Can Micropayment Create Micro-Democracies?

Imagine an interaction in the simplest case possible — between two people. You and another person coming to an agreement over any issue or decision, from the most mundane and insignificant to something weighty and important. This happens countless times every day, and forms the structure of all societies and civilizations.

From the simple case, we can increase the complexity. Add another person, or two more people. Now, finding consensus becomes more difficult, though still possible. But as we add complexity and more people, we’re obliged to add another element to the equation: A middleman of some kind, or several middlemen.

Any kind of public or private discourse of sufficient size and complexity has always required gatekeepers, middlemen or facilitators of some kind. Think of a taxi company hiring and outfitting a driver who will take you from one destination to another. Or a grocery store bringing farmers’ produce to consumers.

One of the prime examples of societal discourse chained to an intractable system of middlemen and facilitators is the financial industry. In any advanced financial transaction, banks and other financial institutions wield tremendous power and exert influence over these transactions. For a transaction to go through, you need not only two or more willing participants but also the banking institution facilitating the transaction.

And even before the rise of financial institutions, any transactions based on currency rather than barter involve some kind of guarantor (usually a government) vouching for the currency being used. When it comes to finance, the gatekeepers and middlemen have been inescapable and unchanging.

However, it seems that we might be seeing the beginning of a change in that regard.

Blockchain and Finance

It’s debatable as to what is the fundamental or most important aspect of blockchain technology. But it’s possible to make a strong argument that it’s the fact that the blockchain is decentralized. In contrast with almost every system previously conceived and implemented, blockchain-based applications and solutions don’t rely on any centralized authority or facilitator. [1]

You don’t need to trust anything in order to complete a blockchain transaction other than the underlying algorithm behind that implementation. Nor do you need any person or organization’s approval or oversight in order to complete your transaction. The system is made up of many nodes, each of which contributes to an overall process of arriving at a consensus to verify all transactions. [1, 5]

Advantages of Blockchain in Finance

This is a major distinction, for a number of reasons. First of all, blockchain-based solutions remove the fear of malice, wrongdoing or carelessness on the part of authority figures. And this doesn’t just extend to obvious wrongdoing like a banking institution committing fraud against their customers.

In any centralized system, the authority figure has control. And if that control should be stolen away or seized, the thief now has control. This is especially relevant in this digital age. If a hacker managed to penetrate a financial institution, he or she is able to wreak untold havoc. And this is unavoidable in a centralized system.

A decentralized system doesn’t have this problem. A hacker or malicious actor would need to overwhelm a majority of the nodes within a blockchain network to take control of the chain. And this is simply not feasible in most blockchain-based designs. Blockchain-based currencies and financial services have the potential to offer security that traditional systems can’t match.

In addition, blockchain-based systems don’t discriminate, nor do they censor. A company, government or other central institution can decide to deny their services to a person or people for any reason at all. In many parts of the world, we tend to take for granted that this isn’t a major worry. But a study of history will show that this always has the potential to be a problem. And in other parts of the world, it’s already a problem.

Decentralized blockchain-based financial transactions offer numerous benefits when compared to those overseen and conducted by traditional financial structures and institutions. [1, 5]

Disadvantages of Blockchain in Finance

As you’re doubtless aware, a number of cryptocurrencies like Bitcoin, Ethereum and Litecoin have risen in prominence and profile over the past few years. This has been especially true in the past 12 months (despite huge losses last coupe of months). These cryptocurrencies can be seen as a first generation of proposed solutions to creating an alternative to traditional financial models.

Like most first generation creations, they all have problems and imperfections associated with them. Some of the issues are being fiercely debated within the world of blockchain, and delve into fairly technical matters. But an issue that almost every blockchain expert would agree upon is the problem of speed and scaling.

By its very nature, a standard blockchain solution is slower and less efficient than a traditional database or ledger. There are a couple of reasons why this is true. The first is intrinsic to the concept of the blockchain and the nodal, distributed network concept.

Each node stores a database containing every transaction completed within the network. If there are thousands or even millions of nodes, that means duplicated data are being stored and updated that many times. Each time a transaction is completed leading to a block being finished, the update must be disseminated to all nodes in a network. Contrast this with a traditional model where data may be backed up, but orders of magnitude fewer times than in a blockchain-based network, a difference that has significant ramifications.

The second reason blockchain-based solutions are less efficient has to do with how blockchain validates its growth. The traditional model is called proof-of-work, and it essentially involves lengthy computational powers being expended. The bottom line is that blockchain-based solutions require resources and time in order to function, above and beyond those needed for traditional ones.

With inefficiency comes cost. Crypto transactions are generally far more expensive than traditional ones, making cryptocurrencies occasionally inefficient for use on transactions of limited scope and value.

And the final issue related to this is the fact that these issues only become worse as time goes on for most cryptocurrencies. A blockchain contains a database of all transactions ever made on the network. As time goes on, the number of entries in the database increases. More space is required, which contributes to the slowdown and inefficiency. [4]

The blockchain world is already working hard to mitigate and solve these problems. Existing cryptocurrencies like Bitcoin and Ethereum have rolled out protocols (example: Bitcoin’s Lightning Network) to speed transactions.

Even more promising are some of the creations of next generation blockchain-based solutions. Hashgraph is a notable instance of an innovative blockchain technology that offers the ability to make microtransactions costing infinitesimal fractions of a dollar. [3] As the blockchain world continues to adapt and learn from previous attempts, we’ll see blockchain-based financial tools that offer all the advantages and fewer, less severe downsides of the technology.

It’s only a matter of time before blockchain-based solutions begin to make major inroads into the overall financial market. And it’s conceivable that this process will happen more rapidly that most people can imagine.

A Decentralized Financial Structure

In many ways, money and finance is everything in life. Food, water, clothing, shelter, transportation, shelter — we acquire all these things with money. Most of us spend the bulk of our waking hours working a job in exchange for money. How many of us would still perform those same tasks and duties absent the financial reward?

We live in a world in which we are dependent on money. And our financial structure is predicated on the centralized structure. We’re beholden to governments and financial institutions for this structure. Without their cooperation, we can’t function on a financial level. And as we’ve discussed, that financial level is absolutely fundamental to our existence.

Now, we can begin to see a financial structure no longer reliant on those power brokers. We’re able to make transactions with other entities without needing the sanction and aid from a government or a corporate unit.

What are the implications of this possible new system? Quite honestly, some of the implications can’t even be fully predicted. The change is so dramatic that it’s not hyperbole to describe it as revolutionary. Like with any revolutionary process, there will be bumps along the road. Entrenched power structures will push back against inroads into their long-held domains. [2]

Beyond that turbulence, however, are some fantastical outcomes. People will potentially be able to experience freedom on a level that they’ve never encountered before. The state has always held ultimate control over its citizens by controlling money or the means of transaction. But the decentralized blockchain model doesn’t require a government as a guarantor. Which removes the massive lever government uses to control its citizens.

The blockchain-based financial world dispenses with a vast number of artificial boundaries and barriers. And we’re not only talking about the barriers put up by the now-obsolete middlemen and gatekeepers. Even the concept of the microtransaction offers new possibilities. Automated transactions costing next to no value allow for the creation of finance-dependent systems that can create benefits and opportunities not previously feasible. [1, 2]

Extending Beyond Finance

Up to the present, most of the mainstream attention paid to blockchain has focused on cryptocurrencies and the world of finance. It’s easy to understand why — The basic concept of a token or coin as a store of value is an intuitive and powerful match with how blockchain works.

Further, finance and money are so integral to life that disrupting that realm is a natural motivation. But the application of blockchain-based technology extends far, far beyond the world of finance. Blockchain applications will transform a host of industries and domains in the near future. [5]

While we could spend time talking about many of the promising industrial applications, one fascinating area where blockchain technology might be transformative is what it can do for the concept of democracy.

To discuss the potential for blockchain to transform the idea of democracy, let’s go back to the fundamentals of blockchain’s advantages over traditional systems. Specifically, how it removes the need for gatekeepers and middlemen. [1]

Most democratic governments are far from ideal when it comes to representing their constituents. Look no further than the approval ratings for many governments to realize that a plurality (or even a majority) of citizens mistrust their governments or feel disenfranchised or unheard.

There are a number of debatable reasons for this, some of which are deep-seated and difficult to identify, let alone solve. But here’s an interesting one: Most democratic governments aren’t particularly good at even knowing what their citizens want.

The process by which people give feedback is deeply, deeply flawed. Annual, biennial or quadrennial elections allow for citizens to vote for a pre-selected range of candidates, and voter participation is frequently a fraction of the total populace. And beyond that, most people don’t give direct feedback (or even indirect feedback) to the government as to their desires.

It can be argued that a number of powerful interests are very happy with a system in which democracy isn’t responsive to the wishes of the people. But this anti-democratic principle comes from that same gatekeeper mentality that is pervasive in traditional systems. Blockchain removes the gatekeeper. In finance, this means freedom of transaction. In government, this has the potential to translate to freedom of expression.

The same structure that can create trustless, decentralized financial transactions can be leveraged to create systems for democratic process on a micro level. At its simplest, blockchain transactions involve the swap of crypto value from one holder to another. But the smart contract model allows for far more complex and nuanced behaviors. [1]

Microtransactions have the potential to go hand in hand with the democratic process. Imagine using blockchain applications to form micro-democracies based on an algorithmically assisted consensus between individuals. These units can be forged into larger and more complicated political units, possibly leading up to some form of global consensus in certain regards.

By removing the barriers created by middlemen and gatekeepers and atomizing transaction and data transfer, blockchain offers the kind of freedom we’ve never seen before. Right now, much of the talk is about revolution in the world of finance. But the coming changes could extend to a model of democracy where people are able to connect with one another outside the control of centralized power structures.

Markus Andersson is the CEO of Polimex and the founder of Sirius network (www.sirius.network)

REFERENCES

[1] — Top 5 Blockchain Benefits Transforming your Industry, Matthew Hooper https://www.ibm.com/blogs/blockchain/2018/02/top-five-blockchain-benefits-transforming-your-industry/

[2] — How is Blockchain Revolutionizing Banking and Financial Markets, Mayank Pratap https://hackernoon.com/how-is-blockchain-revolutionizing-banking-and-financial-markets-9241df07c18b

[3] — Hashgraph Wants to Give You the Benefit of Blockchain Without the Limitations, Samantha Stein https://techcrunch.com/2018/03/13/hashgraph-wants-to-give-you-the-benefits-of-blockchain-without-the-limitations/

[4] — Examining the Other Side of the Coin: Blockchain’s Limitations, Distributed Lab https://www.investinblockchain.com/blockchain-limitations/

[5] — The Benefits of Blockchain Across Industries, Subramanian Iyer
https://blogs.oracle.com/profit/the-benefits-of-blockchain-across-industries

Chairman of Polimex and founder of Andersson Family Foundation. Significant interest in new technology and its influence in today’s global business and economy.