How Blockchains Will Help Restore Personal Sovereignty
Imagine what the world might look like if the resources and productivity, extracted via inflation over the past 100 years, had been left in productive hands? What if those resources remained subject to the guiding hand of the market, continually growing and driving new innovation? We would be living in a more prosperous and peaceful world; with cheaper energy, healthier and more plentiful food, more effective cures for disease and numerous technological advances. We could (should) live in such a Jetson’s world. Instead, we exchanged the possibility of a brighter and safer world for debt, bureaucracy, wars and oligarchy.
To most, inflation’s distortions are invisible. It’s like the cartoon where two small fish swimming along are passed by a larger fish swimming in the opposite direction. The larger fish says, “How’s the water boys?” After swimming a little further, one of the small fish says to the other, “What’s water?”
Society is similar to the small fish in that most people are indifferent to the impact of inflation. It engulfs us and manifests as the economic waters within which we swim. Imagining a world without significant inflation is difficult. One would need to be 120 years or older to have any relevant personal experience. For those younger, inflation is all we know.
The impact of inflation is pervasive, touching everything from the economy and finance to education, housing, cars, and public projects, to name just a few. Additionally, inflation influences the structures of power; quite significantly. He who pays the piper calls the tune and that reality defines elections, the news, public discussion and academic research. Indeed, inflation is one of the singularly dominant forces of the 20th and early 21st centuries.
Demonstration – how inflation distorted the housing market
Why are new houses so large as compared to homes from the 1950s? Why do they feature 4+ bedrooms, 3+baths, media rooms, pools and designer landscaping? Inflation! Bankers, via fractional reserve lending, effectively create money out of thin air and lend those funds to eager home buyers. Bankers love real estate as it provides excellent collateral, and their proclivities towards it created one of the largest asset classes on the planet. Oceans of money pour into real estate at low interest rates with generous terms (30 years to pay) and low-down payments. Those monies fundamentally altered the real estate market. When inflation comes to an end, those houses are going to look like white elephants. Similar arguments could be made in almost any other segment of the economy from higher education to the military and the cars people drive. Inflation touches everything.
Bitcoin Castrates Inflation
Cryptocurrencies and decentralized networks will play a critical role in eliminating inflation and restoring liberty, economic reality and personal sovereignty, while fueling new rounds of innovation and advancement. Cryptocurrencies reduce inflation through a sane and open inflation policy. As an example, Bitcoin replaces the functions of a central bank with math and computer code resulting in a truly regulated currency. Coupled with the holder’s ability to maintain custody of the tokens, the implications for currency creators are profound.
The fat lady is warming up and preparing to sing the final song of the central banking show. When she is done, the inflation trends that drove the world for the past 100 years will reverse rapidly moving us into a new world and a new economic “book” (utilizing the book series analogy). The unwinding of inflation will prove to be massive, pervasive and chock full of opportunities and risks.
Crypto Drives Innovation (While Inflation Kills It)
Over the past 40 years, western nations experienced a slowdown in innovation. Why?, you might ask. Consider the following:
First, increased government spending shifted the direction of innovation away from consumer and productivity enhancing activities towards government priorities, such as weapons and bureaucracy. Capital and mental prowess, which might otherwise have focused on discovering cheaper/cleaner methods of meeting energy needs, were instead directed towards missile technology. More of one activity necessitates less of the other.
Second, the introduction of massive amounts of money pumped into the economy shifted the types of organizations receiving funding. Money creation favors large government related bureaucracies (—i.e., NASA, Post Office, Amtrak etc.) as they are first in line when it comes to the distribution of new money. Such large bureaucracies, however, typically lag behind smaller, hungrier organizations in terms of innovation. Hence, the process of currency creation plays an important role in shaping the innovation landscape.
Third, the creation of currency drives inflation thereby impacting the viability of new business ideas and projects. When inflation is high, the “hurdle rate”, which investors use to evaluate projects, must be raised in order to account for the higher inflation. A higher hurdle rate results in fewer new projects meeting the profitability targets. As a result, more projects are abandoned. Projects evaluated in the crypto economy where the long-term rate of inflation is zero or negative enjoy a much lower hurdle rate. As a result, projects that fail to clear the financial challenges in the existing fiat world might be viable in the crypto world.
Finally, government money corrupts science and research. Developing useful research that impacts and improves the real world does not necessarily produce success in the university research world. On the contrary, success and advancement in the existing world of higher education are achieved by producing work that aligns with the biases and narratives of the funders, while advancing their political agendas.
Centralization and currency creation retard innovation in the ways described above. Blockchain projects, on the other hand, drive innovation as they are permissionless. Anyone can contribute code to existing projects or use the open source code to start projects with new features. The open and permissionless characteristics of blockchains make them fertile ground for innovation.
An Emerging Anonymous Economy
An entirely new economic layer is being built upon the existing economy. In the not too distant future internet enabled devices, computer programs, distributed applications, robots and people will interact and transact with one another in ways that currently seem unimaginable. A crucial component of this emerging economic layer will be the ability of autonomous devices to easily use electronic money via instantaneous micro transactions.
Imagine thousands of companies currently not in existence operating via code on a distributed internet. Such companies would operate essentially as a machine, making and receiving payments in crypto and probably with few or no employees. These companies might complete thousands of small transactions each day, much like an “internet vending machine” (IVM) dispensing uncensorable data and answers as opposed to candy bars. In many cases, the developers and owners of the IVMs will be anonymous, taking payment in crypto and paying no taxes. In addition, a certain percentage of IVM developers will likely be machines operating as Artificial Intelligence actors. Ultimately, government power derives from its ability to sink roots into the productivity of its subjects. Anonymous economy technology provides a path out of the financial surveillance system and towards a more voluntary and truly democratic future. The first anonymous economy residents are exiting the tax farm now.
“Centralized systems create large money pipelines providing cheaters with the perfect opportunity to extract large profits via high fees with no risk.” Naval Ravikant
People rely on networks to solve problems and create value. Indeed, the number of networks the average individual accesses on a daily basis is vast, including social networks of friends, family, co-workers, as well as many companies which deliver the goods and services required to navigate daily life.
When it comes to networks involving money, a trusted third party (TTP) has traditionally been required in order to enforce rules and prevent cheating. Currently, the TTP typically comes in the form of a bank or financial institution. Given the centralized and hierarchical structure of the existing financial system, TTPs are incentivized to misuse and abuse their position. Indeed, TTPs have become the biggest cheaters in the system they are charged with guarding. See the table below for a few examples.
Abuse by Trusted Third Parties
- In 2008 Bernie Madoff’s $64.8 billion Ponzi scheme was exposed. He defrauded 4,800 clients!
- In an effort to drive fee income, Wells Fargo opened more than two million deposit and credit card accounts that customers did not request.
- GMAC and major U.S. banks “Robo” signed foreclosure documents on people’s homes with little or no review. Employees testified in court that they were signing as many as 10,000 foreclosure documents each month.
- LIBOR represents an average lending rate used in $350 trillion worth of financial contracts. Major banks were found to be providing false information in order to manipulate the LIBOR rate which allowed the banks to make large amounts on trades.
- In 1914, the FED ended the convertibility of currency into gold, effectively stealing the people’s gold.
Blockchain technology provides a revolutionary solution to the need for trusted third parties by replacing trust in institutions with trust in transparent code and math. Participants can verify the details of their transactions without reliance on a third party.
“The money network is too important to be controlled by a central authority. “ Naval Ravikant
Eliminating the Middleman
Blockchain technology allows for leaderless networks rendering reliance on third parties unnecessary. For example, assume Party A wants to send $1,000 to Party B. Under the traditional system Party A directs his/her bank to send the funds to Party B’s bank and then the bank deducts the funds from party A’s account. In the cryptocurrency world, Party A can transfer the funds directly to Party B without reliance upon a third party to facilitate the transaction. By allowing the participants to deal with each other on a peer-to-peer basis, the expense and power of the middleman vanishes.
In addition, Bitcoin allows humans to transport value digitally without dependence upon the physical world. As a result, large global transfers can be completed in minutes. (The Bitcoin Standard p199)
Code Replaces Middlemen
- What if the functions of stock brokers and the back-end functions of markets were automated on a blockchain to provide low cost, virtually instantaneous trading?
- What if the functions of a music label were replaced by computer code so that musicians could deal directly with their fans, instead of through middlemen?
- Every six months or so we suffer a major data breach releasing millions of credit card numbers and personal data onto the dark web. The centralized holders of personal data provide hackers with perfect points of attack. What if the data were decentralized so that people controlled their own data? Under a decentralized model, hackers would need to “hack” millions of individual phones to secure the same data. The Civic project is already making this distributed data model a reality.
Connect the Unbanked
Cryptocurrencies provide an avenue for the world’s two billion unbanked individuals to participate in a financial system. Blockchain based financial systems offer networks that are open, borderless, transnational and neutral. These characteristics make it possible for anyone, including the world’s poorest, to trade and transact with the rest of the world. Plugging the currently unbanked into an open financial system will enhance the value of their work, literally opening them up to a world of opportunities.
Digital nomads are currently exiting traditional office life. They complete their work from anywhere in the world, with no more than a laptop and internet connection. Could the world’s unbanked and underemployed use these same tools and techniques? If so, they would likely opt for payment in crypto; and, in the process, the value of their work would be liberated from their arbitrarily depressed State into a world where location is no longer a primary consideration.
Each of the effects of blockchain technology discussed above works towards restoring personal sovereignty, while simultaneously removing economic decision making from the political arena. Indeed, the impact of blockchain technology and crypto include:
- Enhancing the individual’s ability to accumulate wealth via an end to currency creation and inflation;
- Reducing waste, fraud and corruption via the elimination of trusted third parties and middlemen;
- Reducing waste (from #2) and redirecting wealth (from #1) into innovation and development voluntarily selected by the people and markets;
- Providing public accountability for research and development via the need to please funders;
- Making it such that when Nation States resist the blockchain enabled power of the people, Anonymous Economy technology will make it possible for the productive to escape.
As blockchain technology matures over the next five to ten years, the shift in power from centralized authorities towards individuals will be significant, as will the implications thereof. In the long run the freedom, peace and innovation, driven by these changes, will restore the world’s trajectory towards a future George Jetson would be proud of.
Next Article in Series – Investing in a Post Inflation World
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The information provided herein and any accompanying materials is for informational purposes only. The information is of a general nature and does not address the circumstances of any particular individual or entity. You should not construe any such information or other material as legal, tax, investment, financial or other advice. I am not a financial advisor and you should consult with an attorney or other professional to determine what may be best for your individual needs.