If you are wondering what the impact of blockchain in economics is, then you are reading the right article. Blockchain is based on a system that is called Distributed Ledger Technology (DLT), which is not a new terminology. Ledger is a book or a file where the economic transactions are recorded. A document of two columns, debits and credits that at the end should be balanced (total debits=total credits). Ledgers have been around for centuries and have revolutionized the economy, particularly accounting.
Blockchain is double-entry bookkeeping
The system of double-entry bookkeeping goes back to the 10th century, developed by the Korean Goryeo Dynasty. Later on, the records of a complete bookkeeping system was found in the Republic of Genoa, Italy, dating to the 13th century called Messari. During the first industrial revolution, ledgers played a significant role and helped the large corporations with scalability and growing the economies of scope. In the 20th century, the ledgers were digitalized, but still depended on a central system. Thanks to Blockchain, the centralized ledgers can be decentralized and there wouldn’t be any need for the trusted third party.
Make Internet more visible
As internet is used for obtaining information, blockchain can be used to record the transaction of value in an immutable, transparent, and traceable way, which is also called “The Internet of Value”. As steam engine revolutionized the whole economy in the 18th century, it is believed that not even a single sphere of economy will remain unaffected from the DLTs. Blockchain has the ability to disrupt the traditional economics institutions of capitalism, firms, market and relational contracting.
How can blockchain revolutionize the economy?
The blockchain optimists claim that it will reduce the costs associated to the intermediaries and expands the opportunities for the economic collaboration and cross border trades. It will affect mainly the sectors that depend on the third party trust. As examples, below we discussed two sectors that cab be affected the most by the adoption of distributed ledger technologies.
Many inventors struggle going through the patenting process, which is both time-consuming and costly. But, the main pain comes afterwards, when the owners are striving for gaining profit form the patented technology. The commercial rate of success of the $180 Billion Global IP Market is only 2%, and it is the dream of all inventors to reach this market.
Much more than Bitcoin
There is a huge unexploid potential for the use of DLTs in the context of legal applications and intellectual properties. Blockchain can facilitate the registration, storing, and protection of the art works, inventions, trademarks, know-hows, arcitechtural designs, and anything related to innovation and creativity. It has already been used for providing licenses, registration of IP rights, enforcement of agreements, management of digital rights (as registration of the art and musical works), and direct real-time payments to the asset owners.
Recording the ownership of assets protects the inventors against malicious actions and facilitates monetizing the work. For instance, smart contracts can solve one of the major problems of the music and art industry, which is royalty distribution, ownership rights, and clearity. Blockchain offers temper-prove evidence of ownership.The owner of assets can investigate who uses the work and the user has to pay directly to the owner, which means eleminating the third party costs. It also helps the IP offices to track the frequency of use and also prevent the double registeration of similar works. Blockchain can also provide evidence to prove the use, creation, and conception of copyrights, which is vital in the copyright protection and digital rights management.
The finance sector will mostly use DLT
One of the sectors that Distributed Ledger Technologies (DLT) is affecting the most is financial sector. It not only facilitate faster and cheaper transactions, but also solves the double spending problem. Some of the revolutions that blockchain can bring to the finance sector are:
- Cryptocurrencies VS fiat currencies:
- Investment and Fundraising:
- International Payments:
Although, some people believe that digital currencies are operational currencies competing with the tangible currencies and the optimists of the cryptocurrencies claim that one day digital currencies will replace the government-issued currencies, economists and finance scholars are reluctant about the performance of the digital currencies and argue that bitcoin and other digital currencies don’t accomplish the three basic functionalities of the money, which are; serving as a unit of account, a store of value, and a medium of exchange. First of all, the volatility of digital currencies are limiting them as a store of value and a unit of account. Digital currencies are not widely accepted all over the world, due to different financial and governmental regulations, and has resulted to the prevention of cryptocurrencies to serve as a medium of exchange.
Blockchain is changing the way investment was done before. ICOs or Initial Coin Offering is the new name for raising funds, venture capitals, or seed investment. Startups can do it through asset tokenization, which refers to transferring the untradable assets to tradable tokens. Tokenization of the funds that are received can offer a greater liquidity to investors since the tokens can be traded freely on online exchange platforms. According to the CoinDesk, startups raised $6.3 billion, only in the first quarter of 2018, which is surpassing the whole amount raised in 2017 through ICOs.
Blockchain is used for crowdfunding, as well as charity funding. The immutability and transparency of blockchain can increase the trust in charities and contributions to the social sector. Blockchain has and will disrupt the traditional philanthropy sector by eliminating some middle entities from the equation and enabling the giver and beneficiary to interact directly. Recently, some initiatives have been taken to support non-profit programs by issuing a number of social purposes digital coins.
Blockchain can facilitate the cross-border payments, by eliminating the series of bilateral banks that a payment has to pass through, resulting in cost reduction and efficiency growth. Each year, billions of dollars is wasted while moving resources from one country to another and international transactions have always been expensive and time consuming. Blockchain addresses this problem and can eliminate the costs and delays associated to the cross-border transactions.
For instance; according to the World Bank (2016), the global average cost of sending the remittances from the rich to the poor countries is 7.4% and it is almost the same for SMEs. Though, there are also some costs associated to the digital currency transactions, losts of companies that are trying to minimize the costs as much as possible. Recently, the world’s largest global payment processors as Visa have taken initiatives and have launched their B2B blockchain payment system that will not only eliminate the middleman and the costs associated to it, but will also improve the money transfer speed and will decrease the risks associated to them.
How it will affect the Labor Market?
Although it is not clear enough which jobs exactly are in danger or under extinction by the Blockchain and distributed ledger technologies, it is obvious that DLTs will eliminate some unnecessary middlemen from the centralized systems such as banks, real estate companies, legal firms, intellectual property consultancies, and many others. There would not be the need for the verification of information, contract preparation, notary process, third party audit services, and so on, which means that all human force dedicated for such services have to leave the market. For instance, IP and legal industries are among the most traditional sectors that are heavily dependent on the paper-works, regulations, and standards.
Lawyers, consultants, and administrators working in these sectors might have to change the way they work or the role they play, as soon as the system is replaced by the Blockchain. But, it does not mean that there will not be any need for such kind of profiles, in contrast; it means that such professionals can dedicate more time on improving their specialty and expertise rather than spending time on preparation, revision, verification, or control of the bureaucratic documents.
Earning more with blockhain
It should not be forgotten that although Blockchain is distrupting the labor market, it is creating some new professions as well. Based on an article published by the Financial Times; Blockchain related job offers have grown by three folds compared to the 2016 and the number is growing by 40% quarterly. Also, vacancies related to blockchain had increased by 10 times in the HeadHunter platform in the first 6 months of 2017 compared to 2016. It is not just about the jobs created by the blockchain, according to Jerry Cuomo, vice president of IBM, the salaries that are offered for blockchain projects are significantly higher than the salaries offered for the same position in other projects. Blockchain inclusion is already among the desired-skills in LinkedIn.
Blockchain also offers new opportunities for the freelancers, entrepreneurs and autonomous businessmen to develop their own projects. Decentralized Autonomous Organizations (DAOs), are predicted to grow and even it is believed that it might encourage more people to work as freelancers.
Concerns about the Blockchain
Although the disruption that Blockchain has created might be beneficial, it also creates some concerns about the data privacy, operational resilience, and governance. Financial institutions, in particular banks, play an important role in economy. That is why the governments try to enforce strict regulations when it comes to the identity of the clients of these institutions to prevent criminals and terrorists from the money laundry. The pseudonymity in blockchain, mainly bitcoin, can make it easy for such actors to integrate the black money in to a financial system.
Putting the identity information might solve the problem, but it creates another concern about the data privacy, mainly for the banks due to their obligation of protecting the individual privacy. Some solutions have been proposed to solve this problem, as permissioned/private Blockchain (Allows the participants of the blockchain to restrict who can participate in the consensus mechanism of the blockchain’s network, who can create smart contracts, and transact in the blockchain network  ), and bidirectional payment channels (which allow some transaction data to be stored off a blockchain, and the application of zero-knowledge proofs, which allow transactions to be verified publicly without revealing any underlying data about the transaction ).
Centralized systems are prone to the single point of failure risk and Blockchain decentralized system that can be run by multiple nodes will solve the problem. Resilience is one of the advantages that blockchain offers, but since data can be backed-up on multiple servers, it creates some operation concerns and raises questions about the resiliency of the system.
Governance is another issue that has to be solved in Distributed Ledger Technologies (DLTs). The rules dictation and enforcement has to be clarified. Although most of the private blockchains are trying to tackle this problem, it should be accepted that in public blockchains organizations don’t have controlled over how the system is governed.
Blockchain in Spain
Blockchain is one of the topics that is most discussed in the digital development strategy environment all over the world. UK, US, Russia, China, Dubai, are some of the world’s first movers, although the countries that are leading the innovation movement are Switzerland, Estonia, Singapore, Cyprus, Dubia, and UK.
There have been some good news from the Spanish government side lately. Prime Minister Mariano Rajoy’s People’s Party, Garcia Egea recently announced that the government is preparing some blockchain related legislation with the probability of including some possible tax breaks to the blockchain companies in order to to attract investment and new startups related to this technology. This green flag from the Spanish government side is a good sign and some people even believe that such policies can convert Spain to the heaven for the blockchain initiatives.
There are lots of events, meetups, and informative gatherings on the topic and many public and private entities have shown keep interest in adopting distributed ledger technologies. Bank of Sabadell is among the pioneers from the financial side. Alasteria is the organization that works on building a national blockchain ecosystem. There are some active startups issuing ICOs and taking active role in discovering blockchain applications such as Jelurida, Nodalblock, Bit2Me, Bitnova, Bitchain, AvatarBTC, and CryptoPay.
by Loha Hashimy, Consultant de Knowledge Innovation Market (KIM)