Why blockchains?

A few days back Franklin Templeton enabled peer to peer transfers on shares in their tokenized treasury fund($380 million), by enabling their BENJI token to be transferred on the blockchain. Three weeks back Blackrock launched a tokenized fund on a public blockchain(ethereum) backed by US treasuries, which has $350 million as on date, all visible on the blockchain. Holders receive yield not in USD but in their BUIDL token. Visa launches analytics dashboards for stable coins, showing $2.5 trillion volume in the last 30 days . Coinbase started paying vendors in crypto, and Stripe says they will accept crypto again. It seems like I dont need to answer the question ‘Why Blockchain?’ anymore. But wait… These are all finance use cases. Is that all blockchains are good for?

I attended the Harvard blockchain conference a couple of weeks back, and seeing all the energy among the builders and the elegant new algorithms being developed and experimented with rejuvenated my enthusiasm for what is possible on-chain. It also made me think about how to communicate this to others, as most of the people I would interact with outside the bubble would associate blockchain with cryptocurrencies or NFTs and now the craze around memecoins. A discussion on cryptocurrency inevitably leads to a focus on high volatility in prices, several pump and dump schemes and finally fraud. The NFT discussion often veers towards highly priced monkey pics with no perceived utility. Perhaps we need a new mental model to communicate the value of blockchains, without discussing NFTs or cryptocurrencies/memecoins.

I think I found two such mental models, one evangelized by Justin Drake, a researcher at the ethereum foundation and another by Chris Dixon , a VC at a16Z.

Chris just published a book , Read ,Write , Own , which is an excellent step by step discussion of the history of the internet, split into three phases. Ownership is the phase where blockchains come in. He says that many people use the mental model of the casino when focusing on cryptocurrencies, but should think of blockchains as computers on the web that no one owns and can encapsulate rules in code. I won’t dig deep into the book here, as that will come soon in another post. I met Chris at Harvard and got the book signed ! If you cant wait for my post :), you can watch several videos or listen to podcasts he has been on. Here is one by bankless :

Here, I will share the mental model that Justin drake wrote about a few years back ( Atoms, institutions, and blockchains and revisited in a talk at eth global. It builds on what Chris calls the ability of using blockchain to make commitments , and formalizes it in the concept of ‘hardness’. Justin defines hardness as a capability and a measure and I quote

“Hardness is

1. The capability to make a specific outcome very likely to be true in the future, for the purpose of enabling human social coordination

2. A measure of the certainty or security of a specific outcome.

Atoms, institutions, and blockchains let people program hardness to create social coordination tools like money, commercial or political relationships, and more.”

For example, physical scarcity of gold makes it a reliable form of money (atoms). Institutions like courts enforce contracts, creating trust in commercial relationships (institutions). Finally, blockchains use smart contracts and verifiability using cryptography to create secure voting systems, making it difficult to cheat (blockchains). Human civilization requires finding ways to make the future more certain or ‘hard’. Atoms and institutions have been used in the past, but blockchains are programmable and allow for new use cases where institutions or atoms are not the best option.

This predictability, or reduction of uncertainty, is crucial for the complex coordination tasks that underpin our civilization. By providing a new, software-based source of hardness, blockchains expand our toolkit for reducing uncertainty about the future. They allow us to create "casts” a possible future state of the world and then ‘harden’ them or make them guaranteed future states. Such hardness of future states was previously impossible or infeasible, but now blockchains provide a globally accessible, decentralized, tamper-proof record of ownership and value transfer. Moreover, the deterministic execution of smart contracts reduces uncertainty about the outcomes of agreements.

He discusses the pros and cons of hardness possible with atoms and institutions, but I skip that discussion here, and focus on blockchains. Blockchains provide a way to program digital hardness, with benefits such as trust less global access, malleability of software, ease of iteration, and hardness and security guaranteed by economic incentives, which are themselves programmable. He does discuss disadvantages such as being limited to digital environments, security issues in code, and reliance on market incentives which can go wrong from time to time.

As our world becomes increasingly digital, blockchains offer a scalable and automatable way to reduce uncertainty and establish trust in a wide range of interactions. In an information-theoretic sense, blockchains provide significant information to users by minimizing uncertainty about key economic and computational outcomes.