By Marlon Struver
For years people have worried about the increasing speed of innovation. Whereas previous advancements affected blue-collar jobs, the new advancements in AI and Blockchain will likely affect white-collar jobs. This article analyses the disruptive potential of Blockchain technology. How will Blockchain disrupt careers and how can governments respond to make sure Blockchain improves society instead of destabilising it?
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Introduction to Blockchain
Although often linked to cryptocurrencies, Blockchain has the potential to be used in all sectors of the economy with blocks able to contain all types of data from contracts, ownership rights, or most famously transaction records.
Therefore, Blockchain can transfer assets directly and fast throughout the whole global economy, possibly changing the current Internet of information into an Internet of value.
Blockchain transfers these assets by creating digital “blocks”. When new information is added to the network a new “block” is created connected to the previous one. Changes require 51 per cent consensus from all nodes, who validate the change, making it extremely secure.
The added value of Blockchain will grow to 176 billion dollars (161 billion euros) by 2025 and in 2027 ten per cent of global GDP will be stored on Blockchains, showing the disruptive potential. Dubbed “as revolutionary as electricity” by economist Jason Potts, the disruptive capabilities of this innovation are considerable.
Economic Effects
Disruptive innovation is a radical innovation that starts a technological revolution roughly every 50 years and creates a new socio-economic paradigm. This paradigm changes society’s collective logic, creating new industries in its first phase. After the first revolutionary phase, the innovation diffuses to older sectors.
A radical disruptive revolution will attract new interconnected innovations signifying the first part of the revolution. The second stage changes the whole economy and society through diffusion, producing Schumpeter’s creative destruction.
Schumpeter only focussed on markets absorbing innovations but Perez argues that a disruptive innovation also changes social settings. Blockchain is both establishing this new socio-economic paradigm and creative destruction.
Blockchain’s diffusion potential manifests itself in its three incarnations. Blockchain 1.0 allows currency transfers, 2.0 allows transfers of contracts and sophisticated contracts like stocks and titles while 3.0 can transfer government and health service data.
All share a decentralised system, high security, and the almost instant nature of transfers. A secure decentralised system removes the need for intermediaries like banks, accountants, and lawyers, reducing transaction costs while producing new professions.
This creative destruction means restructuring the entire centralised economic system known for centuries. The instant nature of transfers will change entire company structures with less need for subsidiaries, now needed for the transfers of titles or assets.
Social interactions will change since no previous trust between parties has to be established, as Blockchains securely verify agreements instantly through smart contracts.
The current socio-economic structure has already changed, shown by a growing switch of Initial Public offerings on stock exchanges to Initial Coin Offerings, or ICOs, on Blockchain run crypto markets and by growing trust in non-governmental decentralised currencies. This signifies the creation of a new paradigm.
The Past and Current Phases of Blockchain Disruption
Blockchain became famous when it was used in 2008 for running the Bitcoin system by a group or person under the pseudonym Satoshi Nakamoto. The invention had been previously forgotten with the patent lapsing in 2004. This shows Schumpeter’s theory of the importance of the entrepreneur(s) who creates economic value out of an invention.
Nakamoto introduced a new good with Bitcoin and created a new market, both are parts of Schumpeter’s entrepreneurial function. Due to growing consumer demand, many programmers and non-incumbent capital flowed to the new cryptocurrency sector. This follows Perez's model as Perez argues clusters of talent come forward after the revolution is visible and because it is.
This burst of entrepreneurship created many new Blockchain networks with their own cryptocurrencies and incremental innovations like Smart Contracts on the Ethereum Blockchain network.
Creating the option for Blockchain 2.0 and new organisational forms for industries. The 2008-15 period seems to be phase one because of the explosive growth of new crypto-industries and successive new compatible innovations.
New industries and new compatible innovations like Smart Contracts have created a revolutionary trajectory. The initial retardative forces from incumbent sectors have also weakened because of competitive pressures.
Former bank CEOs moving to Blockchain companies and 95 per cent of Wall Street respondents saying Blockchain could play an important role in finance stand out as evidence.
There are strong indications that the Blockchain revolution is in its second phase. The second phase is characterised by fast diffusion, flourishing of the new industries and intensive investment. Diffusion started around 2015 with Blockchain no longer seen as constrained to cryptocurrencies.
The R3 consortium was founded by nine major banks, now 42, to build common standards for Blockchain technology, this signals the push and pull for the creation of a dominant design. Additionally, the technology started diffusing to non-financial sectors, like government administrations. Qatar, Australia, and Germany are all trying to integrate Blockchain into their services.
While economic common sense has been established, regulatory common sense has stayed behind. The social and regulatory adaption is often last because of retardative forces like routine, tradition, and absorptive capacity. These have hindered the creation of sufficient new regulations which are necessary for a new golden age.
Need for New Policies
So far, governments have struggled to implement regulations on Blockchain. Most new regulations have only focussed on cryptocurrencies, like the 2022 EU Crypto Assets Law while ignoring the technology itself.
This is a fallacy on par of only regulating plastic toys, but not regulating the plastic material itself. Failure to regulate this highly diffusive technology will hinder any future golden age.
The need for Blockchain regulation stems from its decentralised nature. When networks fail, there is a lack of accountability and with high market diffusion, any bugs could have catastrophic consequences. Additionally, Smart Contracts’ inability to be updated make it hard to fix bugs.
The Maltese government is one of the few regulators that have regulated Blockchain technology. The Malta Digital Innovation Authority provides voluntary certification of Blockchain networks or connected technology after a System Auditor checked the network. Post-deployment an administrator is required to be available for users of the network.
Lastly, a forensic node is required to be installed by the operator that “stores all relevant information to the runtime behaviour” of a network. This approach was also proposed by the Federal Reserve Bank of Boston.
The voluntary nature limits the harm to innovative behaviour by not restricting innovators while providing a market filtering mechanism for quality networks.
Although the regulatory process has only begun, Malta provides a conjecture for future regulation. Additionally, public policy should focus on increasing absorptive capacity by improving the currently lacking ICT skills among youth.
Conclusion
The disruptive potential and diffusion of Blockchain are bringing about a new technological revolution where firm structures and social interactions will change. Potential creative destruction and the risks of a faulty socio-economic paradigm and dominant designs show the need for new government policies to guide this revolution into a golden age instead of a bronze age.
Sources: Blockchain Revolution, Cointelegraph, Communications Regulatory Authority of Qatar, European Parliament, Technological revolutions and techno-economic paradigms
Written by Marlon Struver
July 2023
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