Note: This article was originally published in YourStory.
The world around us is changing rapidly.
Innovation is driving the advent of new technologies that are mushrooming every day and continually transforming the landscape of modern life. Most recently, Big Data, Artificial Intelligence and now Blockchains are all making huge strides into the way we work and live.
Of these, Blockchain is a technology that is particularly confounding, as it far surpasses the definition of being just a technological breakthrough. It’s true potential extends deep into the esoteric field of economics, the science that attempts to define the rules that drive human society.
This article is meant as a thought experiment to explore the potential for Blockchains to redefine the way a business is created and run. This thought experiment also attempts to illustrate the fundamental crypto-economics that drives many of the disruptive cryptocurrency implementations in the world today.
Let us imagine a new kind of enterprise that is designed to create value through a self-regulating methodology that is both decentralized and auto-incentivizing, as opposed to the conventional top-down hierarchical, command and control approach.
We do this in a two-step process — “the white paper”.
First, we set up an initial monetary policy in the form of a finite number of digital tokens that represents the overall value of the enterprise. This also creates the requisite economic scarcity to start with, that is essential to this approach.
Second, we setup a governance model in the form of clear encodable rules for how the participants who generate value in the enterprise will “earn” in tokens. This incentivizes the participants to “do the right thing” to generate value for the enterprise, which in turn increases the value of the tokens.
These two fundamental steps, essentially, sets up a self-regulating system that, theoretically, should not need the conventional checks and balances of top-down hierarchical command and control enterprises.
The basic hypothesis of economic behavior here is that, the participants will automatically gravitate to “do the right thing” to increase the value of the token that they own and earn. The more business value that is created by the enterprise overall, the more the token value increases.
Next, an initial portion of tokens are sold to the public to crowdfund the seed capital (an “ICO”). The seed capital is used to actually build the enterprise and activate its operations. Note that, as per the rules that were pre-defined earlier, the operations of the enterprise will cause its participants to earn in tokens.
Alternatively, “the white paper” could prescribe an initial self-allocation of tokens to the initial promoters in lieu of seed capital provided by them.
Either way, the tokens are similar to shares in a company, with one major difference —
These tokens may subsequently be exchanged by any token owner in an open token market against any other currency (fiat or crypto) depending on the perceived value of that token in the open market.
A kind of blended currency cum share market.
The above system is analogous to income being earned by the employees of an enterprise solely in shares. The assumption here is that the enterprise would, therefore, automatically self-correct to ensure that it always increases its share value (the basic hypothesis again).
Another important distinction from a traditional enterprise here is that, participants in this new kind of enterprise could be both the employees (sic) and its customers (besides any other stakeholders) all of who are vested in its success by virtue of owning its tokens.
Hence, as you can see, instead of being just an innovative technology for a traditional enterprise, this now becomes a whole new type of enterprise, albeit with a crypto-economic self-regulating governance model.
One basic element for setting up such an enterprise is establishing “trust” between the participants.
This can now be done with the use of an innovative new concept —
A transparent immutable record in the form of a Distributed Ledger, which in all likelihood will be based on Blockchain technology, although it could just as well be any of the alternate “blockless” technologies that are in development, or newer ones yet to come.
The only requirement is to have an infrastructure that establishes trust “inherently” without a third-party arbitrator.
Hence, a self-regulating system.
Most of the well-known implementations of Distributed Ledgers that are taking the world by storm today are Public Distributed Ledgers.
One apparent problem with public ledgers, as they are implemented today, is that all data is visible to anyone and everyone. This could be a barrier for an enterprise, depending on the nature of its operations and its need for privacy.
However, this can be mitigated by encrypting data in a manner that the distributed nodes maintaining the ledger can only see the transaction records, but not its contents, including who the transacting parties are. The records can only be read by the transacting parties using cryptography to identify themselves. A few such anonymous public ledgers now exist.
The alternative is a Private Distributed Ledger that is run by a consortium of permissioned nodes. Here again, private data could be open to the consortium nodes or alternatively, readable only by the parties to a transaction.
The right approach should be where data on the ledger is readable only by the parties to the transaction and if desired any other authorized party (e.g. regulators for oversight, where it is mandated by law). Data is only opened to everyone, if the solution absolutely requires it.
Ideally, if that can be achieved with a public ledger, we would have true distributed trust. If not, a private ledger will need to be used where trust ultimately resides in the governance model of the consortium (which incidentally, itself could be a coded set of rules on yet another ledger).
Either way, data privacy is maintained sacrosanct to make this infrastructure feasible across various types of businesses.
Broadly speaking, in Blockchains, tokens can be earned in one of two token earning models.
Intrinsic Token Earning Model
The tokens are earned as an incentive by the nodes for the act of just maintaining the Distributed Ledger. This is similar to the Intrinsic Tokens that power the Bitcoin Network (the Bitcoin itself), or the Ethereum Network (the Ether).
Extrinsic Token Earning Model
The tokens are Extrinsic Tokens (e.g. a Smart Contract based Token) that are earned as per some rule that determines how value is generated. For instance, a token that provides access to the service, or a token that allows voting rights for developing the platform, or a token that drives the underlying business operations, as in the case of digitized fiat currency.
An Intrinsic Token may or may not be needed, depending on whether the underlying ledger is public and needs an incentive token to run, or if it is private, and does not need an incentive token to run.
An early attempt at a more sophisticated token classification framework can be found at the following link.
Therefore, the ideal infrastructure for this new kind of enterprise would be a Public Distributed Ledger with an Intrinsic and/or Extrinsic Token that is earned by the participants of the enterprise, along with complete data privacy on the ledger to allow only transacting parties and any mandated regulatory authorities to read the data.
Examples of the New Kind of Enterprise
So what could such an enterprise look like?
Let us imagine a few new kinds of enterprises that could be built using this model.
A Distributed P2P Lending Network in which Lenders and Borrowers are joined by networks of Verifiers, Hosting providers and Developers, all incentivized to build, maintain and use the Distributed Lending Platform that is hosted on a Distributed Ledger Technology.
A Distributed Money Transfer Network in which Remitters and Recipients are once again joined by networks of Banks, Currency Exchanges, Hosting providers and Developers, all once again, incentivized to build, maintain and use the Distributed Money Transfer Platform built on top of a Distributed Ledger Technology.
And, in a radically different vein —
A Distributed Charity Organization in which Contributors and Beneficiaries are joined once again by Suppliers, Logistics providers, Hosting providers and Developers. All of them earning tokens from the network for using the network, thereby increasing the perceived value of the tokens, which in turn increases their earnings, while still fundamentally running a charitable enterprise.
Here, charity becomes the value-creating economic activity. Think about it.
Or, here is another one —
A Distributed Writer’s Collective, where a group of Writers tokenize the future Products of their creativity (Books of all kinds) and get Readers along with Publishers and the Platform Hosting and Development providers to create a Virtual Enterprise to fund the creative process in a self-regulating system.
This can be extended beyond writing to any creative endeavor, as a potentially sustainable economic model for creativity.
So, as you can see, a lot of human activities fundamentally create value, and this innovation can be applied across diverse types of enterprises or collectives. We only have to use our imagination to ponder the various possibilities that this opens up.
It is very evident that Bitcoins, Ethereum and their ilk may just be the beginning, and we may be on the verge of an entirely new economic model for society to evolve into.
Finally, as a thought experiment, the purpose of this article is to drive thinking and dialogue. Hence, the ideas are intentionally half-formed.
Any and all criticism are welcome.
The more we discuss and understand the full potential of this innovation, the better prepared we will be to accept the coming transformations in the economics of our future lives.