Dawn of a New Frontier
Welcome to the Distributed Economy
To fix a broken system of online security in finance, blockchain was born. Now it is combining with other tech to fuel an entirely new economic order.
Almost exactly ten years ago Marc Andreesen declared to the world that it was being eaten by software. Indeed, legions of programmers led by behemoths such as Google or Facebook kept biting industry after industry. Uber and herds of other unicorns fed on inefficiencies in distribution and legacy-induced sluggishness. And consumers around the world enjoyed the free leftovers. After a decade of gluttony, Silicon Valley’s appetite is not sated. Its stomach, however, is starting to give out.
Artificial intelligence (AI) was supposed to be the crown of the application-centric worldview. The most powerful tool in history, it would turn humans into a homo deus, a god-like creator of intelligent life. Tech evangelists such as Yuval Harari ascribed a religious certainty to the progress of software development. Indeed advances in machine learning, predictive analytics or optical character recognition helped with process industrialization. Yet we are not one step closer to machine consciousness, creativity, and free will than we were in the 1950s, when the term AI was coined.
If you look deep enough, the application-centric mindset that is keeping media, managers, and investors in its stranglehold is showing first cracks. What has been driving recent productivity and real economic development were neither the alleged artificial intelligence nor the likes of social media platforms, but technological leaps in the architecture layer such as application programming interfaces (APIs) or microservices. And those are nothing compared to the innovation that is slowly beginning to power the next techno-economic paradigm. As so often, the revolution started with a groundbreaking innovation in finance, the artery system of the global economy.
Signs of a crumbling paradigm
While signals of disintegration begin to appear on all levels, the most fundament peril is the porous data security online. Bugs, hacks, and skyrocketing costs are a testament to the trouble ahead. There is a reason banks, insurance companies, governments, and healthcare providers are keeping their most critical data offline or put layer upon layer of intermediaries to safeguard them. IT-companies try to patch systems and retrofit security into them. Data security is treated as an additional layer, rather than an architectural design. But just like with our DNA, such critical functions cannot be added retrospectively.
There is a problem with hardware as well. Despite forces such as Moore’s Law – the halving of prices for processing chips roughly every two years – and the rapid price drops in memory and optic fiber cables, the progress can’t keep up with the explosion of data being generated around the world. On top, companies increasingly see diminishing returns on big data as the first mover advantages wane.
The problems of the application-first mantra are more than technical. We are running into problems with privacy, intellectual property, and business strategy. Some tendencies endanger even the idea of capitalism itself. Neo-Marxist proposals such as Universal Basic Income have a strong backing in Silicon Valley, yet the real danger lies in the nature of market mechanisms that foster monopolies. The price of new unit added in mass-market software is close to zero, which makes the incumbent advantage larger than in other industries.
Moreover, software is always about compatibility and connectivity, meaning that network effects are decisive and winners in a market take all, basically eliminating other competitors. This mechanism is exacerbated in so-called double-sided platforms. Here it is not only about how many users your service has, but also how many advertisers are paying for them.
Eventually, those monopolistic tendencies hurt the free market, which is the heart of capitalism itself. On top, the broad public is often barred from participating in these success stories. While in the past companies were striving for initial public offerings (IPOs) in which every citizen could buy the company’s shares, today the dream of most tech-savvy entrepreneurs is to become a unicorn, rather than a gazelle. This means they are not headed for the public market but seek private investments that put their startup’s worth in excess of 1bn USD.
To counteract these worrying developments some politicians and experts advocate big tech’s breakup, tougher regulation, and more bureaucracy. Luckily, an antidote to governmental overreach is rising by innovators and pioneers that harness groundbreaking technology.
The new economy gorges on algorithmic assurance
The history of techno-economic paradigms shows they are triggered and driven by managers and entrepreneurs that apply radical technological breakthroughs. More specifically: they apply them to solve issues hampering pivotal industries.
Often it is the relative cost structure of the key resource that is shackling business. Cheap water became the key input of the industrial revolution. In the 20th century the internet made information instantaneous and almost free, thus fueling the rise of the digitized world. Today there is another key resource that companies are after, but its punishingly high price is inhibiting growth: digital trust. While we can share information almost without boundaries, this information is prone to manipulation. Making it secure and trusted is expensive and often means building additional layers of intermediaries.
With the invention of blockchain, a technology has entered the stage that enables algorithmically generated cheap trust. This means that the soaring layers of intermediaries in financial and insurance transactions can be slashed to a bare minimum, that sensitive data can be secured and managed by individuals themselves, and that machines will be able to perform billions of (micro-)transactions autonomously. Identities of humans, companies and devices will be as easily verifiable in the digital world as in the physical one.
The importance of security and stability cannot be overestimated for the next wave of economic growth. When Isaac Newton, then not only physicist but also master of the Royal Mint, launched the world economy onto the gold standard, he fixed the value of the pound to the gold in circulation. Henceforth enterprises could assume reliable exchange rates and stable interest rates, which allowed them to put their money behind more ambitious long-term projects around the world. The economy flourished simply by one promise of the government. Today, with technology’s promise that online identities and transactions are legitimate, a similar effect might be underway.
Equally important to the trimming of costs and enabling new business models, is that this new layer of trust will shrink the score of rules and regulations. Overwhelming bureaucracy will be slashed if the security and transparency are woven into the architecture of our systems. Record-keeping and auditing will be massively simplified and will save resources for business and regulators.
The metamorphosis of three critical areas
Where transformations are occurring also shows you that we are in the early stages of a new economic order. In particular, we need to look at three realms that are permeating the entire economy: finance, digital identities, and hardware.
Money
The global financial market will reach 22.5 trillion USD in 2021, with a compound annual growth rate of 9,9%. This makes it one of the largest economic sectors by and of itself, but even more importantly, it is the lifeblood of all other industries. Whether it is the movement of money, the issuance of loans, or insuring risky ventures – every change in finance causes a ripple elsewhere.
Sometimes banking innovation poses a risk, as in the late 2000s when risky investment products paved the way for the global financial meltdown. But for the most part of human history, it has been fueling economic expansion. Whether it was the invention of coins and bills, double-entry bookkeeping, stock exchanges, bonds, or the gold standard. What is limiting today’s financial system is the giant web of intermediaries necessary to validate transactions. The more complex the product and the more territories are involved, the more layers you get. Each layer adds costs and complexity, slows down the process, and makes systems more vulnerable to attacks.
With the invention of blockchain as the engine to power bitcoin, the world’s first real cryptocurrency, a spiral of disintermediation was set in motion. All of a sudden, monetary transactions were possible without the pyramid of middlemen. While it quickly turned out that bitcoin’s model was unsustainable on multiple levels, blockchain technology rose to the top of bankers’ agendas. Even central banks are now set to introduce crypto versions of their fiat money, with 86% of them already having concrete plans to do so.
Central bank digital currency is game-changing. In a truly digitalized economy money will have to be issued and moved seamlessly between banks, companies, individuals, and machines. According to current estimates the Internet of Things (IoT) will connect 24 billion devices by 2030, approximately evenly split between the US, the EU, China, and the rest of the world. With a digital dollar or euro, the stage is set for an extensive layer of digital finance.
Transactions in the IoT, machine-to-machine transactions, and pay-per-use models all require programmable payments, meaning the possibility to algorithmically specify rules for future transactions.
This is possible with so-called smart contracts, a feature of advanced blockchains. Smart contracts are computer protocols with cryptographically coded business-logic capable of executing transactions autonomously. They are what enables a dynamic and interconnected machine economy.
Digital identities
Secure transactions and smart contracts can be applied not just for sending money, but in every industry. Essential to such a seamless interaction between humans or machines is the proof of digital identities, which brings us back to the security question: How can we bring data – including our proof of identity – from the physical world onto the net and keep it safe? The answer of today’s tech titans is to build walled gardens. You hand them your data and trust they will keep it safe, let you access it when needed, and won’t sell it to advertisers. And you also trust they will not be hacked so that all your personal data is exposed. I will let you be the judge of how well this has worked in the past.
This model of internet security has run its course. Rather, we need a centrifugal internet that is not centered around data aggregators. In this system every person would have a unique identity, recorded on an interoperable ledger. It would serve as a universal ID that allows you much more than just to log in without giving your data to every company offering a service, regardless of how miniscule. With this universal ID you could actually manage your data, sell it, rent it, and see exactly what it has been used for and by whom.
Think of it as a new security protocol layer for the Internet. The impact is profound, not just in terms of data security and new services. Advertising is a major driver of GDP as it links sellers to buyers, yet its most cherished branch, digital advertising, is under attack. Industry experts reckon that in 2022 ad fraud will cost advertisers up to 89bn USD per year. As bots and other click fraud are proliferating predominantly outside the walled gardens of giants such as Google and Facebook, they are exacerbating monopolistic tendencies. Having unique and easily verifiable identities would unleash giant budgets for legitimate advertising and would allow new marketing models, for instance giving micropayments to people for watching ads they like.
Hardware
While software preoccupies journalists and managers, it is hardware and IT infrastructure that enables these progresses in the first place. The recent chip shortage has shown the world just how dependent it is on the physical plumbing behind computer programs. Car manufacturers had to shed staff by the thousands, credit cards couldn’t be issued, and new smartphones and Playstations became a rarity on retailers’ shelves.
Hardware has an even more essential role to play in the trust-economy. Data behemoths have focused on the application layer. Innovating on protocols and hardware was only an afterthought. But their ambitions are now pushing the limits of hardware. Two developments are responsible for that: First, the exponential proliferation of data, and second, the unequal evolution of computing components. What this means is that the performance of microchips and storage is advancing much faster than fiber optics. Data generation, storage, and computation have been disaggregated and distributed across the world, because following the centralized model, it is more efficient to do those individual steps in large and specialized datacenters.
The fiber cables are the neural system that connects them, but they are reaching their limits. Bandwidth capacity has exploded over the last years, but it still can’t keep up with the rise in data being transferred.
5G networks will bring relief. What will solve the problem, however, is not solely the buildup of faster fiber optics, but a paradigmatic shift away from centralized computing. Edge computing is a distributed IT architecture that features decentralized processing power. Whether it is self-driving cars, mobile phones, or devices in the IoT – in edge computing they all rely on local computing power instead of sending everything back into the cloud.
Furthermore, IT-infrastructure is headed towards an AirBnB moment. Several startups working with blockchain technology enable any machine with a computer chip to rent out unused resources, from memory space to processing power. This new level of capacity utilization will unburden datacenters and the roads connecting them.
At the same time hardware does not only continue to improve gradually, but it profits from game-changing inventions. Carbon nanotubes are used to make smaller and faster semiconductors. Graphic cards, initially used by gamers, are now powering AI and crypto mining. And the material graphene, discovered only in 2004, is so thin that it can mimic the elasticity of the human brain, hence making an excellent candidate for the next semiconductor material. Computers made from graphene are estimated to be up to 1.000 times faster than conventional computers.
The combinatorial effect
We are still in the infancy of the new techno-economic age. After being fed a media diet of pie-in-the-sky ideas, the transformative pace seems disappointing to some. More than a decade has passed since Nakamoto’s infamous paper introduced bitcoin to the world. Yet the financial sector is still mired in pilots and highly specific use cases, not even to speak about all the other industries that were supposed to be revolutionized by now.
But each new paradigm takes time to gain ground, yet when it finally does, its impact flies off the handle. Partly responsible for this is the combinatorial effect of multiple technologies maturing at roughly the same time. The new economic order is more than the rise of blockchain. It is the exponential economic growth resulting from the compound effect of enabling technology such as blockchain, cloud computing, 5G, augmented analytics, and new hardware.
Equally important to tech breakthroughs, is the way businesses apply them to solve the big challenges of our time. Thus, we must pay close attention to the moves of incumbents and challengers, states, and regulators. So make sure to keep reading on the latest developments in The New Frontier!