2.6 Financial Internet
Our final chapter will serve as the culmination of our technical discussion from part I and the use case discussions from part II to leave readers with a vision for a new financial internet. This next generation internet is where ope logic runs on a backbone of secure shared ledger infrastructure, rather than our current walled garden internet where a few gatekeepers enjoy asymmetric access to our most valuable data.
The only reason for going through the expense and hassle to store hash linked information in a shared global commons is because whatever that data is must be “important”. Since the dawn of writing, keeping track of information has been THE killer use case. Once we were able to write things down, the first “data” was created. And of course what is the most important thing to write down - who owns what!
Not to underplay the importance of protecting our personal health information, or connecting the sharing economy in a more equitable way, but each specific use type of business model is ultimately underpinned by financial infrastructure. Businesses a disparate and hospitals and ride sharing companies, are still just collections of equity, debt, employment, and supplier contracts where humans agree to do things for each other in exchange for some kind of remuneration.
Currently, this web of contracts is stored on a hodgepodge of leaky databases and the occasional file cabinet relic. The future state all we all know by now, is an interconnected hash web of distributed databases. It has to be, the current system is simply too fragile and vulnerable to disruption to survive.
The Best Knowledge System Ever Devised
In its current form, DLTs are far from the fastest computation and storage layers, but they are THE BEST computation and storage layers ever created. Imagine writing something down thousands of years ago on a parchment scroll. To guarantee the data contained within the scroll was never lost, many copies must be maliciously transcribed by hand. Even then, paper is no guarantee the data becomes immortal. New generations must re transcribe onto new paper, or find more durable mediums of storage such as carving the data into granite.
Modern databases automate this process by making data vastly easier to copy and store. Without DLT, we cannot guarantee that the data is valid and stored in a truly immutable shared commons. DLT is the global rock of granite we can etch our histories into assuming enough hard drives survive and any one time to keep the transfer of knowledge going to future hard drives.
If exabytes of porn and cat pictures were suddenly erased forever, somehow, life would go on. People would find new cats to take pictures of, and hire new repairmen to “fix the cable”. But what if your property records were deleted? Or your bank account balance? Or schematics to keep the power grid running?
This is the type of data DLTs are designed to protect first and foremost. To rebuild the internet in a truly robust and fault tolerant architecture, we must start by reconstructing the financial back end. Without this lowest level of infrastructure, friction will remain too high for people to effectively organize together to innovate our way out of the biggest issues facing our planet.
When Friction Approaches Zero
The arc of technology is to reduce the friction required to perform a given task. This natural drive to find better ways of doing things has created our modern world. Why send a carrier pigeon when you can telegraph. Why telegraph when you can fax. Why fax when you can email. Why email when you can swipe right.
Following this trend leads us to a very different financial world from the one we are accustomed to today. The logic needed for common financial operations does not often require much more than simple arithmetic.
Take the simplest type of financial transaction possible, the “payment”. As discussed at the very beginning of the book, we need a system where Alice and Bob can both trust their ledgers will be accurately credited and debited. If Alice sends Bob 10 dollars, she should not also be able to send Carol the same 10 dollars.
As systems like Bitcoin have proved (assuming you can keep track of your private keys) this logic is available in a completely automated way to anyone on earth with an internet connection.
Next we layered on complexity with “smart contracting” where instead of simple A to B payments, financial transactions of any arbitrary complexity can be created and enforced in the same automated manner. This could be anything from mortgage underwriting, to complex international trade agreements, to insurance.
This leads us to a world where IOT enabled smart devices can enforce automated contracts between two individuals just as easily as thousands of autonomous agents either with their own keys, or with risk offloaded to insured custodians.
This basic structure is a primordial soup that will eventually create a global hegemony shattering wave of technological disruption orders of magnitude larger than the best efforts of present day FAANG companies.
Open Systems are More Profitable
In previous chapters, we have detailed how distributed ledgers might displace walled garden business logic in verticals like the sharing economy (dUber), healthcare (DNA printing), and more niche use cases such as sports betting. The commonality between every DLT disrupted business model comes down to open logic displacing opaque logic.
If we can programmatically define the logic behind a certain business functions, DLTs can reverse engineer these processes into more profitable open systems of interconnected value exchange. On the surface this seems possible only because of technologies like hashing and shared databases. The vast majority of people using DLTs systems will care less how they work, they just want the plane to work, not to understand fluid dynamics. The raw technology is merely the parts, the whole is possible because DLTs enable the correct alignment of incentives between all parties via a new form of fluid equity.
STO, ICO, traditional equity, utility token, call them what you want. While the 2.3 Howey Test chapter attempts to better define the nuances of these terms, the overarching goal of the new token economy is to better reward all participants in the system.
When barriers between creator and user break down, outside users and investors are just as keen on making the product better as internal employees, and freelance developers. As the token accrues value for providing real world value, be it tracking global fish stocks, replacing the sharing economy middleman, or keeping personal health information safe, all users of the system stand to benefit.
This idealistic notion in no way downplays the excessive risk when trying to do something new. Most tokens will trend towards 0 value, just like most startups will fail. What is different, the barriers to enter and exit new ideas becomes drastically lower, and the logic used to create new ideas becomes vastly more open. The end result of this shift creates a stronger economic system where residuals from past work can provide future value long after work on a project has finished, rather than our current “gig” economy where one misstep cuts off workers from any possibility of a long tail revenue stream.
This is the dream of all startup employees hoping to cash out their equity at IPO for a lifetime income stream. Instead of remaining solely in the hands of the most well connected, this democratization of business logic into open systems will allow billions of people to access the benefits of “owning” a piece of something bigger than themselves.
What does it mean to “own” something? Is it the legal right to claim dominion over tangible or intangible goods and services? Or is it a social contract with our fellow humans to create barriers between what is ours and what is theirs?
Regardless of the semantics and philosophy at play, the goal of a fair and just society should be to balance the needs of all participants in the system. Always messy, and never perfect as there will be winners and losers to any shared set of rules, we must still strive towards living harmoniously together.
At its best, the free market creates a system of price discovery where activities that benefit people accrue value, and activities that do not benefit people stop existing, replaced by superior competitors with superior ways of providing value.
A DLT enabled financial internet does not inherently solve the deepest issues of creating better societies. Instead, it provides the transparent fabric that can reduce the friction of coordinating economic activity towards zero.
There is no inherent mechanism of the free market that prevents ownership from accruing steadily into fewer and fewer hands by compounding small advantages over time. Are the archetypal rags to billionaire riches always possible, yes. Is it vastly more common for upper class communities to groom their children to perpetuate class divides, also yes.
What the dApp revolution provides for is the breakdown of all technological barriers that prevents individuals from participating in the financial internet. Regardless of the geographic, demographic, or genetic lottery one is born into, all will eventually have access to frictionless finance.
This means at a practical level that anything and everything is for sale. The notion of liquid stocks vs illiquid real estate, intellectual property, water rights, or impressionist paintings disappears. In this future, the average global citizen will have access to convert their mental and physical labor directly into any form of value they see fit.
Rather than inept corrupt central institutions printing money out of thin air behind closed doors, labor can be exchanged for almost anything in a vast interconnected financial internet of real value. How IOT and AI play into this new internet is anyone’s guess, though we tried to provide some insights into this in the previous chapter.
Some might see the full traceability and transparency of all assets on earth as a dystopia. If we know only X amount of blue fin tuna are left, and are being depleted at an unsustainable rate, what pricing mechanism do we choose?
Do people who own tokenized tuna hoard the fish for a profit? Or sell them to the highest bidder who pays a huge premium to eat the very last one? Maybe the government gets involved and uses the same DLT system to enforce police power on those attempting to sell their tuna tokens illicitly.
Clearly, the financial internet is bigger than any individual, corporation, or government. Want we do know is data about every financial activity (which is really a reflection of the impact we have on our planet) will become drastically more open and accessible to analysis via DLT. Or not, this information could also be encrypted and hidden away from view using the same tool sets. It’s up to readers like you to decide the fate of our increasingly digital lives.
Westward the wagons
Thank you for taking the time to read this book. It was a labor of love to compile this (hopefully) useful information into a cohesive narrative framework. Know this book is by no means an exhaustive exploration of the DLT space. How could it be. Everyday something is starting, changing, imploding. Rather than focus on any individual technology stack, we hope this book stands the test of time by providing a higher level way to think about the wider ramifications this technology will have on our collective futures.
So go build something, play with an API, or convert a little fiat currency into a shared piece of immutable mathematics. Why not do it through your brokerage account, they are all gearing up to store your private keys for you. While the arc of history is long, the trajectory trends towards lower friction. Position yourself to embrace the coming change and reap the immense rewards that will come from committing to a distributed ledger future.