8 The Web of Everything

On January 3, 2009, the first bitcoin block was mined, marking the creation of the first cryptocurrency. It was time-stamped by its creator, the mysterious Satoshi Nakamoto,1 who appended in the source code a curious comment: “The Times 03/Jan/2009 Chancellor on brink of second bailout of banks.” By including in the “genesis block” of bitcoin the headline of that day’s edition of The Times newspaper Nakamoto was making a political statement: that this new technology—to be henceforth known as “blockchain”—was a direct challenge to the undemocratic powers of central banks. As the apotheosis of the cypherpunk movement,2 bitcoin was raising the flag of digital anarchism, launching a techno-political revolution fueled by the outrage of the Great Recession. An alternative path to money, one that circumvented the money-printing monopoly of central banks, was now possible. Nakamoto was opening this path to the world by having solved the so-called double-spending problem for a digital currency.

Here’s what that means. Keeping physical cash in your pocket makes paying straightforward. You walk into a store, buy goods worth $10, pay with your $10 bill, and walk out having completed and settled a cash transaction. The $10 bill you had in your pocket is now inside the store’s till. But this simple transaction is not as straightforward in the digital world. If you wanted to pay for the same goods by sending $10 electronically from your computer to the store, there is an obvious problem: how would the store owner know that you were honest enough to delete your $10 bill from your computer and not keep it so you may use it again to buy something else too, that is, to “double spend”? Until bitcoin came along, the only way to ensure honesty in digital money transactions was via a third party, most often a bank. The bank intermediates between a buyer and a seller in order to guarantee that the $10 of the buyer was debited at his or her account before being credited at the seller’s account. For this to happen the $10 must always “sit” in the bank’s computer, while both the buyer and the store owner must trust the bank to ensure that the transaction takes place. Nakamoto’s invention made such intermediation unnecessary. Owners of bitcoin could now transfer their money to anyone directly, without the need of an intermediating third party, and without anyone doubting their honesty. Once a bitcoin is spent, it cannot be double spent. It was a historical breakthrough that made many hitherto unimaginable things possible.

Intermediaries Eliminated by Math

By solving the double-spending problem of digital currency, Nakamoto invented a technology that can deliver secure exchanges where peers can buy and sell anything—money, houses, gold, loyalty points, digital cats,3 whatever. He thus demonstrated how the Internet of Information could be transformed into the Internet of Assets: peer-to-peer exchange need not be limited to information anymore but can extend to include anything in the real, as well as the imaginary, world. Moreover, blockchain allows for the near limitless fractionalization of assets; for example, you can sell or buy tiny percentages of the value of a painting, a house, a spaceship, or a patent. Fractionalization of assets brings down many barriers to private ownership and opens up new possibilities for capital creation to all citizens, rich or poor.

So what is a blockchain? The simplest way to imagine it is as a ledger that records transactions between participants in an interconnected computer network. This ledger is not a central database, as is the case in most classic software applications, but is instead decentralized, meaning that every participant in the network has a copy of the most updated version of the ledger on their computers at any time. This way, all transactions taking place on a blockchain—which are, effectively, electronic messages sent to all participants—are fully transparent to everyone. The practical way that this takes place is as follows: transactions are bundled into “blocks” over a set period of time and are then verified so they become official records in the ledger, like blocks strung together on a chain. Once that happens, all the nodes in the decentralized ledger are updated with the new block. The critical step in the process of recording new blocks is verification. Without “objective” verification, none of the participants could trust that the transactions recorded in any given block were not fraudulent. But how can this verification take place without a “trusted” third party? How can participants in a blockchain be kept honest without some higher authority policing their actions? There are two important mechanisms that ensure that decentralized, or leaderless, verification takes place.

The first mechanism is the cryptographic method of verification. There are various methods, some already used and others in experimental phase. The problem that all those methods aim to solve is practically the same: how can one know that any given node in the blockchain network is telling the truth when verifying a transaction? This problem is known in computer communication theory as the “Two Generals Problem,” and is easily explained using a simple story. Two generals, one commanding and one following, attack a common enemy from opposite directions. However, each general’s army on its own is not enough to defeat the enemy. The only way to win is for the two generals to cooperate and attack at the same time. To cooperate, they need to send messengers across the enemy camp. Messengers may be captured and the message not delivered, whereby the attacking general will be defeated. Can the generals trust that their message was received? Using game theory, the problem was shown to be unsolvable; alas, there is no way for any general to be certain that their last messenger had safely passed through the enemy camp.

Nevertheless, in 1982 a generalized version of the Two Generals Problem was published,4 and the problem was renamed as the “Byzantine Generals’ Problem.”5 In this new story there are more than two generals, but some are traitors. Messages are sent between generals to coordinate an attack. Traitors would do their utmost to corrupt the messages and spread lies in order to foil the attack. What needs to be done in order to ensure that the correct messages are sent and received to every general, regardless of the traitors’ efforts? This general problem was shown to have a solution: the generals can reach a consensus about the truth of a given message by taking a majority vote. The mathematical algorithm that solves the Byzantine Generals Problem is shown to reach consensus—that is, to give either a “true” or “not true” output—as long as two-thirds of the generals are honest. If the traitors are more than one-third of the total, consensus is not reached, the armies do not coordinate their attack, and the enemy wins.

The Byzantine Generals Problem applies to a blockchain when the truth of a transaction needs to be verified. Any peer on the network can act as a treasonous Byzantine general and transmit a false transaction to nullify the blockchain’s reliability. Given that there is no central authority to take over and repair the damage of false messages, the network itself must be “fault tolerant”; that is, the network must run some code (or “protocol”) that solves the Byzantine Generals Problem every time a message is transmitted, so that consensus is reached and truth is verified. In the case of bitcoin the solution to the Byzantine Generals Problem is probabilistic and is called “proof of work.” This method creates a high cost to anyone who verifies a transaction by demanding a solution to a mathematical problem. This cost accrues because of the computing that is necessary and the amount of electrical energy that must be spent in order to solve the mathematical problem.

The second mechanism of verification is economic incentivizing: whoever bears the cost of verification should be motivated to do so. In the case of bitcoin the verification of a transaction takes place by so-called miners. Every time bitcoin miners verify a block, they get rewarded for their effort with a number of newly minted bitcoins,6 just like the real miners of yesteryear who put forth effort and sweat digging for gold.7 This way they compensate for the cost they incurred in order to verify a block, and they make a profit too. Incentivizing with bitcoin rewards, as well as additional transaction fees paid to participants for offering other services, ensures that a blockchain is self-sustaining.

Because of their decentralized nature, blockchains are generally more secure than centralized systems because they do not have a central point of attack or failure. The consensus mechanism is another key security feature that ensures that everyone follows the same rules, and that everyone agrees on the state of the network at any time. In addition, data integrity is guaranteed because blockchains are “immutable”: the protocol that adds transaction blocks to the chain must verify that the new block’s “truth” is dependent on the verified truth of all the blocks that preceded it. This mechanism prevents alteration of transactions already confirmed. If a malicious hacker wanted to falsify a transaction, he or she would need to spend impossible amounts of effort to retro-falsify every transaction on every block in the chain. In such a scenario, conflicted or false copies of the ledger would be quickly eliminated through the sheer weight of the math involved in mining.

Another important property of blockchain is the built-in protection of participant anonymity. Each transaction on a blockchain is associated with a private key that belongs only to individual actors participating in the network. This private key is an abstract series of numbers and characters and does not reveal the identity of the owner. To make a transaction on a blockchain network, a participant uses this private key. It is therefore impossible for a third party to identify who is transacting. This characteristic has triggered much negative reaction from governments and tax authorities across the world. Anonymity on a blockchain seems to present an ethical dilemma. On the one hand, it protects criminals from facing justice and the law. But, on the other hand, it also guarantees privacy and prevents citizen surveillance by an authoritarian state. On closer examination, however, this ethical dilemma can be shown to be less so because of the potential to embed lawful contracts in the software protocol that verifies transactions on a blockchain. These contracts can include a condition to verify one’s legal identity before being allowed to make transactions. This condition may not compromise anonymity but simply return a yes-or-no answer for verification purposes. To understand how such “smart contracts” could enable new ways of decentralized, leaderless human collaboration, we must take a dive into an emerging field of economics for blockchains called “cryptoeconomics.”8

The Tokenization of Everything

The basic principles of cryptoeconomics are relatively simple. Blockchain—also referred to as distributed ledger technology—is used to build an encrypted network for willing participants called a cryptonetwork that provides some service. It could be any service—for instance, data storage, or access to computation facilities, or a marketplace for work or for trading securities and digital or physical assets. Participants in this network are incentivized via the issue of a “token.” These tokens are written in software code as smart contracts, which means that they can be anything their designer decides; for instance, they can be a currency, a commodity, and a security all-in-one. They become valuable because of the consensus mechanism used in verification and also because participants recognize that using tokens on the cryptonetwork is fully secure. Participants transacting on the cryptonetwork may use this token for their exchanges. Depending on how they contribute to the function of the cryptonetwork, they are rewarded with tokens. For example, some participants may contribute by verifying blocks (similar to the miners of bitcoin), others may write or improve the code, provide marketing and community management services, or provide general support. The governance of a cryptonetwork can be leaderless and automated by the source code of the blockchain. The designers of cryptonetworks can formulate specific governance processes; for instance, participants who wish to be part of a decision-making body may “stake” their tokens to participate in committees. This way each cryptonetwork can also have its own form of governance.

Cryptonetworks can be both private and public.9 Private means networks controlled by a single authority, where the source code running the network is proprietary and nodes in the network need to ask permission in order to join. Corporations use private cryptonetworks to automate business processes where the costs of agreeing on a “single version of truth” are high. Typical use cases of private cryptonetworks include syndicated loans or logistics. In such cases many businesses need to cooperate in a process where much time and effort is spent in comparing documents and verifying transactions. Blockchain can provide the means to accelerate these processes and significantly reduce costs. Think, for example, how shipping companies move goods from one geographical area to another, often needing to hand over from one transport agent to another, ensuring compliance with tax and customs laws in a variety of countries, purchasing insurance, making checks on insurance and safety policies, and so forth. All these checks can be automated using a blockchain where all the participants in the process have access.

But the really disruptive power of blockchain is probably in public, or “open,” cryptonetworks; where the entire source code is available to everyone under an open license and there is no central authority to control access. These truly decentralized cryptonetworks are open to anyone, and anyone can join as a node and provide some network service without asking for permission. Cryptoeconomics uses game theory to design and implement economic incentives for leaderless human collaboration on open, permissionless cryptonetworks. Cryptoeconomics can thus enable the realization of new types of peer-to-peer digital platforms that use blockchain technology—called “cryptoplatforms”—where transactions between participants are effected through the exchange of tokens. Cryptoplatforms and tokens have the potential for solving one of the biggest problems in the accelerating digitalization of our economies, namely, the wealth asymmetry problem, because they are disrupting the dominant economic model of the digital economy.

Web 3.0

As discussed earlier, the evolution of digital platforms over the past ten years has given rise to the gig economy by aggregating, dispersing, and automating work. The gig economy is leading liberal democracies toward greater income and wealth inequality, especially as more and more work tasks are performed by automated systems that learn from our data. Digital platforms were made possible by the convergence of three technologies over the past ten years: cloud computing, social media, and mobile technology. These technologies gave birth to “web 2.0,” or the “social web.” As we look into the next ten years there are three new technologies that will shape the digital economy: AI, blockchain, and the Internet of Things. These technologies are enabling a new version of the web called “web 3.0”—or the “web of assets”—a place where not only information but also everything can be exchanged.

Web 3.0 exchanges of everything could continue to benefit the few, but there is also the potential to enable ways to distribute the enormous bounty of the AI economy more equitably and diffusely. To understand how this may be possible, we need to examine the differences between web 2.0 closed platforms and web 3.0 open cryptoplatforms.

What we have witnessed in the short history of the digital economy so far is that the owners of web 2.0 digital platforms—the founders, the executive teams, and their investors—have become richer while the users on those platforms have not. This seems to be unfair. For without users—the buyers, sellers, evangelists, reviewers, riders, drivers, and so on—those digital platforms would be worthless. Web 2.0 platforms are valuable only as long as we, the users, use them. If no one got a ride via Uber, or no one wanted to be an Uber driver, the stock of Uber would collapse overnight, despite all the great talent, software, and investment that has gone into building this amazing company. If no one wanted to post content on Facebook, or use Google to search the web, those companies would also disappear. It is the “liquidity” of a digital platform, measured by the volume and frequency of user interactions and transactions, that makes a platform valuable. However, most of this generated value goes straight to the founders and investors, who, thanks to their expert lawyers and tax advisors, make sure governments get little by way of tax—as the European Union has recognized and thus started pushing for a new regime of “digital taxation”10 fit for the digital era.

Figure 8.1 illustrates the misalignment of goals between owners and users (or “participants”) in the existing digital platform economy. Because of this misalignment, platform owners care for their users only when the participation acquisition costs—the so-called customer acquisition costs (CACs)11—are high. That happens during the initial period following launch, when a platform needs to invest massively in creating both demand and supply at the same time. But once enough capacity has been built on both sides of the platform, the participation acquisition costs begin to drop. Users are attracted to the platform because there are already transactions taking place. As more participants are attracted, the transactions become more liquid, a phenomenon called “network effect.” As the platform grows, network effects lower the customer acquisition costs even further, and platform owners start caring less about individual participants. Web 2.0 platforms are typical rent-extraction machines: the value created by the participants is funneled to the owners. But thanks to the unique properties of cryptonetworks—or “web 3.0 platforms”—all this could change.

Cryptonetworks enable shared ownership of generated value via the wide distribution of tokens among a platform’s participants. As can be seen in figure 8.1, as the liquidity in a web 3.0 platform increases, the value returned to the owners increases too, but so does the value of the tokens held by participants. Tokens can take various forms in order to incentivize participation. They can be tokens that act as currency to be used in transactions, but they can also be tokens of equity options, or shares on dividends, or indeed anything else that innovative entrepreneurs in the era of web 3.0 may come up with.

Services running on open public cryptonetworks shift the power balance in favor of users, and from the few to the many. Imagine, for example, if a number of Facebook’s users disagreed with the way Facebook is evolving its services or behaving in public. In today’s world, they could protest only by writing a few blog posts. But a Facebook written as an open-source cryptonetwork allows for “forking,” which means participants can use the same code to create a similar service governed by their own, preferred rules. In a world of public, open-source blockchains, users could vote with their feet and create Facebook 2.0 without facing legal repercussions. As we will examine later, public cryptonetworks can be applied to enable new forms of company organization and governance.

Criticisms of Blockchain

Cryptocurrencies have been notoriously favored by criminals and tax fraudsters, while many “initial coin offerings” (ICOs)12 were shown to be nothing more than get-rich-quick scams. Bitcoin started trading in October 2012 at US$0.125 and, by December 2018, had risen to the vertigo-inducing heights of US$19,783.21 per coin, mostly because of speculation, only to collapse soon afterward, as many economists had predicted. Since its inception blockchain has had a wild ride on the “hype” slope of the Gartner cycle,13 making the news almost daily, with passionate camps firmly pitching their tents on both sides of the divide on what the future of crypto might be. For critics, blockchains were a fool’s gold, an inefficient and costly technology that delivers little more than data structures for authorized users to add more data to them. For supporters, they are a historical breakthrough that replaces trust with lines of software, echoing Satoshi Nakamoto’s statement in his original white paper: “We have proposed a system for electronic transactions without relying on trust.”14 As the stardust settles in the crypto world and the technology enters its “trough of disillusionment” stage, it is time to coolly examine the arguments of both critics and supporters.

There are two main categories of criticism of blockchain, technical and ontological. Technical criticisms revolve around the inefficiencies of distributed ledgers—for instance, the high cost and environmental impact of running proof-of-work verification protocols during mining.15 Given their immutability, there is also the inherent problem of “append-only data structures” in a blockchain. This means that you cannot delete or edit data in a blockchain. You are only allowed to add more data to it. This is quite problematic because blockchains are a mismatch to existing business systems—for example, in banking or government, where it is vital to be able to go back and manipulate past data records. And, finally, there is the issue of security. Although blockchains claim to solve security problems by not having a single point of failure, as well as through the cryptographic hashing of transaction records, the truth is that security risks do not disappear but are only moved further upstream. For example, cryprocurrency holders are vulnerable to their cryptowallets being hacked. Something as simple as forgetting one’s log-in details can also lead to losses. Exchanges can get hacked, and smart contracts may have bugs that are extremely hard to debug given that blockchains are append only. All these problems are important and crucial for the future of blockchain technology and cryptocurrencies. Unless they are solved, the opportunity of blockchain will never materialize and its application will be restricted.

Nevertheless, these are all engineering problems and therefore, ultimately, solvable. Blockchain technology is still evolving. Security issues are being addressed, and new and more efficient verification protocols are being tried. For instance, an alternative to the environmentally damaging proof-of-work method is called “proof of stake.” Instead of miners spending heavy computing power to solve a mathematical problem to reach consensus, all participating nodes place a bet on blocks. The nodes whose block is the honest block (i.e., contains no fraudulent transactions) get rewarded. The nodes whose block turns out to be dishonest get penalized; the amount of their bet gets debited from their balance. Placing bets doesn’t require high-performing computers and electricity. All a node needs to be eligible to get rewarded is some stake that it can place a bet with. The idea behind this method is, “whoever has the maximum stake in the blockchain must have the loudest voice.” It is therefore not unreasonable to assume that, in time, innovation will deliver much more secure and efficient systems. Current technical criticisms will very likely disappear as blockchains enter the “plateau of productivity” in the next three to five years.

Ontological criticisms, however, that blockchains are not really “trustless,” need to be taken much more seriously. Blockchain enthusiasts claim that mathematics and software code can replace trust. By wearing T-shirts with messages such as “in code we trust,” they claim that the combination of a distributed ledger, a consensus algorithm, and the issuance of tokens is enough for humans to transact without the need to trust anyone else but themselves. But can software code really deliver such wide-ranging social trust? It seems very unlikely. There is a whole ecosystem of various technology providers and stakeholders around a blockchain system, and every participant in that ecosystem wields some degree of power or influence. Importantly, all those participants are human. Math and software can only take you so far. It seems that claims of blockchain having solved the problem of human trust are overblown and misplaced. In order to trust any system, you must trust the people who made it, maintain it, and run it.

For example, you need to trust that those who coded the smart contracts had the right skills and intentions, as did everyone else who coded every other bit, piece, pipe, and engine that makes a cryptonetwork possible. If something goes wrong—as it surely will—there must be some kind of governance structure and mechanism to decide how to fix it. The human part of governance of a blockchain cannot be fully automated using smart contracts. If it were, it would instantly become subverted by the same problems that it was meant to resolve. In other words, you cannot have faulty code fixing faulty code. Some human needs to intervene at some stage to get things sorted out. That human needs to have the authority to do so. How this authority is given, by whom, and under what circumstances are matters of governance. They are also matters of legal compliance. Blockchains cannot operate outside the law and the courts. Doing so would expose participants in a public blockchain to predation as well as to prosecution. Trust is a social good too vital and too complex to be replaced by math. Humans will inevitably remain at the core of whatever is built using this technology, as creators, participants, contributors, adjudicators, regulators, and governors. Blockchains are therefore revolutionary not because they replace trust with math but because they enable alternative forms of decentralized governance of digital platforms. This, as we will see, is key to democratizing the future AI economy.

Blockchain for Democracy

Blockchain may not be so much in the news nowadays, but it is not going away either. It has already set off a wave of change that is unstoppable. Bitcoin may have lost 50% of its value at its highest point but still trades steadily around the US$7,000 mark. A market for cryptocurrencies is continuously evolving. There are countries considering diverting national energy resources into industrial-scale bitcoin mining.16 New exchanges are being launched around the world, and forward-looking regulators are shaping new legal frameworks that weed out speculators and allow for the innovation of new, and regulated, financial products. Facebook has proposed Libra, a cryptocurrency backed by a fund of fiat currencies, setting off much furor and anxiety among central bankers and governments as to how much such a privately run currency could destabilize global money markets. It is not only private corporations that see the opportunity for blockchain to revolutionize the financial world. In late 2019, Mr. Mu Changchun, the head of the digital currency research institute of China’s People’s Bank, told a forum in Hong Kong of the bank’s plans to adopt a digital currency, powered partially by blockchain technology, called “Digital Currency Electronic Payment.”17 A few months earlier, in August 2019, the governor of the Bank of England, Mark Carney, in addressing the annual meeting of the Federal Reserve Symposium in Jackson Hole, Wyoming, reiterated his support for a global, central bank–issued cryptocurrency called “synthetic hegemonic currency” (SHC), perhaps through a network of digital currencies. This was a very bold proposal, for, if SHC were to happen, it would cause a major paradigm shift in the global financial system, effectively deposing the US dollar as the world’s reserve currency. Carney was quite explicit on that, adding in his speech, “An SHC could dampen the domineering influence of the US dollar on global trade. If the share of trade invoiced in SHC were to rise, shocks in the US would have less potent spillovers through exchange rates, and trade would become less synchronized across countries.”18 Carney was right to be concerned about de-risking the instability of financial markets in an age of renewed trade wars, since such instabilities directly impact the politics in liberal democracies and the welfare of citizens. But blockchain technology could facilitate the reinvention of our political system and our economies in many ways beyond the adoption of a global—and more stable—cryptocurrency.

Throughout this book I have argued that for liberal democracy to survive in the age of intelligent machines we must solve the problem of current, and future, wealth and income inequality. As AI systems automate work and we and our children become part-time workers at best, or chronically unemployed at worst, we must find ways to counterbalance the loss of a steady income and the personal and family security that this income brings. I have also argued that universal basic income is not only fiscally problematic but also insufficient to providing a decent living standard—let alone supporting the accumulation of capital and wealth by the many. It is also in conflict with classical liberal values of a minimal state, as it requires an even greater role for government as a redistributor of wealth. We therefore need noncoercive, bottom-up ways to more evenly spread the new wealth that AI will create and deliver true prosperity rather than mere sustenance.

For the wealth that AI will create will be tremendous: a 2018 report by management consultancy firm McKinsey estimated that AI could deliver an additional US$13 trillion to the global economy by 2030.19 That is almost a 15% boost in today’s economic output. This prediction is in line with similar forecasts made by Accenture and PwC. Almost everyone agrees that the dividends from adopting AI in business and government will be enormous. Nevertheless, in the same report, McKinsey also warns that the “adoption of AI could widen gaps among countries, companies and workers.”20 Continuing with “business as usual” is clearly not an option, for it will exacerbate the causes of popular mistrust in liberal democracy as a system of government that enables a fairer distribution of wealth. We need radical change so that everyone has a stake in the future AI bounty. As I have argued, one of the reasons for so much inequality in a digital economy is that citizens are not earning anything in return for their contribution to the success of digital platforms, as all this value is extracted from the platform for the benefit of a few. Cryptonetworks, by introducing a new, decentralized way of governing digital platforms, could be the way to democratize their governance and give citizens who use them, or otherwise contribute to them, a say in how they are run. Given their tokenization capability, cryptonetworks also hold the promise that the new web 3.0 could be a place for spreading the wealth of the Fourth Industrial Revolution more diffusely. This is now a more realistic prospect than ever before because the AI economy is largely based on our data. With blockchain technology, as we shall see in the next chapter, we can trace and record the value that each individual piece of data contributes to the success of a digital platform that is powered by AI algorithms. In other words, we can account for the contribution that each one of us makes, and we can use this as a monetization and repayment mechanism.

Furthermore, a technology that delivers a decentralized way of governing human collaboration can be leveraged to experiment and develop new forms of business organizations that have been hitherto impossible. Just imagine a leaderless, virtual company in which millions of people contribute through their data, ideas, and work in collaboration with intelligent machines—a cybernetic learning system, such as the ones discussed in the previous chapter, wherein the goal would be the production of a high-value social or economic good. Our imagination is the only barrier to how we may leverage technologies we currently have at our disposal in order to reboot capitalism in the twenty-first century and deliver a new iteration of a free, democratic, and prosperous society.