I originally presented the ideas that I describe below at TheBlockchain.NZ conference on May 8th, 2017.

Over the past few months I’ve heard enough talk about private and consortium blockchains. It baffles me still that many people take private blockchains seriously. Blockchains were fundamentally designed to remove middlemen from our affairs. If you don’t agree, please read Satoshi’s white paper. You don’t even have to read it all, it’s all on the first page. It’s already been sung, but it can’t be said enough:

Once again, the ultimate feature of blockchains is that they do not allow for centralization of power. Why? Well, because humans suck! If we’re put in a position of power we tend to use it for our own gain. Where there’s a monarchy, there is a possibility of tyranny. The 2008 crisis, for example, was caused by a few bad actors with a lot of power, nothing else. In the process they had made billions of dollars leaving the rest of the world in ruins. Après nous le déluge!

The Economic Case for Decentralization

One of the defining factors of our societies today is inequality. There are articles, books and papers written about inequality, it’s been very well researched, but two new papers show that this change might be due to high market concentration.

Today’s capitalism is set up in such way that it incentivizes companies to become bigger and bigger, by means of acquiring other companies, until just a few companies are left. We live in a world with one search engine, one social network, one store and one taxi company. Monopolies or companies in oligopolistic markets can and do extract rent, that is they charge more for their goods and services than they would in a market with perfect competition. This, in turn, allows them to attract more talent and lobby their interests.

Research shows that, indeed, inequality between individuals has risen, but it might be due to the fact that corporate inequality has risen quite dramatically. In fact, the above mentioned research shows that wage gap within companies does not increase as fast as the wage gap between employees in top firms and the rest.

Monopolies and Innovation

Monopolistic or oligopolistic markets don’t just cause economic inequality. Companies in highly concentrated markets also don’t have an incentive to innovate. Why do so, if there is no threat? So, instead of providing better services, these companies spend their hard-earned rent on preventing competition and therefore innovation. The Schumpeterian hypothesis fails to explain the reality. Many companies working on similar ideas will produce better results.

Immoral Profit Strategies

The bigger company gets, the more capital it possesses, the easier it becomes for that company to lobby its interests. Wall Street companies, for example, paid economists for endorsing business models that at the end led to the worst financial crisis in the human history. For these companies nothing is immoral if it improves the bottom line. It’s amazing that it all happens quite naturally, the tragedy of commons is very real.

Solving Inequality with Blockchains

How does blockchain solve any of these problems? By equalizing all the participants of the market, by removing power from the equation. If there is no central point of failure, e.g. no bank to facilitate transactions and store the account balance, then there is simply no room for a bad actor here. With Bitcoin, for example, no one controls the accounts, therefore no one can steal from them or otherwise manipulate the network, like banks used to do. This comes with the downside, of course, that no one can restore your password (i.e. private key), if you lose it.

In a decentralized travel distribution system, for example, there is no room for rent-seeking intermediaries, therefore the wealth they are currently hoarding will be distributed to the rest of the network, making travel cheaper for travelers and more profitable for travel companies.

With decentralized market models it’s impossible to game the system by e.g. subsidizing the participants of the marketplace and then, when a critical mass for creation of monopoly is reached, to double the commission fee.

Public or Private?

The immutability aspect of smart contracts prevents the creation of monopolies, but how can we trust a blockchain that is fully controlled by a single company or individual? With private or consortium blockchains, where it is possible to change the rules of the platform, the incentives to game the system by a bad actor are too high. If there is a slight possibility for someone to withdraw one billion dollars from such a system, that possibility will be used. If not by a bad actor inside the company, then someone else, a hacker, will do it.

Another downside of consortium blockchains is that the whole consortium will only move as fast as its slowest participant. With the inability of big companies to innovate, it’s a recipe for a disaster.

Conclusion

Only public, permissionless blockchains can help us solve problems like inequality. Private or consortium blockchains are irrelevant in the grand scheme of things.

Big companies fail to understand that they can’t just simply use blockchain and win. The beauty of the blockchain technology is that it loses its power once controlled by someone. That is why attempts like R3 and Enterprise Ethereum Alliance are doomed to fail. These consortiums have been created for discussing the standards for intranets (as opposed to the Internet), at best, and at worst they are attempts of big corporations to curb innovation. In my opinion, they are simply a way for founders of those consortiums to extract huge amounts of money from the participants, nothing more. I do hope that I’m wrong, but it seems to be very unlikely.