How An Economy / Law / Society Can Run On A Decentralized Blockchain Like Bitcoin or Ethereum

Evolution of an Industry

Let's start off by stating the evolution of industries. Many of the large industries in the world are outdated and inefficient. The whole banking sector is highly outdated and inefficient which is why Bitcoin is creating a huge disruption in this space. The further behind an industry comes the more disruption a new technology will cause.

We are seeing a similar disruption occur with education and the media. The Internet is tearing through them like a twister and forcing them to evolve or go out of business. When better ideas come around it's really hard to hold on to the old ones. College is less necessary when we have the Internet pre-loaded with Google and YouTube. We can just fire those up and learn pretty much anything we can learn in college (and a lot more) for very cheap.

The old-school media of TV and newspaper is inferior to the Internet. We don't need to wait a day for a new newspaper to be printed so we can get the latest "news". Newspaper news is not new, it's old. We should call it the oldspaper. We don't need to tune into the nightly news to understand what's going on in the world. We don't need CNN to tell us what we already heard on Twitter 30 minutes ago straight from the horses mouth. Old school media channels are simply less and less relevant in this world of connectivity where the Internet allows anyone to relay their information without the middle-man of conventional media (just ask the President).

So this type of evolution is natural and it's how advancement works. This is how our lives get better -- by replacing old systems with newer systems that do things better.

Banking and Currency

The reason the banking industry is so far behind is because we don't have competition in this industry, at least not in the way it matters. While we may have some competition in banking, we don't have competition in currency. Before Bitcoin the only currency we really had was the currency issued by our governments and maybe gold and silver. If we wanted to buy things we would use Dollars or Euros because this is what our governments issued as legal tender.

And the reason we have so few currencies is because governments don't like competing currencies. When you have competition in currency you lose control as a government. All we have to do is look at what has happened in the past when somebody tried to create a competing currency. In the earlier days of the Internet a company came around called e-gold. e-gold was basically digital gold. They held your gold for you and allowed you to transfer it to and from places online -- Paypal with gold basically.

Because the world of finance is so closely regulated by government e-gold was set to fail from the beginning. e-gold actually did many of the things that Bitcoin currently does and because of this it grew rapidly. e-gold provided a great alternative to the conventional fiat system. When you provide a better product it will catch on and people will use it. The problem is you're competing against the government and the government does not like competition.

So of course, the government found things that e-gold was not in compliance with, accused them of money laundering and all the other things you would expect. Eventually e-gold was stopped by the government and that was the end of their business. Even though they were providing value and their customers voluntarily chose to work with them that didn't matter. The government wanted to stop them and they did.

Now here is the important thing to note. e-gold wasn't really doing anything different than what Bitcoin currently does. They're both digital. They both aren't licensed. They both let people buy and sell illegal things.

The difference is that one is centralized and the other is decentralized.

Because e-gold was centralized and owned by somebody it was easy to simply go after the owners and stop them. When you have a central entity controlling something you can stop that central entity.

With Bitcoin, there is no such entity. Bitcoin is decentralized. This is why Bitcoin hasn't been shut down. If Bitcoin was not decentralized it would have been shut down by now. Let me repeat.

If Bitcoin was not decentralized it would have been shut down.

People really need to get this. With Bitcoin there is nobody or thing to shut down. There is nobody who owns Bitcoin and who is running it as a business. Bitcoin is decentralized and open source. Bitcoin is an idea, not a business. And because of this Bitcoin can't be stopped, at least not in the conventional ways businesses are.

We have to understand that the conventional banking industry which uses the government to protect itself does not like Bitcoin at all. Bitcoin is a threat to this industry. And if they could they would use the government to stop Bitcoin. But they can't use the government to stop Bitcoin because Bitcoin has created a decentralized system that can't be stopped. In the past a new currency (like e-gold) would be stopped through the government and the big banks would continue on. And because of this we would not see much innovation in currency and there would be lots of control over our currency with inflation, interest rates, etc. With Bitcoin this is changing. These people are losing control and there isn't much they can do about it.

It's really important to get this because at the higher levels the world isn't all about fun and easy going competition. At the higher levels it isn't even about competition, it is about using the government to keep the big businesses in power. Banks don't just easily accept a new currency that poses a threat to their control. That's not how it works. You have an established, old system of control that will do anything it can to keep that control and power. So if you want to out-compete them you have to do it in a way where they can't stop you. If you simply create a better product they will just use the government to take you down.

You simply can't only be better.

You have to be better and a distributed idea that can't be stopped. You have to be more than just better. You have to be unable to be destroyed. And this is what decentralization does. And this is the core of what Bitcoin is. This is why people like Bitcoin so much.

Economic Competition

Okay, now let's shift away from currency and start talking about the economy in general. Bitcoin is obviously doing something good in the world of currency. The question then becomes, could this same type of thing be done in the economy? How far can you take this Bitcoin concept?

When we start talking about revamping the economy we are once again getting into some pretty heavy government stuff. The economy itself is largely controlled and regulated by the government. In a lot of ways the economy and the government are inseparable. So if you want to do the economy in a different way then you are basically saying you want to do the government in a different way. This is a problem in so many ways.

The economy relies on certain legal rules. The very way we define property and contracts and the way we enforce them is completely tied to government. The economy relies on currency. This is tied to government. Even with Bitcoin you're still forced to pay your taxes in "legal tender" which is the currency of your nation. So even when we use Bitcoin we are still legally required to pay taxes on Bitcoin transactions. You can't escape the economy, even with Bitcoin. The economy itself is heavily tied to the government and it could be argued it is the government.

So when we talk about doing an economy similar to Bitcoin we have to understand that we are dealing with disrupting government itself. This is a very dangerous place to be. You're not talking about simple, fun competition. You're talking about an edifice that will do anything it can to survive. It's one thing to be like let's use Bitcoin to do a trade with each other. It's another thing to be like, let's build an economy completely outside of the existing government. Because we have to understand, this is what would be going on if we were to apply the principles and technology of Bitcoin to an economy. A nation basically is its economy.

Before even going into something like this we have to realize what we're dealing with and the scope of the sins we would be committing. By even talking about this you're basically a terrorist or some type of outlaw. You're anti-government and you're a bad guy -- for wanting to improve government. We simply can't even talk about this stuff. It's sad because I'm not even joking about this. I get how this kind of a thing works. I get what having unpopular ideas does and how it is branded.

As Aristotle said:

"It is not always the same thing to be a good man and a good citizen."

A good idea may make us a bad citizen. And if we're a bad citizen we will face some heavy penalties. So again, even talking about this kind of stuff is heretical. Suggesting that we could be a system outside of government is basically treasonous. So it's no longer fun and games when talking about a topic like this and if you do something that somebody higher up doesn't like you're going to jail for life.

Look at what happened to Ross Ulbricht. The guy ended up with multiple life sentences for freaking building an online marketplace with Bitcoin. He basically built an economy outside of any government and because of this he faced heavy penalties. Yes, of course people were buying and selling drugs on his site. We all know the government doesn't care about that, the CIA are the largest drug runners in the world. Besides, that's how new technology always works. People use new tech for the fringe services as adoption happens. The first DVDs were not Disney movies -- they were pornos. Fringe industries drive new technology.

Every time I revisit the Ross Ulbricht story I cry. I cry because I see exactly what Aristotle is talking about. I see an innovator, an entrepreneur and a great human being who is working to bring the human family forward and then I see the parasite of government crush him. I see the old world working against the new world. I see a power structure doing anything and everything it can to stop innovation to maintain its control.

And when you're dealing with innovation in the economy you're no longer dealing with nice guys. We're not talking about mom and pop shops. We're not talking about the store down the street going out of business. We're talking about a government going out of business. We're talking about the oldest story known to man, the struggle between good and evil. It's a completely different group you're dealing with here.

It may sound like I'm just rambling on about pointless stuff rather than talking about the actual technical execution of this, but we have to understand it isn't about the technical execution. The technical execution means nothing. We have to understand the scope and environment that weren't in. e-gold was technically better than most currencies. That didn't matter. The government made short work of them. It isn't about only being better as I said. And without having an understanding of history and how the world works at a higher level it is really hard to even address this type of a thing.

If you come in like a naive college student from Silicon Valley who wants to create a better economy you will be squashed like the bug you are. If you come in with all the arrogant tropes you learned in college you will be working for them quicker than you can say, "if you only knew the power of the dark side". The real world isn't like the dream world you learned about in college. I'm not being negative either. I'm a very positive and optimistic person. I just know history and have seen too much to ignore it. I'm not saying there isn't a way to do this. I'm just saying the way this is done must really take everything into account. I have ideas on how to do this. But I'm not going to ignore all this and act like none of this matters. Everything matters, especially when you're dealing with something of this magnitude.

Competition vs Decentralization

Now we need to get into a more technical matter. In general competition improves an industry. If we have more people all trying to come up with ways to do something better then the end result will be better.

We see this especially in sports. People who compete in American Football are really, really good because it's competitive. The competition drives better training and better execution. If sports weren't competitive then the quality would be lower -- the athletes wouldn't perform as well and we wouldn't want to watch it as much. This is why mens sports generally receive higher viewership than womens. Men do better in sports. People like better. Yes, I know, quite sexist!

So this same dynamic happens in business. The more competition the better the product and the cheaper the cost. We have lots of competition in the mobile industry which is why phones get cheaper and better. 20 years ago a mobile phone was a block the size of a brick. Today for cheaper we get something that we can carry in our pocket that is way faster and better. Competition is where it's at. And if we leave any market open to competition it will improve.

But then why don't some industries improve? Why does competition not help the market? It's obvious. We don't have competition there. When medical prices go up we can be sure there is restricted competition in this market. We have government rules, regulations and laws dictating almost every aspect of the medical industry, including insurance. The whole thing is a mess.

Were it not for government intervention, medical prices would be dropping. Medicine would be so cheap we wouldn't even need insurance. The medical industry is a prime example of government intervention interfering with competition in the free market.

The point is, competition creates better quality for less cost. So if we want better quality in something then sometimes all it needs is competition, not some crazy technology like a... blockchain.

This bring us to the blockchain. Simply putting a blockchain in an industry thinking it will solve the problem is missing what a blockchain even is or how it should be used.

I talked earlier about decentralization. This is a cornerstone to a blockchain. The value of the blockchain is the decentralized aspect. And in order for this decentralized aspect of the blockchain to work there has to be certain parameters met.

Now if an industry has competition in it then decentralization won't do anything really. Competition is probably the best way to advance something. If we want to advance the mobile phone we just let companies compete. We don't put mobile technology on a blockchain -- that doesn't make sense.

We have to understand that a blockchain serves a unique purpose:

A blockchain allows for competition to occur in an industry where competition may not exist.

This sentence packs a lot in it.

Let's go back to the financial industry. The financial industry currently doesn't innovate like say the mobile industry. This isn't solely because mobile phones are new. It's because you can't legally compete in the financial industry. Like we've talked about, when you try to compete here you get squashed. The financial industry is where the big boys play, and the big boys use government as their protection, not innovation. So you can't compete against these guys. You can't just go and start a currency like e-gold. You'll be put out of business by the government. They'll find something that you are doing wrong. They'll find a law or create a law you're not in compliance with.

And now this is where the blockchain fully shines and where its innovation is most clearly seen. The blockchain allows for competition to exist in an industry where competition currently does not exist because the decentralized nature of it makes it hard to stop. Where normally you couldn't compete against a company because you don't have the correct license or whatever else, a decentralized blockchain lets you do it anyway. It's like a free pass to compete. It's like using a cheat code. The people are like, "you can't do this", and you're like, "just watch me". That is the true beauty and genius behind a blockchain. And this is why Bitcoin is such a problem for the financial industry. They can't stop it. Who do you fine? Who do you put in jail? Who do you go after? The old tricks that are used by these businesses don't work when we're dealing with decentralization. There is no clear heart or brain to target. It's all decentralized and it reconfigures itself dynamically. If one computer goes down another pops up.

So this is what we need to think about when we're talking about the blockchain. We're talking about a decentralized system that basically allows you to compete in an industry where competition otherwise does not exist. This really is the crux of all this.

So look at it like this. In a perfect world we would just have competition and that would be sufficient. Competition would continue to advance all industries at an amazing pace. But since we don't live in a perfect world where competition is welcomed with open arms, we instead have to inject ourselves into competing through a blockchain. We instead compete through an unstoppable blockchain, rather than through a stoppable business. That is the main point I want to get across and something we really need to understand.

In many ways decentralization is an Agorist approach. Decentralization is basically counter-economics that bypasses the current system and works outside of it. Decentralization is a way to compete where competition is not legal or easily available.

Get on with the freaking blockchain economy!

Okay, so now we're ready to start talking about how to actually do this. How do we create an economy on a blockchain? Should we use a blockchain? How would it work?

Well, if we're going to be doing some type of economy, blockchain or not, we are going to be stepping on the government's toes. The government currently regulates how an economy works. So to start out we would have to define the scope of this endeavor.

Are we looking to do an economy within the confines of the current system? Do we want an economy that simply uses Bitcoin as the currency for trade between two parties? Do we want a marketplace that exists on the Internet but still follows current government laws? If that's what we want then we pretty much already have that. This also doesn't really change much. So it would have to be more than just this.

Are we talking about an economy that still follows government laws but is on a blockchain? That's pretty much a contradiction of terms. A blockchain doesn't suddenly make something better. A blockchain allows for competition to take place where competition otherwise can not. So if we are talking about a blockchain economy that follows all current government laws then we don't need a blockchain. We can simply compete within the current paradigm we already live in.

If we want to use a blockchain for an economy then we almost by default must replace government functionality. This is what blockchains do -- they allow for competition in fields where competition can't exist. It's almost like the saying, "be careful what you wish for". If we really want to use a blockchain for an economy then it's going to have some really powerful ramifications that we must be prepared to meet. This is why I spent some time earlier on going through all of this. People need to realize what they're dealing with here. With great power comes great responsibility.

If we're going to be doing a blockchained economy then we are talking about replacing core functions that are normally provided by the government, like legal services. The core of an economy is trade and the core of a trade is a contract between 2 parties. In a trade 2 parties are exchanging value with one another. But how is this trade enforced? What happens if one person lies or commits fraud? What happens if one person rips another person off? How do we handle this basic legal functionality?

Normally this would be provided by the government. Normally the government has laws saying what you can or can't trade and laws on what constitutes fraud and what doesn't. But when we're talking about a blockchain for this then we are talking about the Wild West. We don't have any laws on any of this stuff.

Normally if somebody breaks a law with a government system then we fine them or send them to jail. But how do you do this with a blockchain? How do you do this without a government? Well, now we're getting into the meat of the matter. Now we are talking about how to basically create a government on a blockchain.

Currency Blockchain VS Non-Currency Blockchain

Let's cover an important part about the blockchain used for Bitcoin. A blockchain for a currency is different than a blockchain used for something like trade.

With currency, the blockchain itself is the product.

The currency you own is directly tied to the blockchain. So when you transfer money to somebody that whole transfer is built into the blockchain and is now permanently there. The blockchain is the product and your product is the blockchain. This is the nature of how currency works.

With something like trade it is completely different and throws a monkey wrench at the whole thing. With trade you're not only talking about digital things. With trade you have physical things too.

And physical things can't go on a blockchain, or at least it's not as obvious how they would.

With currency the actual blockchain consists of your currency. With trade the blockchain does not consist of your trade. If I trade $20,000 for a car I can't put my car on the blockchain. With Bitcoin this is how it works. With Bitcoin your actual product, the currency, is on the blockchain. With something else like trade your actual product, the car or whatever else, is not on the blockchain.

So the obvious solution may be the use a representation of that traded item on a blockchain. Rather than putting the car on the blockchain why not put a digital token that represents the car? Why not just store the title of the car or something like that?

Sure, that works but then it creates a new very large problem and the crux of this whole thing:

How do you trust this?

If on the Bitcoin blockchain it says I sent Jimmy 1 BTC there is a block containing that transaction showing exactly this. That is what I mean when I say the product is built into the actual blockchain.

If on a trade blockchain it says I sold Jimmy a car for $20,000 how do we know that I actually delivered Jimmy the car? How do we know that I'm not just lying? How do we trust that this is accurate?

Well, this is the obvious challenge with using a blockchain outside of just currency. Because of the nature of how a currency works and because it is an all digital product, it can be easily put on a blockchain. When you're dealing with things outside of these parameters you now open up a new can of worms.

And this is one of the points I'm trying to get across with all of this. It's not so easy as simply saying let's use a blockchain for it. Blockchain serves a specific purpose and in order for a blockchain to work there must be a trust mechanism. With currency this trust mechanism is the fact that all blocks require a proof of work that can't easily be spoofed due to the sheer processing mechanics of hashing. Every new block verifies the previous block. The more blocks built on top of a block with your transaction the more trust your transaction has.

With currency this mechanism is brilliant and elegant. With other things it gets tricky. This is one of the things Ethereum is taking on with the way they have Smart Contracts. The idea behind this is that you can have contracts, or pieces of code, on a block that execute specified code based off of specified parameters. This is all fine and dandy but it still faces the same challenge of trust. How do you actually trust this when dealing with non-digital things? This is what I mean when I say there is more to this than simply the technical aspect of a blockchain.

Again, with currency the trust is baked into the blockchain because the currency is the blockchain. The amount of money you have is written into the blockchain. With a car it's not written into the blockchain. If you sell a car you can't verify that you really did sell that car or that it was the car you said it was. With currency you can verify all of these things.

So this is a real challenge. And I'm not here to say I have all the answers because I don't. But, fortunately I think we can start to come up with answers if we understand more fully what the problem is. I think if we can understand the unique pros and cons to a blockchain and understand the underlying dynamics of decentralization and trust then we may begin to posit a favorable way of handling non-currency things like an economy.

Trust on a blockchain

Without trust a decentralized blockchain can't work. And this trust component of the blockchain is heavily tied into the law component. With Bitcoin the trust/law aspect is built in as previously discussed. But when we move outside of currency it is not. And this becomes a hard challenge to square. This now gets into a discussion about law and how to do that with a blockchain.

When we talk about law we are dealing with something much different than currency. With Bitcoin, currency, when it disrupts the financial industry that is one thing and it is bad enough. But when we talk about law, now we are talking about going up against the very institution which has a monopoly on violence in our country.

Law is basically a monopoly on violence. If you break the law, the government will use violence on you to throw you in jail. The endgame enforcement for law is violence. And it obviously works very well which is why governments use it.

So when Bitcoin comes around it is going up against a system which controls finance. Finance permeates deeply throughout all of the economy. But it doesn't include violence. Finance doesn't have physical violence going on. Financial institutions are not legally able to use violence. Law and the whole legal system does use violence and is legally able to use it. When we are talking about enforcement of contracts we are talking about a threat of violence if that contract is breached.

What I'm saying is that going up against the financial industry is one thing, but going up against the police and legal system is a totally different thing. With the legal system the police are the final say. The final say is the threat of violence.

You can't have your own laws within a country that supersede the existing laws.

The existing laws take precedence and will crush you if you try to create your own laws within a country. You obviously can't create your own police agency and say this is how we will enforce contracts. Any law that you create that deviates from the current laws of your country will get you in trouble. This is obvious, but it is important to state because it is a distinguishing factor between a currency blockchain and a legal blockchain.

So using violence to do some type of legal blockchain is a bad idea. But it also doesn't really make sense from a blockchain perspective.

A blockchain is digital and as such a legal solution on a blockchain would most likely need to be digital.

The whole idea of violence for law enforcement may be an outdated system that is in need of an update. And perhaps a legal blockchain could be exactly this.

We are all told our whole lives that violence doesn't solve problems, yet that is the very core of what our legal systems will do when they need to solve a problem. The end all of our current legal systems is violence. But maybe there's a better way.

Reputation

One way I could see a legal blockchain working is with reputation. If you look at some of the businesses we use on a day to day basis like Amazon or eBay you see they rely heavily on reputation. Reputation is tied to trust. How do you know somebody from China will send you a new product you ordered off eBay? You don't 100%. But you have a pretty good chance they will if they have 10,000 reviews and a 99.8% positive rating. If they have a history of fulfilling their contractual obligations and many peers can attest to their validity then this makes them quite trustworthy.

Moreover, if they break their obligations they will receive negative reviews and feedback. And the more they do this the more their reputation will pay the price. If they do this enough they will have a hard time selling products and finding new customers to trust them. Reputation has equity and can go up or down.

In contrast, if you have somebody who is new to eBay and who has never sold anything they are going to have a much harder time convincing somebody that they are safe. And without having an underwriter like eBay to back their offering they will probably have to charge less or do something to earn your trust. This is how reputation works and we all kind of get this.

It's the same thing with people. People that we know and have a history with we trust. We trust our family because we have a long relationship with them and we have both reciprocated value to each other over time. I don't want to belabor the point but I just want to show how reputation is quite fundamental to trust.

So if there was a way we could build a reputation type system into a blockchain then I think we would be on to something. And at first thought it may seem pretty easy. You just give people an ID and then have all trades and contracts based around the reputation of this ID. But the more we mesh out the details the more tricky this becomes as well. It's not so straight-forward.

We have the obvious issue of privacy. With currency you don't need to know the identity of a person. But when somebody is receiving a physical good you kind of do.

How does the reputation work? Is it based on points? It it based on quantity? It it based on quality? Does it work similar to Google PageRank? How do you measure this? Is this all kind of silly when talking about law? There are a lot of questions on this.

How does punishment work? What does having a high or a low reputation mean? Do you punish people in non-violent ways? Do you ostracize them? Do you cut them off from society completely? Isn't this now Big-Brotherish? Do you put your entire reputation into a single blockchain? Do you lose all anonymity?

The questions go on and on. I've thought about this a lot and still can't put my finger on it completely. I'm pretty sure we need some type of trust/legal framework at the core of all of this and I'm pretty sure a non-violent framework is the correct way to go. The question is then how do you actually put this together to where it works and does hold people accountable and does enforce contracts better than the current system we have. Because if we can solve these problems and actually build it then I think people will start using it. People use things that make their lives better.

In my view the goal is to build a better legal system than what we currently have. I have actually written an entire book on this kind of a topic. How do we build a better society framework than what we currently have? Can we do this on a blockchain? Can it be decentralized? Can it be open-source? Is a blockchain the end-all-be-all of this or is there something even better and more innovative than this? Those are questions we have yet to answer!

Conclusion

So hopefully this sheds a little light on the topic of blockchains and using them for things outside of just currency. This is a topic that interests me quite a bit considering I am a fan of things like Seasteading and SEZs. I want to see competition in governments and I want to see more innovation in the parts of our lives that are most heavily controlled and kept from advancing.

I'm obviously not an expert on all this and I don't fully know how any of this would work out. But it does interest me and I am always thinking about how this kind of stuff would play out. Being the businessman I am, I am also always looking for opportunities to develop something like this and bring it to market. I've pondered the idea of a legal framework for many years now and I haven't quite had it click yet like certain things tend to do. So until then I will continue to search and maybe somebody reading this can help fill in some of the holes ;D

 Filed under: Internet / Tech, Bitcoin, Ethereum, Blockchain, Governmentchain, Hard Problems, To The Moon, Heretical Thoughts, Free Speech Except This