World Economic Forum, 28 November 2022. Originally published here. With Justin Banon, Jason Potts and Sinclair Davidson.
The world economy is in the early stages of a profound transition from an industrial to a digital economy.
The industrial revolution began in a seemingly unpromising corner of northwest Europe in the early 1800s. It substituted machine power for animal and human power, organized around the factory system of economic production. Soon, it created the conditions to lift millions of humans from a subsistence economy into a world of abundance.
The digital economy began with similarly unpromising origins when Satoshi Nakomoto published his Bitcoin white paper to an obscure corner of the internet in late 2008. We call this the origin of Web3 now – with the first blockchain – but this revolution traces back decades as the slow economic application of scientific and military technologies of digital communication. The first wave of innovation was in computers, cryptography and inter-networking – Web1.
By the late 1990s, so-called “e-commerce” emerged as new companies, which soon became global platforms, built technologies that enabled people to find products, services and each other through new digital markets. That was Web2, the dot-com age of social media and tech giants.
But the actual age of digital economies was not down to these advances in information and communications technologies but to a very different type of innovation: the manufacture of trust. And blockchains industrialize trust.
Industrial economies industrialized economic production using physical innovations, such as steam engines and factories. Such institutional technologies organize people and machines into high production. What the steam engine did for industry, the trust engine will do for society. The fundamental factor of production that a digital economy economizes on is trust.
Blockchain is not a new tool. It is a new economic infrastructure that enables anyone, anywhere, to trust the underlying facts recorded in a blockchain, including identity, ownership and promises represented in smart contracts.
These economic facts are the base layer of any economy. They generally work well in small groups – a family, village or small firm – but the verification of these facts and monitoring of how they change becomes increasingly costly as economic activity scales up.
Layers of institutional solutions to trust problems have evolved over perhaps thousands of years. These are deep institutional layers – the rule of law, principles of democratic governance, independence of bureaucracy etc. Next, there are administrative layers containing organizational structures – the public corporation, non-profits, NGOs and similar technologies of cooperation. Then we have markets – institutions that facilitate exchange between humans.
It has been the ability to “truck, barter and exchange” over increasing larger markets that has catapulted prosperity to the levels now seen around the world.
Information technology augments our ability to interact with other people at all levels – economic, social and political. It has expanded our horizons. In the mid-1990s, retail went onto the internet. The late 1990s saw advertising on the internet. While the mid-2000s saw the news, information and friendship groups migrate to the internet. Since their advent in 2008, cryptocurrencies and natively digital financial assets have also come onto the internet. The last remaining challenge is to put real-world (physical) assets onto the internet.
The technology to do so already exists. Too many people think of non-fungible tokens (NFTs) as trivial JPEGs. But NFTs are not just collectable artworks; they are an ongoing experiment in the evolution of digital property rights. They can represent a certificate of ownership or be a digital twin of a real-world asset. They enable unique capital assets to become “computable,” that is, searchable, auditable and verifiable. In other words, they can be transacted in a digital market environment with a low cost of trust.
The internet of things can track real-world assets in real-time. Oracles can update blockchains regarding the whereabouts of physical assets being traded on digital markets. For example, anyone who has used parcel tracking over the past two years has seen an early version of this technology at work.
Over the past few years, people have been hard at work building all that is necessary to replicate real-world social infrastructure in a digital world. We now have money (stablecoins), assets (cryptocurrencies e.g. Bitcoin), property rights (NFTs) and general-purpose organizational forms (decentralized autonomous organizations (DAOs)). Intelligent people are designing dispute-resolution mechanisms using smart contracts. Others are developing mechanisms to link the physical and digital worlds (more) closely.
When will all this happen? The first-mover disadvantage associated with technological adoption has been overcome, mostly by everyone having to adopt new practices and technology simultaneously. Working, shopping and even entertaining online is now a well-understood concept. Digital connectedness is already an integral part of our lives. A technology that enhances that connectedness will have no difficulty in being accepted by most users.
It is very easy to imagine an interconnected world where citizens, consumers, investors and workers seamlessly live their lives transitioning between physical and digital planes at will before the decade concludes.
Such an economy is usefully described as a digital economy because that is the main technological innovation. And the source of economic value created is rightly thought of as the industrialization of trust, which Web3 technologies bring. But when the physical parts of the economy and the digital parts become completely and seamlessly join, this might well be better described as a “computable economy.” A computable economy has low-cost trust operating at global market scale.
The last part of this system that needs to fall into place is “computable capital.”
Now that we can tokenize all the world’s physical products and services into a common, interoperable format; list them within a single, public ledger; and enable market transactions with low cost of trust, which are governed by rules encoded within and enforced by the underlying substrate, what then?
Then, computable capital enables “programmable commerce,” but more than that – it enables what we might call a “turing-complete economy.”