New technologies are often defined by the first successful example. Smartphones are all compared to the iPhone. Electric cars are all compared to Tesla. And blockchain applications are compared to Bitcoin.
In the case of blockchain, this is somewhat unfortunate. While Bitcoin was a huge technical breakthrough in 2009, it has since been surpassed by other technologies for nearly all use cases. This is mainly due to the slow speed of Bitcoin development relative to blockchain alternatives.
Holders of Bitcoin believe that it is better to maintain ownership than sell because there will always be more new buyers to drive the price even higher. So far that hypothesis has been proven more-or-less correct with a few large hiccups along the way. The overall trend has been up and to the right, and the total price appreciation of Bitcoin since “Pizza Day” in 2010 has been about 6,000,000%.
When the price of an asset has risen by that much with no clear reason beyond “more people wanted to own it,” it’s difficult to focus on anything else. In my view, cryptocurrencies are a red herring. As my cofounder Victor Wong puts it, tokens are a means of transferring value, not a source of value.
Blockchains don’t just transfer money. They define agreements.
If you’re interested in positive-sum outcomes, the most promising aspect of blockchain is its ability to facilitate agreements — not its ability to enable rug pulls. To illustrate this point, let me list some of the magical-sounding things you can do with a blockchain via smart contracts.
— You can create a legal agreement that transfers money between different entities when certain conditions are satisfied. This contract’s execution (and subsequent transfer of money) requires no external enforcement outside of that provided by the blockchain itself.
— You can provide cryptographically verified evidence to an auditor that you complied with regulatory requirements.
— You can borrow arbitrarily large amounts of money to execute an arbitrage trade from a lender you don’t know and who doesn’t know you, and do so with almost zero risk to the lender.
In all three of the above cases, blockchain can provide a net productivity gain over legacy methods of conducting such processes. These productivity gains have little to do with the current value of an arbitrary token. Let me describe for each point how exactly this productivity gain is realized.
Business agreements
Business agreements benefit from similar gains in efficiency because blockchain allows for programmatic standardization of contracts. Take for example a construction project; a typical contract awards payouts to a contractor when they reach certain milestones. Once the contractor believes a milestone has been reached, a large 3-ring binder containing a record of progress on the site is handed to the developer, and the process of reconciliation begins.
Reconciliation is time consuming. The developer and the construction company argue over every little charge in a milestone, often for several months. On average, the construction company is not paid for 84 days after completing a milestone[1], which dramatically increases the capital requirements needed to keep the business running. And at the end of the process, it’s common for one party to owe the other tens of thousands of dollars or more due to discrepancies.
Encoding a business agreement as a smart contract allows the developer to track what the construction company is doing in real time. Instead of waiting several months or more for a milestone to be completed, then discovering that the contractor has spent ten thousand dollars on something completely unnecessary, the developer can monitor progress in real time. This cuts down the time between milestone completion and payment, reduces uncertainty about how much money is owed, and enables improved estimates of the time remaining until project completion.
Regulatory compliance
For many businesses, regulatory compliance is a huge burden. It often requires hiring expensive experts specialized in a particular law and running all contracts through their office. One of the most painful challenges is complying with an audit, which can sometimes cost tens of thousands of dollars. When the government comes knocking, they often want years of records. Collecting and organizing these can be extremely difficult. Proving who you transacted with and who they transacted with is sometimes intractable.
This kind of transaction tracking is a default feature of the blockchain. On STRATO Mercata, regulatory bodies can be granted access to private shards containing the full history of transactions a company has performed on that chain. Because all transactions are cryptographically signed, and falsifying transactions on the blockchain is computationally infeasible, auditors can be provided with extremely strong evidence that companies transacting on the blockchain are not engaged in money laundering or other illegal activity.
Arbitrage: Capital and credit history are no longer a barrier to entry
Suppose you discover that Ether is trading for $1500 on Binance and $1550 on Coinbase. You could buy Ether on Binance and sell it on Coinbase and pocket the $50 difference. This could potentially make you a lot of money, especially if there are a lot of people trading on each exchange.
But once you start implementing this strategy, there’s a good chance that someone else with a lot more money would spot what you’re doing and copy your strategy. So a better strategy would be to borrow a large amount of money from the bank, buy Ether on Binance, sell it on Coinbase, then pay back the loan. Since you’d have a lot more money to work with, your total profits would be far higher and other traders wouldn’t have a chance to copy your strategy.
Flash loans are a solution to this problem that only work on the blockchain. They completely bypass the need for credit checks, collateral, and all the other normal parts of the loan process. The entire process of borrowing, buying, selling, and returning the money can be performed in a single transaction on the blockchain, such that the loan will only be issued if it will be repaid.
The way they work is through a smart contract. Blockchain has the unique ability to ensure that the loan is only issued if it will be paid back. If you’re familiar with computer science terminology, flash loans are an example of an atomic operation.
In other words, an arbitrary amount of money can be loaned to a debtor at zero risk to the creditor. That’s pretty cool! The ability to borrow via a flash loan enables a broader pool of people access to these arbitrage opportunities, making markets as a whole more efficient.
Blockchain needs to integrate with existing laws and institutions
Blockchain’s origin in the Bitcoin whitepaper means there will always be a group of people skeptical of using it to help comply with regulatory bodies. In my opinion, this is an outdated viewpoint. Blockchain is about so much more than just cryptocurrency. It is the basis of a whole new way of doing business on the internet, which we refer to as “Web3 Commerce.”
But blockchain is simply not capable of replacing all of the world’s institutions. No technology can do that so long as humans run the world. What it can do is make existing institutions more functional by replacing the foundational infrastructure on which they run.
[1] An Associated General Contractors of America Survey shows construction DSO to be at an average of 84 days with large complex jobs as high as 161 days.
