On-Chain Economies and the “Trust Gap”

tl;dr: In a world of attention scarcity, value and brand will migrate to entities that are more trustworthy. On-Chain economies will be far superior to off-chain economies.

I have a tendency to “over-name” things.

I’ll see a trend and, probably because my default mode network is marketer/salesman hype machine, I like to make a big pronouncement.

“The Age of Blockchains” or “The Arrival of Decentralized Economies.”

It’s both a strength and a weakness.

Same, But Different
But naming helps. I like to use a method that I picked up from Ragy, the CEO of Sprinklr, called “same, but different.”

Give people something with which they are familiar and then modify it slightly.

“Star Wars, but under the ocean” is how many Hollywood films are pitched.

So, when it comes to the arrival of the “Age of Blockchains,” I’ve been searching for years for the right way to describe what I perceive to be the implications.

My most recent (and horrifically embarrassing effort) was “decentralized economies fueled by blockchain-backed crypto assets.”

Though technically accurate, it’s a mouthful and requires a lot of explanation, so it’s not really a good one.

Digital-Analog Hybrid Economies
What’s been dawning on me with greater frequency recently is the fact entire economies are going to move to blockchains.

With the Internet and social media, the digital part exploded at scale (we all know that), but the back-end processing was still mired in a pre-digital world. These were centrally located, physical entities. I’ve been to Facebook’s headquarters. It’s a real place.

Facebook (and all the others) had to hire people with HR, have payroll, set up systems, have management review processes, etc.

They took their money from banks and paid them out through banks.

So while the “front office,” as it were, lived in the 21st century, the “back office” was living in the 20th. Sure, they have some efficiencies and improvements, but they still have payroll every 2 weeks….not every day.

Essentially, they are a hybrid between digital and analog economies.

Digital-Native Economies
Public blockchains are different.

Because they have solved for the “double spend” problem, they are able to have fully digital front AND back offices.

That means that the entire economy, circular as it is, never has to touch the “pre-digital” economy.

Today, economies that don’t use the “traditional” banking system are called “shadow” or “gray” economies. However, even those tend to touch the regulated banking system at some point (hence the issue around money laundering and know-your-customer laws). Sure, there are sometimes payment mechanisms in other assets, but I would think they are all physical in some fashion (e.g. diamonds, gold coins).

With blockchains, we are seeing the emergence of digital-native economies. They are 100% digital with no additives!

This end-to-end digital value system (the economy) brings speed, efficiency, portability, censorship resistance, self-sovereignty, and verifiability.

It also gives more power to end users while also offering the potential for effective regulation of a new kind, albeit one that is community-driven and decentralized versus a centralized entity like the SEC or FDA.

At some point, I’ll write a blue sky post about decentralized regulation, but not today. The key point is that verification and regulation is actually easier to do because transactions, reputation, and history are all stored “on-chain.”

On-Chain = Greater Trust
What that could mean is that the members of the economy, the token holders, can have more trust that the system is working the way it is supposed to function.

Perhaps even more importantly given the times we live in, it is possible to verify that each person is being treated equally according to the law.

That type of knowledge and experience is what breeds trust in “on-chain economies” versus “off-chain economies,” such as Facebook or Google.

Now, it’s not going to happen on Monday even if I wish it would.

However, I believe that, over time as trust and confidence in “on-chain” economies grows, value will migrate.

Incentives, Behaviors, and Social Goods
What “on-chain” economies can also leverage that off-chain economies cannot are smart contracts, enabling programmable money/value. This has the benefit of allowing the collective group to incentivize individual behaviors of members in line with larger goals that benefit many.

I know this is a bit esoteric and, frankly, I’m still flushing it out in my head, but it was sparked by Albert Wenger’s book, “The World After Capital.” One of the primary themes is how we are in the death stages of the industrial age into the “Knowledge Age.”

In the Knowledge Age, it’s not capital that is at a premium, it’s attention. This is Herbert Simon stuff, something I touched on 13 years ago.

In this era, consumers and businesses will value economies where they have greater trust (implicit or explicit) that if they pay with their attention, it will be worth their while.

This isn’t true just in terms of an economic ROI, but in terms of a “total ROI” including non-financial metrics and other social goods.

As Albert writes:

We are bad, individually and collectively, at allocating attention.

For example, how much attention are you paying to your friends and family, or to the existential question of the meaning and purpose of your life?

How much attention are we paying, as humanity, to the great challenges and opportunities of our time, such as climate change and space travel?

Capitalism cannot address these attention allocation problems because prices do not, and cannot, exist for many of the activities that we should be paying attention to.

Prices do not work, but incentives do. This is where public blockchains have a chance to excel.
Bounties.network incentivizes people to pick up trash. This is something that doesn’t have a price, but does have a societal benefit.
These types of experiments are very early and immature, but I think that the combination of trust that “on chain” can deliver with the flexibility that smart contracts affords will create a magnetic effect in terms of where value (not just financial) is generated and resides, before getting reinvested into the economy.
There’s a lot more to explore here. I know I’m not clear on it myself.