Things are certainly still vague, but it’s not impossible either.
Attitude adjustments
The blockchain could change people’s attitudes towards objects, thus reducing their attachment to goods. It will make them more open to putting their items in storage and allowing other people to rent them out when needed.
The availability of software and tools to provide vendor protection against vulnerability of attacks and other types of cybercrime can also be another factor contributing to the change in mindset through increased security.
Increase machine-to-machine (M2M) transactions
Imagine a scenario where machines use blockchain to become independent members of the market with their respective bank accounts. This will then allow machines on the Internet of Things (IoT) to be able to rent on their own. Of course, advances in artificial intelligence (AI) are equally necessary for this to happen.
In addition to that, the machines will also be able to schedule and pay for their own maintenance, purchase their own spare parts and maintain transaction records, all using blockchain technology.
The bottom line
In addition to benefiting the economy, blockchain technology may be the key to solving major problems such as poverty and corruption in the developing and developed world. Furthermore, the ongoing coronavirus pandemic will certainly make things more complex on all fronts.
Without doubt, adapting to the massive blockchain and associated technological changes will disrupt the current economic conditions. All the more so because the action plan to implement these changes is still a work in progress, which is why entrepreneurs and innovators have to resolve uncertainty through a process of trial and error.
However, it is a challenge that should be welcomed and addressed head-on as the possibility of technology changing operations across all sectors for the better is much greater.
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