As humans, we find ways to lower uncertainty about each other so we can exchange value. One of the first individuals to explore institutions and the role they play in lowering our uncertainties to be able to do trade was the Nobel Economist Douglass North. Douglas North pioneered New Institutional Economics proposing that institutions were just formal rules like constitutions and informal constraints like bribery.
If we reflect back to our hunter-gatherer economies, we simply traded within our village structure. There were some informal constraints in place, but mostly all of them were enforced with violence or social repercussions. As our societies began to expand, grow more complex, and trade routes became longer and more distant, we established more formal institutions like banks for currency, corporations, and governments. These institutions enabled us to manage our trade as complexity and uncertainty grew. This then lowered the amount of control we had as individuals. Eventually, with the breakthrough of the internet, we put these same institutions online.
Douglass North argued that institutions are a tool to lower uncertainty so that we can connect and exchange all kinds of value in society. Now, for the first time, we can lower uncertainty with not just economic and political institutions, but we can do it with the blockchain.
Identity management to lower uncertainty
Blockchains can store any attestation about any individual from any source. Allows us to create a user controlled portable identity. More than a profile, it means you can selectively reveal the different attributes about you that help to facilitate trade or interaction. For instance, you choose whether to reveal that the government issued you an ID or that you're over 21. Revealing the cryptographic proof that these details exist and are signed off on helps to facilitate trade and commerce among individuals who don’t have to trust each other. Having this type of digital identity means you can do all types of trade in a completely new way.
Increasing transparency in our interactions
Say someone is sending you something by mail that you bought. You want to know the product you bought, that it's the same one you bought, and that there's some record of how it got to you. Using the blockchain, we can create a shared reality across non trusting entities. This means all the nodes in the network do not need to know each other nor trust each other because they each have the ability to monitor and validate the chain for themselves. You can create the same efficiency of a monopoly without actually having that authority. All these companies and people can interact with each other without having to trust each other. For consumers, you get more transparency because you can see its certificate or token move on the blockchain adding value as it goes.
Getting recourse and disabling the ability to renege on deals
Blockchains let us write code, binding contracts, between individuals and then guarantee that those contracts will bear out without a third party enforcer. You do not have to release the funds until all the conditions are met. This is the idea of smart contracts.
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