How the Decentralized Revolution Will Reshape the Global Economy
Bitcoin and the cryptocurrency revolution in general promise to usher in a new monetary age.
The current economic system is heavily dependent on trusted third parties for enabling, verifying, and controlling how money flows around the world. This dependence has led to a system rife with corruption, inefficiencies, and misaligned incentives. The removal of trusted third parties like central banks is the killer app of Bitcoin and other trustless currencies.
However, we don’t just trust the banks, and payments are just the beginning. When it comes to financial decisions we trust our friends, we trust the news, we trust “experts”; in short, we trust our sources of information.
Payments are just the Beginning
Payments are just one aspect of a marketplace, be that a marketplace of goods, services or ideas. Communication, reviews, and investment advice from trusted sources are essential elements of commerce.
As we become more connected to people across the globe (many of which we do not know personally), the trust we place in them becomes harder to justify and more important to verify.
In the context of a product review system or social bulletin board, every user is a trusted third party. In the context of raising capital to fund experimentation and entrepreneurship, venture capital firms and investors act as trusted third parties to determine the best investment for the benefit of the economy as a whole.
Cryptocurrencies and the investment mechanisms they enable (ICO, STO, etc.) promise to upend the current models of investment and raising money, empowering a new wave of creators to participate in the economy, but this process goes beyond the ability to receive funds.
As investment opportunities open up to the general public, the ability for these “unsophisticated” investors to obtain information that they can trust becomes imperative. The incentives of users and the welfare of the ecosystem must be aligned. Decentralized, trustless systems must go beyond enabling trustless payments and address the other aspects of a marketplace.
ICOs are Dead, Long Live ICOs
ICO scams and dishonest token projects are in the news everyday. Vast amounts of wealth are up for grabs from uninformed investors willing to send Ethereum to any team with a slick website. This phenomenon threatens to undermine the credibility of the cryptocurrency space as a whole, and a solution must be found.
The ICO discovery, vetting and investing process is complicated and inherently flawed in its current manifestation. Too much trust in unverified experts, lack of deep understanding by investors, and the absence of investor tools result in a great deal of friction for new investors. This concentrates good investment in those already traditionally set up to make good investments and siphons wealth from those who need it most.
In order to unleash the full potential of democratized investment through the token economy, solutions must be found for ensuring all actors behave well. It is important for systems to incentivise good actors and make working against the system impractical and expensive.
Projects should be rewarded for honestly representing their technology and experience while being penalized for acting dishonestly. Analysts must be compensated for sharing insight and reviewing projects while losing face for misleading or low-effort work. Investors must be empowered to make informed decisions and discouraged from wild speculation.
Proof of Reputation
To achieve this, we must build a mechanism to decentralize trust. There must be a codified, self-regulating system that allows users to gain reputation through good behavior and to leverage this reputation to engender trust from others.
As a creator, I need a platform that allows me to garner attention for my project from both experts with the ability to review and critique and investors with the ability to fund and participate. As my reputation and stake in the system increases, I should be brought to the attention of higher caliber investors and analysts.
As an expert analyst, I need a platform that rewards me for sharing authentic, accurate information about projects I’m researching. My reputation and reward should depend on my track record of honest reporting and vetting through peer review of my work.
As an investor, I need a platform for the discovery of quality projects with crowd-sourced research by experts at my fingertips. I should be able to safely manage my funds, view my investments and share promising projects I’m excited about. As my clout and investment experience grow, I should be rewarded for my attention and my input on projects in the space.
The financial incentives create a game theoretic situation that ideally encourage good behavior on all sides.
The problem of reputation has proven to be a challenge, but it’s only a matter of time before a system is devised. Various promising projects are working on just that.
Userfeeds is working on what they call Proof of Relevance, a decentralized protocol for determining the relevance of information. They see information relevance as the native currency of the Internet and seek to break up the monopoly over relevance currently enjoyed by Google, Facebook and other information curation engines.
This provable relevance can then be leveraged to create platforms for collectibles, social content, and curation of media in any form. They’re working to decentralize the attention economy across the board.
Menlo One has built a framework for decentralized marketplaces and communities powered by an incentive system dubbed Proof of Reputation. The protocol creates a social layer of peer-reviewed content that rewards users for providing value and building trust.
The Proof of Reputation protocol can be implemented and utilized by developers in the creation of new dApps, the flagship of which Menlo One is creating themselves in the form an ICO analysis and discovery platform.
Projects that desire review by experts must pay for this service, while those experts must (conceptually and literally) stake their reputation on the reviews they share. The project teams have skin in the game in the form of Menlo Token (MET) spent to get eyes on their project, and reviewers have skin in the game in the form of tokens staked on shared reviews that will be vetted by other community members.
Steem has built a platform for injecting financial incentives into a media networks, providing a protocol of base primitives for posting, promoting, commenting on, and supporting content of any kind.
As you participate in a community or marketplace, your influence grows through the accumulation of Steem Power and you are paid out in Steem tokens, incentivizing creating and promoting quality content.
Their reward mechanism empowers creators, curators and consumers to build mutually beneficial marketplace around any set of content, and the impending introduction of Smart Media Tokens will give community organizers fine-grained control over token economics.
The DAOStack project is building what they refer to as an operating system for the decentralized future. They see Decentralized Autonomous Organizations (DAOs) as the future of cooperation and organization and have built a set of tools and protocols to reduce the friction in setting up these systems.
Collaborative media curation, decentralized research projects, companies run by the crowd: any sort of network of individuals that requires a reputation system, internal value transfer vehicle and governance protocol can be efficiently achieved with a DAO model.
By introducing prediction markets around the implementation of governance proposals, they hope to incentivize both participation in decision-making and the reward the quality of decisions.
Trust in the Future
As these experiments and others play out in the wild, we’ll learn ever more about possible mechanisms for decentralizing reputation, relevance and collective information curation. The challenges are substantial but the challengers are many and innovative.
Digital identity and reputation is quite possibly the most pressing barrier to ushering in the age of truly collaborative communities and markets on a global scale, and once solved will have profound implications for the next step in societal evolution.
The future of trust is bright, trust me.