Haseeb Qureshi, an analyst, and general partner at MetaStable Capital, believes that the real purpose of cryptocurrencies is not to replace existing institutions but to become new, more efficient institutions that operate on the basis of decentralization. The mission of cryptocurrency is to live up to the promise of creating a global financial environment for everyone, just as the Internet has become a global information medium.
Most pioneers of the cryptocurrency world would not say that they are building “institutions”. This term smacks of centralization – it is too asexual (with the exception of “institutional capital”, which is accepted with outstretched hands).
In recent cryptocurrency dispute between Paul Krugman and Katie Hon, Krugman was asked why he denies the existence of a decentralized cryptocurrency entity. He replied:
“We have already developed a clever social thing: strong institutions […] And it will be difficult, really difficult to think of something better. ”
This position is not popular in cryptomir, but it seems to me that Krugman is absolutely right.
If we ask ourselves what has become the driver of the economic vitality of most of the developed nations of the world, then we all know the answer: strong institutions. If you improve the country’s institutions, society inevitably begins to flourish – economically, socially, ethically. Institutions are difficult to copy, they are the conquest of hard social and political labor for many generations.
If cryptocurrencies want to make the world better, why should they avoid institutions? Using cryptocurrencies, are we turning away from that one thing that, as we know, works?
Not so fast. In fact, cryptocurrencies are about institutions. Especially they are aimed at building scalable, global and decentralized institutions – institutions that are designed to survive a particular group, country or period of time.
What do we mean when we talk about institutions
“Institute” is a widely known and at the same time vague term. In its original 1991 article Douglas North defined institutions as “constraints that structure political, economic, and social relations”. There are both formal restrictions (such as contract law, property rights, the judicial system) and informal ones (traditions, taboos, social norms). Simply put, institutions are rules that bring order and certainty into our economic and social life.
Institutions are significant because risk and uncertainty are the enemies of commerce. If you do not believe that your goods will be delivered in safety, or that your currency will be of any value tomorrow, you will cease to conduct economic activity. When institutions emerge, more and more willingly take risks, and thus a healthy market emerges – and with it a healthy society.
New institutions appear infrequently. A controversial statement states that the latest global institution built there was internet.
One of the promises that stand behind the idea of the Internet was that it would become a global information medium. At that moment, when all the information in the world would be digitized and placed on public servers, everyone would have access to human knowledge. And in many ways it was possible to embody! For most people anywhere in the world, if they want to find out any information, they are looking for it on Google or Wikipedia. Search engines today are distributed almost everywhere.
It is noteworthy that these institutions were built, and then this result was enjoyed everywhere. No need to tweak Google or LinkedIn for a specific country, be it Brazil or Burundi. All you need is to translate the user interface, so that every society in the world can use the search on the Internet or a social network (although with some reservations).
If this sounds obvious, it is because now we take the scale for granted. But for most of human history, the spread of institutions in the world took place through conquests and empires. Now all you need is a computer and an open network port.
And yet, for finance history has developed exactly the opposite. Each country has its own fenced and home-grown financial infrastructure. Each nation should develop and staff its own version of the following institutions: banks, credit systems, stock exchanges and legal structures. If they do not, they are doomed to remain a financial backwater.
We know about it. But when most of the money in the world is already in digital form – why did not money become like the Internet?
With the help of cryptocurrency, anyone can freely connect to the global financial system, consisting of bank analogs, savings accounts, payment services, public registry and contractual system. Innovation in this area can be shared with everyone. The promise of cryptocurrency, in this case – to become the first global financial environment. They have to do with money what the Internet has done with the information.
This will have an incredibly powerful effect on humanity.
Cryptocurrencies will compete with centralized management systems
Today, the majority of citizens around the world have few opportunities to combat inefficient economic management. They can try to circumvent capital controls, they can enter a gray or black market, they can translate their savings into dollars or gold. But in the future there will be another, more powerful option: cryptocurrency. They will enable people to integrate into the global digital economy and financial system with full-fledged financial services.
Therefore, it would be incorrect to say that cryptocurrency replaces institutions. Instead, cryptocurrencies will build alternative decentralized institutions. These decentralized institutions will be more “portable” and global, they will work autonomously, and they will provide financial certainty for that part of the world that does not yet have it.
This is an important idea: in a world where more than 50 nations have passed the hyperinflationary stage over the last century, cryptocurrency will serve as a powerful means of controlling the way financial managers are.
The best antidote to poor governance is competition. Cryptocurrencies are the only serious competitor against the centralized financial infrastructure. Economic choice, freedom of exit and the ability of citizens to coordinate – this is exactly what leads to better local governance and better institutions in the long run.
But cryptocurrencies will win this confrontation only if they can build solid and influential institutions.
Why do cryptocurrencies need institutions?
Many crypto anarchists consider the term “decentralized institutions” meaningless. The whole point of decentralization, they say, is the elimination of institutions. They see institutions as distinctive signs of centralization, a temporary parking lot, which they will eventually throw away.
In fact, exactly the opposite. Institutions are critical to any stable economic system. They provide gradual development (or modernization), and allow people within a given society to conduct business safely, peacefully and predictably.
Of course, cryptocurrency prices fluctuate with insane intensity – so aren’t cryptocurrency initially risky? And what about the ethereum’s credo that “code is law”? Doesn’t all this mean that cryptocurrencies are the antithesis of institutions?
Indeed, the fundamental property of most cryptocurrencies is immutability. The authorities – no matter how strong – cannot take away your assets from you, without having a private key. But it will not be a mistake to say that a cryptocurrency institution is a fixed norm of the right of ownership.
The community of Ethereum continues the debate on economic policy, inflation and property rights. Of course, over time, the views on these items evolved: there were times when management preferred security and restitution to property rights (fork theDAO), and there were times when immutability was chosen (for example, the refusal to save fork Parity). During the recent postponing update constantinople the rate of maintenance of invariants of smart contracts prevailed over the timeliness of software updates. All these events are a reflection of the formal and informal institutions that govern Ethereum.
Because of all this fuss and controversy, some might think that Ethereum is poorly controlled, but this is a mistake: the phenomena described are precisely the realization of the institutions of Ethereum. If you believe in the principles underlying Ethereum, then it becomes clear that Ethereum is doing an impressive job of satisfying institutional constraints. And institutions include more than just management — they also include software, economics, and the community. Infrastructure elements like Infura, Metamask and ERC-20 are part of what makes Ethereum’s work continuous and predictable.
Users, companies, miners, developers and entrepreneurs – they all count on Ethereum to keep its promises. In other words, they are involved in the development of an ecosystem because they believe in the institutions that lie at its core.
Onchain-management as an institution
Most institutions have value because they make our lives predictable. Without them, businesses and businessmen could not effectively make plans for the future. That is why judicial precedent is at the center of any mature judicial system: it allows you to predict the outcome of a case without having to go through an expensive court process. This makes the laws more predictable.
This is one of the reasons why I am skeptical about on chain management. While this concept is attractive in theory, the administration of justice through randomly selected groups (or, even worse, through the bondage of plutocrats which nobody chose) is unlikely to end up with something good.
If you want me to use your blockchain, I will ask: why should I trust you? If on chain voting can change the properties of the blockchain or take away my coins, I want to know exactly what the hell this voting will turn out to be. More often, any voting mechanism based on the amount of coins in possession can be broken by one or two “whales”.
On chain management makes a great first impression. In theory, it sounds like a more transparent way to control, rather than dirty systems from everyday reality. But anonymous and unaccountable users participating in on chain voting make the system more opaque and difficult to predict.
I do not mean that internal management is bad in its essence! But in any radical experiment with control mechanisms, we should expect that, perhaps, a new approach will not work (as in any other experiments). Until we know what the situation is, it is inevitable that on-mine management will be considered as risky and unstable.
What about network sharing? Is it possible to fork the network if there is a desire to change something for the better?
Observers love to blithely argue that the threat of a fork is a way to continuously check the performance of crypto networks. But they do not realize what makes any economic system valuable. This is not a code, not a ticker name or a UTXO. These are institutions, and institutions cannot be divided.
Imagine a group of tough revolutionaries who separate part of the territory from a peaceful country. If they establish a junta, wave a flag, or call themselves a rival state, will the outside observer view this as a development of the “original”?
Similarly, the fork, which does not improve the original institutions, is a convincing way only for those who are called to benefit from it. A large amount of funds raised and impressive reserves are not enough: institutions cannot be bought, but only built. This is confirmed by the fact that almost all cryptocurrency forks failed (the most notable exception is Monero, which uniquely improved the institutions of its predecessor, Bytecoin).
The way forward
Finally. cryptocurrency is not just a technological innovation. It is also a social and political innovation. If you want to build valuable institutions, it takes time, patience and a lot of mistakes.
If you just look at the prices, then we can say that the cryptocurrency, as a project, failed. By reading Twitter and Bloomberg, you can even make sure that cryptocurrencies are dead (Bitcoin recently celebrated 10th birthday and 300th obituary).
But the story of change is long. We can agree with Paul Krugman on this issue: the changes will not end in the next year or two. Most technological revolutions began with similar speculative movements up and down: railways, cars, video games and the Internet – only a few of them. Cryptocurrency is waiting for the same thing. Indeed, the nature of technology is likely to increase these cycles.
It would be an omission not to touch ICO topics. It is the ICO that is the apotheosis of why institutions matter. Here is an excerpt from an earlier post published last year:
“Unfortunately, blockchain speculation right now dominates in the eyes of most people. The signal is drowned out by noise.
But this was to be expected. We have seen it before.
When people first realized the incredible potential of the Internet, huge sums of money were thrown onto random dotcoms. In anticipation of mass distribution and the creation of astronomical value, speculation fueled speculation for as long as This is madness finally ceased in 2001.
What is happening now is a similar phenomenon. In the end, there will be a decline. ”
It became clear to everyone that the ICO boom was a circus of unregulated “penny stock”. The ICO did not destroy the venture capital industry – they created a parody of it. It will take some time before the crypto industry clears itself of it, expels all the scammers and speculators, and again focuses on creating real value.
In the future, we will need to create more effective fundraising institutions for projects: to introduce more standards in terms of transparency, disclosure, incentives, consultants, partnerships, marketing, restrictions and liquidity, and what this means for both creation and getting value. Organizations such as Messari and Gemini are pioneers in self-regulation, but much remains to be done in this direction.
This is the only way to win people’s trust. Not shouting at them for not being decentralized enough, but showing them that decentralized institutions based on a crypt on an open blockchain are a more convincing alternative.
I would like to finish this note with another quote from an early post:
“When the dust settles, as after the crash of the dot-com, serious projects – new Microsoft, Amazon, Google – will have to come and do ungrateful work to build the future.
There is still a lot of work ahead. ”
PS: The editors of BitNews, with all the support of the author’s optimism in the last lines, do not leave hope that decentralized institutions will be established at the protocol level, or services running on top of these protocols at the protocol level will not be able to pursue user data collection goals. the further use or transfer of this data to anyone – by type, as is customary in modern centralized services of Google, Facebook, and the like, registered for a particular group of people or under control this or that jurisdiction – to the detriment of other jurisdictions, which gives rise to insane laws in those very other “disadvantaged” jurisdictions, like the “Spring Law” and all sorts of Great Chinese and other hair channels.