Blockchain technology will do for cooperation what the internet did for communication.
When people hear about Bitcoin and blockchain technology, they think about money, trading, and ubiquitous financialization. This text will argue that blockchain technology can be more than that. We will explore the revolutionary potential that an immutable public data storage that functions as a single source of truth has for human cooperation.
While humans don't have any particular physical features that are superior to those of other animals, our ability to communicate and cooperate makes us as a species so unique. We are continuously augmenting these abilities even further through inventions like language, money, writing, legal systems, the printing press, stock markets, and the internet.
It is hard to foresee the impact of new inventions. Few would have predicted the number of daily interactions that are now dependent on the internet thirty years ago. A hundred years ago, the internet would be unexplainable magic to most. To make the impact that we think blockchain technology will have on cooperation more tangible, we will compare it to the internet's impact on communication.
Here are some significant changes that the internet has had on communication that can serve as a base for comparison:
While communication describes the information exchange by a group, cooperation describes a group working together.
Cooperation means working together for a common benefit instead of competing or working for own interests.
Fundamental global challenges and big projects can only be addressed through cooperation. Communication technologies like the internet allow us to cooperate on a very large scale. Global organizations can coordinate vast amounts of members; Walmart has over 2.2 million employees, for example.
However, we believe that a new technology is once again about to change how we cooperate dramatically.
Trust is a fundamental challenge in (online) cooperation. Cooperation partners must ensure that they are in a cooperative relationship and that no party is putting their benefit before the group's benefit.
Cooperation partners need to rely on the agreements made with the involved parties. They need to trust each other to provide the agreed-upon work and resources, not embezzle shared assets or information, and share the benefits of the outcome as agreed upon.
Trust can be established in various ways and grows naturally when relationships age.
Legal contracts facilitate trust in cooperative relationships in most professional work. NDAs enable trust in sharing information, employment contracts foster work relationships, and a variety of contracts make up the legal framework for a shared business.
Establishing trust through legal contracts has its price. Working with lawyers is costly both in terms of money and time. The average hourly billable rate for lawyers in the US is close to $300 per hour (Clio, 2020).
Consulting a lawyer and drawing up new contracts makes little sense when working with small budget projects, making establishing trust through legal contracts seldom a viable option.
Individuals from emerging economies often don't have access to strong legal systems. Providing access to justice is one of the SDGs (United Nations, 2021). When cooperating with parties in developed countries, they often also have a disadvantage because they don't have the same access to legal advice.
While in theory, everybody should be equal in front of the law, in practice, there is a difference between the rich and the poor. Money decides the quality of legal counsel and the ability to afford court proceedings. It is difficult for individuals with limited financial resources to win cases against big companies or wealthy individuals.
As discussed above, we face significant challenges when establishing trust for cooperation via legal contracts. We might think that the ways to cooperate are better than ever before; we can hire a lawyer online, find templates for legal contracts and discuss them online. But communication in the 80s also seemed better than ever; we had international phone calls, global TV networks, and fax machines.
Cooperation might be in communications pre-internet moment.
"A blockchain is a growing list of records, called blocks, that are linked together using cryptography. … blockchains are resistant to modification of their data because once recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.
Blockchains are typically managed by a peer-to-peer network for use as a publicly distributed ledger, where nodes collectively adhere to a protocol to communicate and validate new blocks" (Wikipedia).
We won't go into the technical details of blockchain technology here, but we encourage you to learn more about it; this video is a good starting point. However, more profound knowledge of blockchain technology is not necessary to understand this text. Most people don't know how the internet works technically, but they understand what it enables them to do.
For the scope of this article, we are looking at blockchain technology as a new invention that allows us to store data publically in an immutable (unchangeable) manner.
The first use case and blockchain technology's raison d'être was decentralized digital money. Bitcoin was conceived as an "... Peer-to-Peer Electronic Cash System" (Nakamoto, 2008). To enable decentralized digital money, it was necessary to store a ledger (record of transactions) in a way that nobody could manipulate and was not dependent on a single decision-maker.
Bitcoin is now 13 years old. So far, nobody has been able to persistently manipulate the data stored in the Bitcoin blockchain, even though the incentives to do so are very high, with a trillion-dollar market capitalization at its peak.
Before blockchain technology, there was no method of creating a persistent, publicly used data storage that couldn't be changed and controlled by single decision-makers. Most applications we use in our daily lives create data owned and controlled by companies that can change, delete or sell it.
Before blockchain technology, we couldn't trust data because data management was always unpredictable and out of our control.
The implication that immutable data has for our society is drastically underestimated. We are just beginning to explore the potential this will bring for new technological innovations and how we cooperate. Almost every aspect of our modern life now relies on data, and we spend more and more time in digital worlds that are exclusively built by data (Statista, 2021), yet we can't trust it.
Bitcoin created an immutable public data storage to store transactions and enable decentralized digital money. People started to think about using this immutable data storage to store more than just monetary transactions.
The next big innovation in blockchain technology was Ethereum. Ethereum does not only store transactions but also the code of computer programs and the state of these programs.
Ethereum allows us to run decentralized and immutable computer programs using the immutable storage of blockchain technology. This allows us to create all kinds of decentralized applications (dapps) we can imagine, not just decentralized digital money. Dapps are immutable applications we can trust; they promise to behave in ways they are written in, and they can't be otherwise changed, turned off, or have their data manipulated.
Because of their dependability, decentralized programs that run on a blockchain are compared to contracts and called smart contracts.
"A smart contract is a computer program or a transaction protocol which is intended to execute automatically, control or document legally relevant events and actions according to the terms of a contract or an agreement" (Wikipedia).
It is as if two parties go to a notary and draw up a contract in which the agreement is magically automatically executed; smart contracts enable this automatic execution. Once the contract is deployed to the blockchain, it can only be used as agreed upon; nobody can change it in unintended ways or turn it off.
Smart contracts allow us to create self-executing, immutable agreements.
As we established earlier, cooperation is based on trust. If cooperation partners contribute resources and share the outcome of cooperation, they need to be able to trust each other that they will behave as agreed upon.
To establish trust in important agreements, we traditionally use legal contracts. The Latin term: pacta sunt servanda ("agreements must be kept") is one of the oldest and most fundamental principles of law and forms the basis for contract law and cooperation.
We discussed earlier some of the challenges of using legal contracts to establish trust:
With immutable, self-executing agreements, blockchain technology shows an alternative to traditional contracts for establishing trust between cooperation partners.
The following examples will illustrate how this works in practice.
Bitcoin is an obvious first example of cooperation enabled by blockchain technology.
There is no central authority that runs Bitcoin. The Bitcoin ledger is maintained by a network of equally privileged participants called miners, who are rewarded in Bitcoin for their contributions.
Anybody can become a Bitcoin miner; there are no employees with employment contracts or, for that matter, even a legal entity representing the Bitcoin project. Miners cooperate on this project without any legal contracts, but they trust the code that they are rewarded according to their contributions. The Bitcoins that miners earn are stored on the Bitcoin blockchain, the very place they help to secure.
Bitcoin shows that people can cooperate on a project as important as a global currency and a payment network without knowing each other or establishing trust via legal contracts. They trust the distributed code and the immutable data storage that stores the rewards they receive for their contribution to the project.
Smart contracts are used to create and manage blockchain-based tokens that can represent ownership. They can represent digital or physical ownership, for example, in art, video game items, company shares, voting rights, or currencies.
We distinguish between two types of blockchain based-tokens:
NFTs have become a very popular way to represent the ownership of unique, often digital properties. We can think of them as an easily digitally tradable title (representation of property rights) stored on the blockchain.
If we buy a photograph in a gallery in the physical world, we need to trust the gallery that the photo is genuine and not just a copy that the artist didn't produce. If the photograph is of high value, we will get a certificate to prove its authenticity. Verifying the certificate's authenticity and taking legal action in the event of fraudulent behavior is very expensive. This makes the cost of the transaction of the artwork generally high.
In economics, transaction costs account for any expenses that occur when making an economic trade, including proving the authenticity and solving potential disputes, as in the example above.
The higher the transaction costs, the less effective the trade. "Transaction costs may be viewed as the economic equivalent of friction in a physical system; i.e., if friction is too great, no or at least impeded movement will occur, suggesting that if transaction costs are high, no or little economic activity is likely to occur" (Wigand, 2003).
We used an artwork here as an example to illustrate how high transaction costs can occur when formalizing ownership of properties through legal contracts. Transaction costs might be even higher without any contracts because authenticity and ownership are harder to prove, and disputes are more likely and less likely to be solved.
With blockchain technology, we can use smart contracts to create agreements and manage ownership. Smart contracts make it very easy to authenticate and transfer ownership. Using blockchain-based tokens as proof of ownership can drastically lower transaction costs, removing friction and enabling more trade between strangers, especially for digital and lower-value items.
Blockchain-based tokens enable cooperation because it is much easier for cooperation partners to collectively own properties by eliminating the need to draw up legal contracts that define property rights — making it easier to share ownership in collectively generated value.
An interesting example is the Noun DAO, which auctions every day one NFT. The proceeds of the sales are going into the treasury of the Noun DAO, which the holders of the NFTs collectively own. At the time of writing, the DAO treasury holds 26,476 ETH (over 29 million dollars).
DAOs are the most direct example of how blockchain technology can enable cooperation.
A DAO (Decentralized Autonomous Organization) is a member-owned organization without centralized leadership that has the rules of administration and ownership written in smart contracts.
DAOs are typically capitalized with blockchain-based token assets and often issue their own tokens that represent ownership and decision-making power to their members.
Members of a DAO carry out work decided via the rules of governance and are rewarded from the DAO's treasury.
In practice, DAOs typically consist of the following:
DAOs can be thought of as blockchain-enabled versions of cooperatives. The description of a cooperative as an "autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise" (International Cooperative Alliance, 1995), also holds for most DAOs.
The difference between cooperatives, other traditional organizations, and DAOs is that DAOs enforce the rules of governance and ownership via immutable code instead of pure trust or legal contracts. Here are some of the benefits of DAOs:
DAOs reduce transaction costs
Creating a proper traditional organization is expensive and time-consuming.
Setting up a joint bank account can take months and might be impossible for some members, depending on their jurisdictions. It is also hard to scale up to large amounts of members.
Creating the legal framework for large-scale organizations is also very time and resource-intensive. A legal structure with decentralized decision-making and no central authority is very difficult to facilitate.
DAOs enable anybody to create organizations with joint accounts (multi-sig wallet) and enforceable governance rules for a vast amount of members in a short amount of time via smart contracts. The governance rules can be easily customized and allow decentralized decision-making without a central authority.
DAOs are transparent
The DAO's capital, the members' voting power, and governance rules are all public. The same is true for most of the communication; tools and products developed by DAOs are usually open-source.
Transparency allows people to make more informed decisions to participate in the DAO, invest in it, or use its products and services.
Being open and transparent also fosters innovation and collaboration because everybody can see what DAOs are doing and how they are doing it. New projects can use code and ideas from existing DAOs and start their own experiments.
The high transparency of DAOs makes it also easier for people to contribute.
In traditional organizations, the employees make the most meaningful contributions to the products and services offered. Sourcing and hiring new talent is a top priority, but talent shortage is often a major issue for many companies (Korn Ferry, 2018).
DAOs have a much more open structure, allowing anyone to contribute. Because of their transparency, it is also easy for people to see what they think they can improve and how they can contribute. This enables DAOs to onboard contributors faster and grow much quicker than traditional organizations.
We can draw parallels to open-source software development, which can have much quicker development cycles and be more secure than closed software development. While many open-source projects lack a good business model that compensates contributors, DAOs can issue tokens.
DAOs make raising early capital easier
Raising capital for early projects is often a significant challenge, especially for founders who don't have connections to investors. DAOs can raise capital publically at any stage by issuing tokens.
Organic marketing from co-owners
Spreading awareness and marketing a project to a large public is very resource-intensive. DAOs have a legion of co-owners with skin in the game that have an intrinsic incentive to spread awareness and promote the project.
While there is a lot of potential for DAOs and blockchain-based cooperation, we also need to mention some challenges.
There are blockchain projects that only have immutable programs and data on paper but could not guarantee immutability in the face of powerful enough adversaries. Which is one of the biggest and most fundamental challenges, but wrongly written code, poor user experience, and sloppy user behavior also lead to hacks and losses.
Blockchains like the Bitcoin blockchain and currently still the Ethereum blockchain use a lot of energy to secure the data. While many projects like Ethereum are working on alternatives, their security still needs to be proven.
Blockchain technology is still very young and was built by technical people. It is tough to use and understand for a broad range of users.
Managing big decentralized projects like DAOs with a vast number of members is difficult. Decision-making can be very slow, and coordination between working groups is hard compared to traditional organizations.
Finding and implementing the right governance system is still a significant challenge. Coin voting, where individuals with the most financial recourses have the most voting power, is currently an industry standard but might not lead to the best outcome for a project, as discussed by Ethereum inventor Vitalik Buterin in this post. But research and experience with new governance systems might lead to exciting solutions beyond the blockchain space.
Creating and enforcing rules that regulate our behavior to create the best living situations for everybody is a fundamental challenge for our society. From the Codex Hammurabi to the Napoleonic Code to the Civil and Common Law we have today, humanity has always continued to optimize these rules and enforcement systems. We can be sure that we are not at the end of this evolution.
Human behavior is also drastically changing; we spend much more time in digital spaces. In 2020, adults in the US spent, on average, seven hours and 50 minutes with digital media each day (Statista, 2021).
These digital spaces, but also more and more of our physical world, are directly governed by rules written in code, controlled mainly by private companies. Creating traditional legal contracts to oversee these rules feels as efficient as sending floppy disks via mail to communicate.
Because blockchain technology provides a persistent data storage that enables us to store data and execute programs in an immutable way, we can write code that can function as immutable digital agreements. Which can take over functionality that current legal contracts have and more efficiently govern digital behavior.
Enabling everybody to create enforceable digital agreements easily will drastically change how we cooperate. We believe that the impact that blockchain technology will have on cooperation could be as significant as the impact that the internet had on communication. While it's difficult to foresee the future of blockchain-based cooperation, we can revisit how the internet changed communication that we discussed at the beginning of this text for inspiration.
While new blockchain-based cooperation structures might not look like the institutions we have today, they could take over their functionality. At some point, they might even restructure how we organize our physical life and govern cities and countries.
How we currently govern our society faces significant challenges. While government spendings are at all-time highs (OECD.org, 2020), the trust in democratic governments and media is at a record low (Edelman, 2022).
The technologies we interact with daily have changed immensely in the last 50 years, but how we govern our society has not.
We need to make improvements on how we govern our society fast. Apart from the well-known, seemingly increasing global challenges, new technological advances like AI, quantum computing, and biotechnology might create big power asymmetries that can only be addressed in a global effort.
Blockchain technology allows us to experiment with governance and participation on a large scale and might improve our ability to govern our society. This text intents to show that blockchain technology is more than a hyper-financialization tool and open minds to new experiments with blockchain-based cooperation.
I would be very happy to discuss any comments and feedback on the thoughts expressed in this text. Please feel free to message me on Twitter at @moritzfelipe. Thanks a lot for taking the time to read through this.