The Promise & Appeal of Blockchain Technology: Transforming the Sharing Economy as We Know It

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In the past decade, we have seen the incredible growth of start-up companies like Uber, Spotify, Pinterest, and Air Bnb. These are the current generation of high growth and high net worth companies, or what are known as “unicorns” in the start-up world. A unicorn is a startup company valued at over $1 billion, and are called unicorns because it represents the incredible scarcity of such successful ventures.

What do all of these unicorns have in common? From the onset, these companies are not offering a novel service or product. Before Airbnb, people used hotels. Before Uber, people used taxis. Before Pinterest, people used magazine cutouts on a physical vision board. Before Postmates or Grubhub or Seamless, people picked up their dinner order at the actual restaurants.

Instead, what these “unicorn” startup companies offer are new ways to use data, technology, and the internet to better provide existing outcomes to people, on demand. In other words, these companies are facilitators—they make this sort of direct transaction easier. Anyone with an internet connection can order an Uber, and conversely, anyone can become an Uber driver.

Thus, with the explosion of these companies, the term “sharing economy” was born. As defined by the Brookings Institute, the sharing economy is “the peer-to-peer based activity of obtaining, giving, or sharing access to good and services”.

The Promise of Blockchain Technology

So how does our adaption of the sharing economy relate to blockchain technology?

Blockchain technology relies heavily on the concept of decentralization: it takes this idea of peer to peer direct transactions even one step further. While Uber merely facilitates the direct transaction, blockchain will eliminate the need for any intermediaries at all.

In other words, the decentralization of blockchain is the elimination of any form of central authority. Blockchain has no central authority, the same way that the internet has no central authority and no private ownership. It is a network on which individuals can do direct transactions with each other, and this network is built upon the idea of trust.

Trust is one of the key attributes associated with blockchain technologies. As pointed out by the Economist magazine, blockchain offers a way for people who do not know or trust each other to create a record of who owns what that will compel the assent of everyone concerned. In other words, it is a way of making and preserving truths.

Historically, we have all relied on some form of trust in order to facilitate any sort of agreement among each other, whether it is through the form of a handshake or something more formal like a legal system. However, the problem with our current intermediaries is three parts.

First, the problem with everything being centralized onto one system with a single point of entry has obvious data breach concerns. With the recent data leaks from EquifaxSEC, or Deloitte, consistent cybersecurity threats mean that information cannot just be stored in one central data system.

Second, there is less public accountability for any transactions that may be prone to modification. Blockchain technology is ultimately a means for individuals to coordinate common activities, to interact directly with one another, and to govern themselves in a more secure and decentralized manner.

Last but not least, the continued existence of third-party intermediaries between two transaction parties ultimately hinder efficiencies in the supply-demand marketplace. For example, an intermediary between a customer and an online store is Visa, MasterCard, and the like.

From Sharing Economy to Collaborative Economy

Blockchain technology is ushering in a new age of collaborative economy. What the sharing economy has done with unicorns like Uber and Airbnb is to take the services that were monopolized by one party and “unbundled” them in a way that allows for direct peer to peer transaction and sharing. The popularity of this new form of service better met the real supply and demand of the market, and thus took over.

A recent article titled “Beyond the Bitcoin Bubble” by the New York Times illustrates how the future of transit would look like on a blockchain.

Cities could build Transit apps [the protocol that will underlie any apps that may be built on top the traffic blockchain network] that allowed taxi drivers to field requests. But so could bike-share collectives, or rickshaw drivers. Developers could create shared marketplace apps where all the potential vehicles using Transit could vie for your business. When you walked out on the sidewalk and tried to get a ride, you wouldn’t have to place your allegiance with a single provider before hailing. You would simply announce that you were standing at 67th and Madison and needed to get to Union Square. And then you’d get a flurry of competing offers. You could even theoretically get an offer from the M.T.A., which could build a service to remind Transit users that it might be much cheaper and faster just to jump on the 6 train.

By democratizing the marketplace, the sharing economy becomes a collaborative one; instead of tech giants and unicorns dominating any market share, the price is set by the forces of the market.  The blockchain is the next step in the “unbundling” of services. Because it is able to take out third parties entirely, the system will become more efficient for both sides of the transaction. For example, though Uber provides a much more convenient way to transport, it still charges almost 30% to be that trusted intermediary (or, third party). This leaves room for more efficiently within the system. Without a centralized management for pricing, the price will be set by market demand; and the value for both the driver and the passenger is maximized as the market approaches equilibrium.

The collaborative economy differs from the current sharing economy in that the crux of the ‘collaboration’ is based on the horizontal participation of all parties of a transaction without a centralized institution.  Aside from the efficiencies in the marketplace, blockchain also provides a social good: information sharing, which in turn fosters decentralized collaboration. Information asymmetry, an economic theory, explains why trade cannot flourish in a world that is not entirely transparent. Possessing the same information for all sides of a transaction gives way to better decisions and a larger degree of trust– both incentives to collaborate.

Because open source goes to the heart of blockchain protocol development, the businesses that are built on a blockchain protocol is, by definition, an open source business. Taking the idea of “unbundling” further, what the blockchain allows for is for the users to own their own personal data and records. Such a concept would also apply to the healthcare system. The latest cover story in the Economist argues that the fundamental problem with today’s healthcare system is that patients lack knowledge and control. Access to their own medical records and the ability easily to share information with those they trust can reduce inefficiencies in their own treatment.

The sharing of information levels the playing field among the various parties to each transaction that is part of our day to day. Whether blockchain technology can live up to its egalitarian promise will in large part depend on the people who embrace the platform. We are being ushered into a new age of market-making equipped with maximum control over our own personal data, and that is a beautiful thing.

 

All opinions published on this blog are my own and do not reflect the opinions of any institutions that I am affiliated with in any capacity.  

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