The Bullish Case on Blockchains

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The last 100 years have been economically dominated by corporations. Corporations have brought us health, wealth, and wisdom. Corporations organized the invention and distribution of drugs that saved billions of lives. Corporations took care of automation and efficiency gains and subsequently made billions of people live lives in prosperity and wealth — an average worker today has more access to goods and services than the wealthiest king in the mid ages. Corporations democratized access to the world’s information – competition drove prices of wisdom and knowledge down so that now you can become a master programmer, artist, farmer, or mechanic for free just by reading blogs and listening to YouTube videos. Not only shareholders have benefited tremendously by the rise, and often fall, of companies– consumers have even more.

In 2007, an unknown person with the pseudonym Satoshi Nakamoto has published a whitepaper called “Bitcoin” (?) that has introduced the Blockchain technology to the world. This book is not about the technology itself, there’s plenty of freely accessible material on how the blockchain works on the web. Instead, this book makes the case that Blockchains will have the same economic impact in the 21st century as corporations in the 20th century. 

This is a bold claim and in this book I try to make my case as it occurred to me that even though this book won’t be long, technically versatile, or even innovative in the sense that it presents some novel insights, this book is the product of a sudden strike of awareness I experienced during my long walk through the forest listening to the Podcast interview with one of the creators of a top 10 cryptocurrency. 

The purpose of this book is simple but nonetheless powerful – making you see the drastic potential of the Blockchain technology to completely disrupt our world that may be obvious to some people today – but certainly not to the majority of people like you and me.

So, let’s get started, shall we?

The Blockchain will be your new employer

In the introduction, we mentioned that the blockchain technology has the power to replace today’s corporations. And it can do so in a slow and steady way that cannot be stopped by any centralized entity such as a state or another company. If you compete with the blockchain, you will almost certainly fail because it is like an animal that cannot die as long as at least one cell is still alive. If you cut off one head, two new ones emerge. The Blockchain is like democratic forces when many countries in the world were still monarchistic. Even though centralized forces may look scary and dominant, they’ll quickly erode as they die the death from a thousand cuts. 

I don’t want to start with Bitcoin because your thinking is already too much biased towards how Blockchain technology can replace the global currencies. I want to start with what else you can store on the Blockchain: rules. 

If you think about it, a corporation is nothing but a set of rules. How much will every single employee will get paid? How to find new customers? How to acquire new employees? What to do with human, capital, and natural resources to earn money? When to start work and when to end? Which customers to exclude? And on and on. Collectively, these questions and how they will be dynamically answered by the corporate organism determine how this organism will behave. The set of rules is influenced by all kinds of external forces such as (Arbeitsverbände?), local governments and politics, people’s individual biases and perceptions. Yet, every business owner knows that building the business machine as a system that works independently of any single individual is the ultimate art and craft of a CEO. 

Building companies is building systems for incentives, culture, and communication.

Many problems with corporations come from the fact that the systems are not reliable and trustworthy. Employees may not getting paid while the management teams receive huge stock option packages and bonuses. Rules get broken for no reason other than individuals who place their own egoistic needs higher than that of the whole. Management needs to hold on to work that is not needed even though they could release more people and improve the system significantly. This is how nimble companies become fat and start to die.

But regardless of these disadvantages, a company is nothing but a legal entity, a system, a rulebook. 

This is where the Blockchain comes into the scene. The Blockchain can serve the same role. You can program a set of rules, incentive systems, principles, and even transaction blueprints into the blockchain. Contracts if you want. Smart contracts if you know your stuff. 

Today, you can create a Blockchain instead of a corporation. The Blockchain can hire, pay, incentivize people according to rules you programmed into it. You can create an organization on the Blockchain. You write the rules into the Blockchain and it executes the rules no matter what. It may hire employees and fire them. It may incentivize other people. It can set the stage and change itself according to external influences. 

Shareholders Become Tokenholders

A company is a legal entity, you may view it as a higher-level organism, consisting of a group of people that collaborate on a for-profit motive. Conceptually, a company is divided into owners and operators, although the two will often mix having owners involved in operating decisions and operators given part-ownership to induce them to act like owners. 

Companies became popularized in the 17th century to fund shipping and exploration operations with a profit goal. For example, the Dutch East India company was involved in colonial ventures of European nations in the 17th century. The company issued share certificates of ownership to the shareholders that were already tradable on the Amsterdam Stock Exchange. 

The formation of companies has some major advantages because it allows a separation of capital and labor. Shareholders are usually protected and can only lose their investments, not more. The profit motive attracts funding for many massively complicated operations that would not otherwise be possible.

If you wake up in the morning, you may drink a smoothie of, say, apples, oatmeal, chia seeds, berries, nuts, and green tea, paying only a tiny percentage of your income. But the infrastructure investments required to accomplish this are mind-boggling. Ships, containers, myriads of workers, robots, electric energy, and year-long farming efforts. The logistics and planning require major investments in server infrastructure and information technology. And each of the resources needed for your smoothie requires additional production and distribution capacity. To produce the servers for logistics planning is a complicated orchestration of globalized organized effort. An insurmountable amount of capital and organized effort are needed to keep us floated with the goods we need or desire.

And most of this is done by companies today. Shareholders invest capital in infrastructure when they see a market need or demand and they find profitable employment for it. As compensation for taking the capital risk, they get to vote on important company decisions (governance) and share in the profits of the operation – both on a per-share or percentage basis. Operators, systems, and workers invest labor, skill, and technology for implementation. Companies have shaped our world like almost no other single invention. You may argue that companies drive a large share of the invention and innovation in our world.

In the digital age, however, blockchains are already in the process of taking over many of the functions of traditional corporations. As a means of creating trustworthy and reliable systems that can orchestrate the collaboration of labor, skill, and capital investment, they have significant advantages compared to traditional corporations. Let me explain.

With the invention of Blockchain technology, a new pattern starts to emerge: shareholders become tokenholders, and operators are incentivized by the “play book” written in the blockchain. Tokenholders get to make important decisions about the “play book” and often they share in profits – e.g., by getting token rewards they can then sell on the open market or crypto exchanges. For example, Bitcoin has the miners who become tokenholders that can then by hold or sold. Another example is proof-of-stake blockchains such as Ethereum and Internet Computer where tokenholders get the voting power and incentives in form of new tokens. Together, the tokenholders in a proof-of-stake blockchain collectively decide on important matters regarding the future of the system established by the Blockchain.

You set up a blockchain as a decentralized “rule book” that establishes the incentive systems required to foster organized effort. In a company, the rule book is not very reliable as it can be changed easily and often cannot be enforced. Think of all the ways shareholders have screwed over employees in the past, or employees have screwed over other employees, or employees who have screwed over shareholders! There’s a misalignment of interest and incentives that cause shareholders and operators to work against each other to a certain extent. This “friction” in the system is extremely costly for the society but many have accepted it as required costs of keeping the economy working. 

However, Blockchains can overcome this misalignment of incentives. As the rules can be written into the chain, all participants have a clear and aligned incentive to keep the Blockchain successful. They knew the rules when they joined the system as operators, tokenholders, or both. And, more importantly, they know the rules are more reliable – they’re written in the Blockchain and can only be changed in a decentralized, almost democratic process of majority consensus. 

Consider the following example. A freelancer marketplace may decide to go on-chain by creating a Blockchain that is responsible for governance of the marketplace. The Blockchain’s rule book differentiates four potentially overlapping groups of participants: clients, freelancers, tokenholders, and mediators. Clients buy tokens on a crypto exchange that can be used to pay freelancers. Freelancers get tokens from clients for service rendered. The tokens will be held in escrow by the Blockchain and released if both the client and the freelancer agree on the successful delivery of the service. A certain percentage of service exchanges between clients and freelancers will result in conflict that will be resolved by the mediators. The mediators are elected by the tokenholders. A certain percentage of the tokens exchanged between clients and freelancers will be captured by the Blockchain and used to incentivize mediators and tokenholders and keep the system running. 

In this scenario, the Blockchain behaves like a traditional business system: it pays “employees” and “shareholders” (mediators and tokenholders), sets the rules of the service or value exchange, and builds the infrastructure. Yet, it is not owned or operated by a centralized entity. It cannot be controlled or shut off by a single government. The rules are more reliable and less subject to manipulation because they’re enforced by smart contracts that automatically execute on well-defined conditions such as releasing the funds if both freelancers and clients agree. The Blockchain is an impartial system that orchestrates the reliable delivery of value. It runs 24/7 and independently of human biases and centralized control. It is not, legally, a company but it serves the same needs previously served by freelancer marketplaces.

Yet, this discussion wouldn’t be complete without going even further and asking the tough questions: is everything better just by using Blockchains? The answer is, of course, no! The Blockchain is entirely controlled by the majority in terms of tokenholders (proof of stake), or computing power (proof of work). Much like a company is at risk of being subject of a hostile takeover, i.e., unknowingly to the management or the company operators, a new shareholder acquires a majority stake in the company, a Blockchain can be subject to a hostile takeover as well. To take over a Blockchain, you simply need to control majority consensus. In the case of Bitcoin, this is very tough because you need to buy a massive amount of computing power that is currently unbearable for any single entity due to the sheer size of the computing network. But the smaller the Blockchain, the easier a single entity with enough economic interest can acquire a majority consensus. In a proof of stake Blockchain, it just needs to buy a majority of the tokens. As many Blockchains have a market capitalization that is below that of large companies, a large company could theoretically decide to acquire the majority in a Blockchain and destroy it, or, perhaps even worse, manipulate it to serve their own interests rather than those of the collective.

The emergence of Blockchain technology allows for an unbelievable flexible and decentralized orchestration of value creation that supersedes that of a company – at least when looking only at the digital space. However, it doesn’t automatically solve all governance problems such as protection against hostile takeovers or egoistic prioritization of tokenholders over all other stakeholders. The hope is that future Blockchains that focus on true value creation rather than just tokenholder incentive maximization will win a bigger portion of the pie. In this sense, they’re not that different from the incentives in traditional economy where the companies with the largest value creation usually fair pretty well.

Bitcoin is the Ultimate Asset

Bitcoin was introduced in Satoshi’s Whitepaper with the title “Bitcoin: A Peer-to-Peer Electronic Cash System”. [1] The main contribution of the paper was to solve the “double-spent problem” that a single virtual coin cannot be spent twice by a malicious party. This problem was previously not well-addressed in a distributed environment where contributors have an economic interest in hacking the system. However, through the introduction of the “proof of work” concept, the system became virtually unhackable. Only if a majority of the network’s computing power collaborates on an attempt to hack the system for a considerable period of time can the monetary system Bitcoin be manipulated. Given that the combined computing power of the distributed Bitcoin network has an energy footprint that is larger than that of many countries, it is virtually impossible for a single party to manipulate the network. In fact, if one party tried to manipulate the network, it would quickly be realized by its participants and they would fight back. 

Consequently, the Bitcoin network is one of the safest entities on earth. If you own one Bitcoin, you own the purest asset in the world. Only 21 million Bitcoins can ever exist. Nobody can change this fact because it is written into the rules of the Bitcoin protocol. Nobody can spend a single Bitcoin twice. The higher the price of Bitcoin rises, the more participants the network attracts due to the economic incentive to be a participant of the network and to get paid by the network for doing so. And the more participants the network has, the safer it becomes against manipulation of a single party.

An asset is a store of value. Bitcoin is the perfect store of value because there cannot be any dilution. Virtually no other asset can provide the same function. Gold is constantly diluted as the gold supply expands. Bonds are promises of future cash flow and they are heavily diluted as more and more of those promises arouse. Stocks are ownership interests in companies – and a single person, the CEO can often decide about how much of those ownership interests exists – so they are dilutive too. Real estate is dilutive as more and more houses are built. Even land can be seen as dilutive as the vertical space allows for a virtual infinite expansion. Bitcoin, on the other hand, exists in limited quantities forever – 21 million Bitcoins are the maximum. In fact, every day Bitcoins get lost and will never be recovered as, for example, Bitcoin holders die and their heirs cannot access or even don’t know about the Bitcoins of the dead holder. While virtually all other assets are inflated with more and more of the same, Bitcoin actually deflates.

So, on the one hand, you have an asset with constant or even reducing supply. On the other hand, all other assets are inflating. Let’s assume a world where the demand for all assets remains the same over time. In this world, the value of Bitcoin will rise against stocks, bonds, fiat cash, real estate, and most other commodities. It rises with the inflation of the other assets. But the demand for Bitcoin is growing rapidly due to many factors – currently, the Bitcoin market capitalization is significantly lower than the market capitalization of all other assets. The fact that Bitcoin offers such unique inflation protection means that more and more investors move from traditional inferior assets into the relatively small Bitcoin asset which results in an explosion of the price. However, even when a steady state is reached, the increase of the world population and the inflation of other assets results in a strong drive towards increasing Bitcoin prices.

But there are many more advantages of Bitcoin. What if you need to leave your country quickly? Many unstable countries experience situations where people have to leave their houses and move to another country to avoid risks to their life and well-being. Gold and physical money are not very portable. Your bank account can be frozen by the government. Real estate cannot be moved easily. Land cannot be moved at all. Commodities are hard to move because they are at a thermodynamical disadvantage: they consist of matter. If you need to move out of a country quickly, you can do so with Bitcoin at the speed of light. It is one of the most portable assets that has ever been created by humanity.

In addition to that, it cannot be easily stolen too. Money, gold, cash, real estate could all be taken away forcefully. But even if somebody shot you, he couldn’t access your Bitcoin if you stored them the right way. Most people wouldn’t even know about the asset as a piece of paper or even your brain is enough to hold them anywhere you want. A simple series of digits is enough to access, transfer, or take with you all the wealth that may be held in a virtual wallet.  

Leaving all of those advantages aside, Bitcoin has a counterbalancing effect on the governments in the world. No single government controls the Bitcoin network as it is a global decentralized network of computing energy. Saylor calls Bitcoin the Bank of the Cyberspace. However, as the government inflates assets and prints more money, more and more people will deposit their assets into the dominating store of value in the cyberspace, Bitcoin, that is immune against those inflating forces. Thus, governments lose their monopoly on monetary control and they need to cut back on the inflation to avoid losing market share in the global exchange of value. 

All assets are in constant competition against each other and the existence of a perfect asset like Bitcoin threatens the centralized power of the central banks. It deprives them of the tool they became so used to: inflating the prices of everything to relatively reduce their debt load without needing to tax their citizens explicitly. Without this tool, they may need to do in the openness what they’re doing now in the shadows: getting enough money to fund their operations. Many Bitcoiners believe that this will increase the likelihood of an open, transparent, and fair political conversation with the people. For example, governments all over the world have issued debt to pay for their operations which was then eaten away by inflation. The dynamics in our society are hard to grasp and some people have paid dearly while others (e.g., the holders of debt with reduced interest rates) have benefited greatly. However, an alternative to increasing the money supply via debt would be to do so via direct fair payments to everybody such as in a universal basic income. Bitcoin will hopefully lead to an open conversation about the economic society we want to live in.

Valuation of Blockchains

Blockchains must have an in-built incentive system to motivate investors, tokenholders, developers, and hardware providers to contribute. The power of any blockchain comes from its decentralized infrastructure. But there need to be an incentive to motivate people to take action and foster the growth or maintenance of the blockchain. For example, the Bitcoin blockchain takes a small portion of Bitcoin value from each transaction and gives it to the miners. However, the Bitcoin itself would be worthless if you couldn’t use it ultimately to purchase goods and services. Thus, the role of investors who trade fiat currency for Bitcoin is still very important because they inject utility and value into the Bitcoin incentive system.

But why should somebody spend their hard-earned money for tokens on a Blockchain? What is the value of a token?

There are many ways to value an asset. One of the most successful and most logical ways to value an asset is discounted cash flow analysis (DCF). Today, every successful investor from Warren Buffett to Peter Thiel to Jeff Bezos uses DCF to determine the value of assets such as businesses. If they can acquire assets below the intrinsic value – as determined with DCF – they buy the asset. 

If you know the future, the discounted cash flow analysis is very straightforward: you sum up over all free cashflows the asset generates and, after making a simple adjustment, this is the intrinsic value of your asset. Future cash flows are less valuable than today’s cash flows because you could earn an interest in the interim. That’s why investors discount the expected future cash flows back to the now using an interest rate they would have accomplished otherwise. 

However, as you don’t know the future you have to do the next best thing: guess it. To value any asset, you can simply open a spreadsheet and put in the expected future cash flows and discount them back to the now. You sum up all of them and get the expected intrinsic value of your asset. As the expected intrinsic value fluctuates with fluctuating expectations, people can come up with different valuations for different assets. For example, when the company Google was founded in 1998, the cash flows were very small compared to today. However, some early investors quickly figured out the potential and imagined a likely near-term future where the cash flows could be very significant – so they offered to buy the company for valuations that looked crazy to some people. As nobody knows the future, value is in the eye of the beholder. 

To value a blockchain, we first make a couple of assumptions. Shareholders become tokenholders – they control the blockchain. Some blockchains pay out the tokenholders, others don’t, yet. However, all blockchains are assets to some people. If you control a blockchain, you can participate in the decentralized decision making, much like a shareholder does. If you outright owned your government, you could make decisions in your favor that increase your today’s cash flows. For example, you could reduce your individual taxes while increasing everybody else’s, or you could increase the pension of people with your characteristics, or you could simply pay you a higher salary. Power translates into monetary value. 

Thus, the lower bound valuation of any blockchain is its future cashflows but it can be more due to the power and control component. Let’s focus on the former though! Some blockchains are programmed in a way that they destroy tokens over time. This leads to deflation where in a constant-demand environment the value of each individual token appreciates over time. You could see this appreciation as potential cash flow as you could always cash out of your token holdings by selling them on the open market. There may also be some inflationary mechanisms build into the blockchain that destroy value for existing tokenholders. These may serve like an asset (token) tax that is taken from the ones who own it and given out to the ones who need to be incentivized to strengthen the blockchain. 

Nobody knows the future. It is impossible to predict how much cash flow a blockchain generates over its lifetime. Blockchains today are new forms of entities that, like companies, are controlled by a number of people (depending on the size of the blockchain) and where people are incentivized to contribute to its success. Like Amazon, Google, Facebook in their early days they don’t produce a lot of cash flows now. But as the adoption and impact of blockchains grow, the cash flows they control will increase as well. Some blockchains are likely to be valued much higher than any single company on the planet! If you arrive at a number of future cash flows generated by the blockchain, you can divide it by the number of outstanding tokens (that, fortunately, is a known and predictable number for many of today’s blockchains) to arrive at the economic and governance value per token. As blockchains are such a young asset class, many more refined methods will arrive that attempt to value them correctly because valuing blockchains correctly is the equivalent superpower of valuing companies correctly, one of the most profitable job descriptions in the last century.

For example, billionaire Bitcoin investor Michael Saylor proposes another way to view and value the Bitcoin network in particular. Saylor argues that the Bitcoin network has become a bank in cyberspace where people park their excess free cash flow to plug in the unique properties of the asset such as no centralized control, higher security, de-facto deflation (i.e., your cash becomes more valuable over time as a fraction of the 21 million Bitcoins get destroyed or lost every year), and portability. He argues that people adopt Bitcoin as their treasury asset and move their excess cash into it, much like they currently move their excess cash into a bank account – but with the difference that the excess cash doesn’t get inflated and is much more secure than any other asset class. For example, if you moved gold into a bank in the year 1900 with the goal of storing your excess value for 100 years, your best-case scenario would have been a significant inflation of the gold asset class as more and more gold was produced (about 2% increase of the gold supply per year). But your expected scenario is a 100% loss of your gold assets as banks in Germany, Russia, France, and even the US with “Executive Order 6102” in the year 1933 would have surrendered all gold reserves to governmental force. In times of need, it is very hard for governments to resist easily accessible wealth of its citizens. In fact, inflation generated by central banks can be seen as a form of taxation of the savers who hold their assets in inflation-sensitive assets such as fiat currency. 

Bitcoin, on the other hand, doesn’t have these problems. That’s why many people today use it as a treasury reserve bank parking their excess cash into it and holding Bitcoins instead of cash as a long-term asset that doesn’t inflate in nominal terms. As they park their excess cash, the cyber bank loads up in monetary energy by the amount they transfer into it. For example, if 1000 companies park $1,000,000,000 (1 billion USD) of their excess cash in the Bitcoin treasury bank, the value held by the new treasury reserve Bitcoin increases by $1,000,000,000,000 (1 trillion USD). As more and more businesses follow this strategy, the Bitcoin treasury bank build up monetary energy. If next year the 1000 companies earn another excess cash of 1 billion USD and they all park it in the Bitcoin treasury bank, its asset base loads up by another 1 trillion USD and the Bitcoin price appreciates by that amount (minus volatility and short-term trading effects). 

So, Taylors view is that the Bitcoin asset class could theoretically be valued using a DCF analysis. If Bitcoin is the treasury bank for 1000 companies parking all their excess cash in it, the value of the Bitcoin asset class appreciates by the free cash flow of these 1000 companies. Today, many companies in the US park their excess cash in USD which keeps the demand for USD treasury high. In the future, many companies may park their excess cash in BTC which will increase the demand for BTC – with a constant, even declining supply of BTC. All participants who’ve parked their money in the Bitcoin treasury bank do now share a common interest of keeping the money secure and convincing others do park their money in the treasury as well. These strong network effects are one of the driving forces for the rapid adoption of Bitcoin. But even if we reach an equilibrium in a given year where adoption doesn’t grow anymore, Bitcoin will still get its fair of free cash flows of the companies and individuals committed to using it as their treasury reserve. In such a steady state, you could value the Bitcoin asset using a DCF with the free cash flows of its participants that are deployed in the Bitcoin treasury reserve and, thereby, purchasing more Bitcoins and increasing its value by the same amount by the law of conservation of energy.

The father of value investing Ben Graham said that in the short term the stock market is a voting machine, in the long term it is a weighing machine. According to Taylor, the same holds for the Bitcoin network where its value is given by the net sums deployed into the cyber bank Bitcoin. In the short term, the Bitcoin price may fluctuate wildly. But in the long term the price is determined by the excess monetary energy stored in the Bitcoin network. In fact, Saylor names the four pillars that contribute to the Bitcoin value over time: adoption, utility, inflation, productivity. 

Adoption: The more people adopt Bitcoin as their treasury reserve asset, the higher the valuation rises. If the asset base stored in the Bitcoin network increases by 10% as people and corporations adopt it, its treasury value increases by the same 10%. Bitcoin went through several phases of adoption. First, only crypto-enthusiasts and early miners and computer scientists adopted Bitcoin. Then, a wave of very early investors and venture capitalists followed. Wave after wave, the adoption of Bitcoin grew geometrically and, at the time of this writing, a good portion of the individuals own Bitcoin. However, the limits of adoption are far from reached at this point. As the market capitalization of Bitcoin grows, so does it’s potential to be adopted by the next bigger types of investors. As it grows in adoption, smaller companies will use it as its treasury reserve asset which will grow its market cap which, in turn, makes it possible for mid-sized companies and financial institutions to take their first positions. The potential for adoption doesn’t stop there–it is likely that smaller states start to adopt it to secure their asset base and, as the market cap of Bitcoin grows, larger and larger states begin to adopt it. At each point, there’s a strong incentive to be early. For example, the early small states will be rewarded for being early adopters as the laggard small states start to adopt. This accelerates the adoption of Bitcoin and leads to strong network effects. Sure, this adoption phase cannot go on forever. Over time, there must be some kind of conversion – or even reduction of demand and adoption.

Utility: As the adoption increases, a whole ecosystem of services arises and companies start to build their business models around Bitcoin and other cryptocurrencies. Examples are payment providers and investment firms who allow their customers to “plug into” the crypto asset base with financial instruments such as debt and decentralized finance. Many Blockchains perform services outside of payment such as storing information in a trustworthy, decentralized way or smart contracts that allow for an implementation of a secure and decentralized “if-this-then-that” rule system that may provide utility to parties that don’t trust each other. For instance, Blockchains can mediate conflicts on the individual, corporate, or even state level by enforcing objective contracts that were agreed-upon by the respective non-trusting parties. As the relative utility of Blockchains and their applications increase, their valuation is likely to increase as well. 

Inflation: Programmers can create all types of Blockchains with various rules. Per design, the Bitcoin network has an upper limit of Bitcoins that will ever be created: 21 million. In regard of this fully-diluted number, Bitcoins are a scarce resource that doesn’t inflate over time. This is in contrast to most other asset classes – debt, businesses, money supply, gold, oil, real estate – that can and are inflated over time. We will build more houses, create more businesses, mine more gold, and print more fiat money. However, we will not create more than 21 million Bitcoin. Due to the inflation of other asset classes, Bitcoin is likely to increase in relative value. For instance, the supply of gold increases by roughly 2% per year whereas the supply of money may increase even faster as centralized banks inject more of it into the system every year. This means that after a period of 35 years or so, the value of an ounce of gold will be cut by half. In roughly 100 years, it’ll be cut by half three times leading to an 85% loss in purchasing power. As Bitcoin doesn’t inflate, its fiat-denominated value is likely to increase by the loss of purchasing power, the inflation rate.

Productivity: Assume, one Bitcoin gives you a certain share x% of the world’s economy in the year 2020 and the year 2090. Even when assuming a world with 0% inflation, we may see a growth of productivity, say, by 2% per year. This means that in 35 years, the economy has doubled just because of the increase of productivity. If one Bitcoin in 2020 gives you x% of the world economy with size Y and one Bitcoin in 2090 gives you x% of the world economy of size 4Y, the value of this same Bitcoin has increased four-fold — it now buys four times as many goods and services.

Together, according to Saylor, the value of Bitcoin is a function of the increase in adoption; the creation of new types applications and use cases along with its increasing adoption that all increase its utility; the inflation of alternative assets relative to Bitcoin; and the productivity increase of the Bitcoin holders committed to use Bitcoin as their treasury reserve. These four factors determine the increase of the future cash flows into the Bitcoin network and, thus, its future valuation.

Governments on the Chain

A government is, to lend Yuval Harari’s argument, a net of stories that speaks about hard and soft rules, norms, culture, and collaboration. Governments fill an important role in society in that it allows for more or less friendly and productive collaboration among millions of people. Subscribing to a shared belief system is necessary for humans to productively collaborate towards common goals. In fact, formal and informal communication devices or rule books such as the constitution of the US have been crucial for technological advancement and our ability to rise to what may be called the dominating species on earth, even though we are quite vulnerable and weak if we find ourselves alone in the wild. 

One of the big trends in the last century has been democratization of governments. At least formally, many countries today are democracies where people have the power. In fact, the term Democracy comes from the Greek word dēmos which means ‘people’ and the word kratos which means ‘rule’. The people are supposed to rule. The technical implementation of democracies in the pre-Blockchain era has been a nightmare. People distrust elections and suspect voting fraud because the ruling power also has a lot of control of how the votes are counted – and they generally have a strong incentive to manipulate the vote in their favor. Of course, many if not most governments may not tamper with votes but the fact that some do results in a ubiquitous trust crisis in modern democracies. 

The act of voting itself is highly decentralized and difficult to tamper with without risking the unveiling of attempted fraud. However, as the votes are counted and “bubbled” up to a central counting entity, the general vulnerability to fraudulent behavior increases as fewer and fewer people are needed to manipulate the voting statistics. 

These kinds of problems can be solved relatively easily by Blockchains that are trusted stores of information. To manipulate the information stored in a Blockchain one had to manipulate more than half of the governance of the Blockchain. With correct implementation, no single entity can tamper with this information. Conceptually, every single citizen could write their vote in the Blockchain and everybody could verify the vote statistics easily by running a computer script that analyzes the entries of the Blockchain. 

So, Blockchains will eventually help implementing and improving the credibility of existing states and their governments. However, the reach of Blockchain can go even further. 

With Blockchains being able to not only store rules and laws but also perform concrete actions via smart contracts, one could imagine building complete virtual governments on one or more blockchains. With Bitcoin being a decentralized asset in the cyberspace, more and more Blockchains, controlled by the decentralized community of tokenholders, will set and even enforce adherence to rules. If Alice reprograms her self-driving car to drive into another car, the Blockchain may temporary revoke her ability to control the car. These automatic rule enforcements may be voted upon by the Blockchain tokenholders. While this may sound like an extreme example, it is not too far ahead, given that thousands of programmers currently create applications on top of programmable blockchains such as Ethereum. Such simple “if this then that” rules are already deployed in all major programmable blockchains.

The blockchain ecosystem is proliferating rapidly and with the current rate of adoption of all kind of blockchain applications, we may see a partial or, in some cases even complete, replacement of governments by Blockchains in many areas of life. At least technically, the blockchain technology has brought us much closer towards the implementation of true democratic systems and governance.

Censor Me If You Can – Artwork That Cannot Be Destoyed or Altered

Due to their centralized, non-fungible nature, blockchains are perfectly suited to store digitized artwork that can never be forged, censored, or destroyed. As long as the Blockchain remains intact, nobody can destroy the information encoded on the chain. Many authocratic nation states of the 20th century have relied upon censorship to not only control the propagation of information but also the information itself. Say, you wanted to write a political paper and ensure that this paper can be read in its original form, say, 100 years from now. The currently best bet would be to publish it with a publisher. However, this may be very hard because you need to go through the gatekeepers to get your book accepted and then published without modification. If there’s no economical incentive to publish a specific book, most publishers today will outright reject it. You may self-publish the book but then you’d need to host it on a privately-controlled server. If the paper would become very important, who guarantees that it is not modified by the entity that controlled this server? And even if you’d completely trust this entity – say you run your own server at home – you could still be hacked, and if the government would have an interest in censoring the information, they could simply send you to prison. Before the invention of blockchains, there was simply no way to reliably store original information that can be accessed by everybody in its original form.

The unique value proposition of blockchains is to solve the “Byzantine General Problem” – to reliably distribute information in the presence of a minority of untrusted parties. It is likely that we’ll see many applications to distribute digital artwork and information building on the powerful value proposition of Blockchains. In fact, one of the first applications implemented on the Ethereum Blockchains are Non-Fungible Tokens (NFT). Roughly speaking, they allow you to, conceptually, upload any digital file into the Blockchain. This file then cannot be altered with at a later poin in time.

In fact, one of the first pieces of information programmed into a Blockchain was contributed by its inventor who called himself Satoshi Nakamoto. A Blockchain is a series of blocks of information. The first block of a new Blockchain is referred to as “Genesis Block”.

The blockchain infrastructure allows artists to distribute truly accessible, reliable, and non-fungible art. But the applications reach further. For example, it solves the problem of transferring the will without needing to trust or pay a third party such as a lawyer. It also allows to reliably transer real estate between untrusted parties without paying a notar. For instance, when purchasing real estate, a significant fraction of the purchase price must be transferred to notars just to solve the trust problem. These frictional costs are likely to reduce or even vanish from societies that integrate with Blockchain technology. 

An additional example where Blockchains will be useful to ensure the fair and secure dissemination of information: official corporate releases. Currently, they must be distributed by centralized news agencies to make sure that all investors can base their investment decisions on the same information. In the future, we’ll probably see these official press releases be distributed over trusted Blockchains to ensure that nobody can doubt (or tamper with) its validity.

First-principles thinking suggests that there will be thousands, if not millions, of possible applications given the exploding penetration of data and information prevalent today. Only a small portion of data will be stored in Blockchains because of the large necessary overhead imposed by them. Blockchains are not efficient because to ensure the reliability of data, it must be replicated among many participants in a distributed (blockchain) system. But a small portion of data is extremely sensitive and must be secured even in the presence of “failures” of nation states or other centralized entities. Applications that rely on this type of data can benefit tremendously by the invention of Blockchain technology.