A couple of weeks ago, I wrote a post with 10 things that amazed me about bitcoin (here). I just can’t stop thinking about the idea that I brought up in the final point of that post, specifically that bitcoin could enable the development of self-enforcing contracts. It is just such a huge game changer that a program could hold wealth in a way that is inaccessible to anyone, and then distribute said wealth based on defined and agreed mathematical rules.

One example I have been thinking about is that I could create a contract to support this blog, whereby readers could donate their support to the contract but I would only get paid out a certain amount (or perhaps a percentage of the total pool) for every post I make. In this way, donors would be able to give their support but also would have some form of assurances that they would continue to receive content for their donation. Additional complexity could also be used to enhance the effectiveness of such contracts; things like such as word requirements, per reader bonuses, cost recovery clauses, an expiry dates when unused money should to be returned to a donor etc.

While applying this to a blog is a rather mundane example, I can imagine this could be exactly how donation driven projects will be run in the future (such as charities, scientific foundations, maybe even governments). 

All of this got me thinking that this kind of programmatic wealth distribution is exactly what contracts already do. A lawyer draws up a piece of paper that says I am going to do A, so you will pay me B. What self-enforcing contracts change is that we no longer necessarily need a court system to arbitrate contract law, instead the contract will be mathematically predetermined and enforced by the commons of the cryptocurrency network. While I imagine that larger contracts would likely be built with some sort of failsafe mechanism for arbitration, there is no need for such a thing to exist. Would such a system be subject to gaming by the parties involved? Yes of course, but I still feel it would be an improvement on current generation contracts and would certainly leave the door open to expanding complexity necessary to close loopholes.

The twin technologies of cryptocurrencies and cryptocontracts are going to turn contract law into a programming language. 

Essentially what we are talking about is a real democratization of contractual agreements. Whereas today contracts are restricted to deals with enough value to justify a lawyers time (mortgages, business deals, land transfer etc…), in the future there is no limit to what could be codified into simple contracts. You could imagine forming a self-enforcing contract around something as simple as sharing a lawnmower with your neighbor, hiring a babysitter, or forming a gourmet coffee club at work. Where this could really revolutionize things is in developing nations, where the ability to exchange small-scale microloans with self-enforcing contractual agreements that come at little or no cost would be a quantum leap forward.

For more exotic examples, I was thinking of what could come if such contracts were combined with the ubiquity of data tracking today. In my example above, you could set up a contract with my blog to transfer a micropayment to support the blog every time you refer to an idea you found on my blog. Similar payment contracts could be set up for knowledge archives like wikipedia where you might agree to submit a micropayment every time you use or reference information from the site.

If we combine self-enforcing contracts with the idea of biological data tracking then things could get really wild. Imagine that you are carrying a cell phone which measures your emotional state. You then enter a contract with an entertainment company to pay them a certain amount based on the intensity of emotion which you experience during the movie or video game you are using. Suddenly you would be no longer only figuratively buying an emotional experience when you purchase something, but you are directly incentivizing emotional payout based on a self-enforcing contract. 

At every level our lives are built around spoken and unspoken agreements, yet the codification of a contractual agreement has been relegated to only the most important and expensive transactions. The emergence of cheap and plentiful self-enforcing contracts means that we can codify simple transactions and agreements. We will be able to reprogram our lives based on self-enforcing cryptocontracts. 

The coming boom in cryptocontracts comes with its own risks as well. In a world where self enforced contracts will be an everyday occurrence, we must be much more careful clicking on those terms of service agreements which nobody reads. We are going to need to be well aware of what it is we are giving away. Similarly, we must each decide what we want to codify in our own lives. Although it may be possible, it may not be wise to establish contractual arrangements around romantic or family relationships.

Ultimately, cryptocontracts will offer us a revolutionary new way to rebuild and reorganize our lives and our societies from the bottom up.

Edit: For those interested in the technology discussed here, I encourage you to check out the Ethereum project, which is working on developing a computing language to run these types of contracts on a cryptocurrency backbone. 

Edit2: I have been reading some of the comments on sites linking this article and I want to clear up one common confusion. The key difference between a cryptocontract and a standard contract is that the contract can itself hold wealth in the form of crytocurrency. All contracting parties can see the format of the contract and agree on its content, but the use of cryptography means nobody has access to the funds until the program moves it in accordance with the guidelines agreed. Another point is that these contracts could easily implement a clause for exception handling in the form of some form of court or other 3rd party mediation. 

UPDATE: Openbazaar is another project doing some very interesting work in this area. They are trying to create an open and distributed marketplace which leverages the power of cryptocurrency and reputation networks to handle dispute resolution without a central authority. A very exciting and interesting project, and definitely worth checking out over at https://openbazaar.org/

I watched a great talk from Andrew McAfee and Erik Brynjolfsson this week. For a few years now these two have been evangelizing about the coming automation revolution that now seems to be given to wider discussion if not yet acceptance.

In their second book, The Second Machine Age, Brynjolfsson and McAfee return to their diagnosis of extreme economic disruption due to increasing automation in the manufacturing and service industries. I have yet to pick up the book myself, but after watching their Google talk I am sure to do so in the very near future. 

In their presentation, they reference some surprising statistics, including that the number of people employed by the manufacturing industry in China has actually decreased in recent years. As automation starts to really accelerate in the manufacturing sector, this might mean that developing economies potentially have much higher exposure to associated economic disruption. What it will mean for the steady climb of the world’s poor if they lose access to the lower rungs of the economic ladder remains to be seen, but it seems entirely possible that automation could lead to serious problems for places like Bangladesh.

The most fascinating thing that I think the two brought up was a very apt comparison of human workers to horses. A hundred years ago, a horse was a very important economic unit. In 1900, if I offered to lease my horse to almost any business owner for a reasonable price, they would have likely taken me up on the deal because they could do a lot of stuff with a horse. They could transport themselves to work, they could deliver goods to market, they could plow a field, or they could sub-lease the horse out to do any of these jobs for other people. Horses used to be useful and profitable.

But if you were to take your horse to most any business person today, even if you offered the horse to them for free, you would probably get laughed out of the building. What the hell am I supposed to do with a horse? This would almost certainly be their response for the simple reason that horses are no longer economically useful. Machines have replaced horses so perfectly that the cost to train, feed and house a horse greatly outweighs their economic benefit. Outside of a few niche nostalgic industries, horses are economically obsolete. 

So this of course begs the question, are human workers going to become like the horse? Of course there will be an economically productive place for exceptional people for the foreseeable future (just as there is for exceptional horses), but the question is really about the average worker.  Will we soon get to a point where automation is so cheap and so effective that the cost to train, feed and house an average worker will outweigh the economic benefit that can be derived from them. 

McAfee says that he and Brynjolfsson have had heated discussions about this very issue, but generally they are still not sure whether we are headed to a future where average workers are economically obsolete. To me it is scary how clear the conclusion is. Yes, human workers are just like horses, we are already on the arc of economic obsolescence and we have been for some time. 

There is a simple example that makes me so sure that average workers are slowly falling behind their economic benefit — children. Children used to be a clear economic benefit to their parents. They could be easily put to work doing any of the countless menial tasks associated with an agricultural economy, such as plowing fields, harvesting crops, milking cows and churning butter. Children were economically beneficial, and people responded to this by having lots of them.

But, as the first industrial revolution started making it easier and cheaper to use machines to produce food, a huge number of workers migrated to the city looking for work. In the cities, children lacked the strength, fine motor skills and education that was necessary for them to be really useful in the factory economy. Suddenly, children went from an economic benefit to an economic liability. The cost to train, feed and house a child greatly outweighed their economic benefit, and parents responded by having far fewer of them.

People responding to this change from children being an economic benefit to a cost is a story that has played out over and over again across the world. The economic disincentive to child-bearing has been the single most important factor in the falling fertility rates across the globe. This change is so complete that we are now in a world where the overall average number of children per woman is only 2.5 (see this excellent talk by Hans Rosling and the BBC).

It is a striking fact that the transition of human children to economic obsolescence has been so complete the worldwide birthrate already stands barely above replacement numbers. And in more recent times, I think obsolescence extends well beyond just children. Only a couple of decades ago, an 18-year-old with only a basic education was still of fair economic value. They could get a job in a small business or in a factory and likely be of good economic value to the business owner; at least their value was more than enough for them to survive on. Nowadays this no longer seems to be true, a point reflected in the fact that minimum wage generally falls close to or below the amount of money which is really needed to train, feed and house an average person. We already live in a world where the economic benefit of an average untrained individual is falling behind their maintenance costs. 

The creeping arc of economic obsolescence may not stop at uneducated 18-year-olds either. The economic downturn hit young people disproportionately harder than the older population of established workers, and it seems that for youth around the world the recession is not yet over. So many grads, even with good post-secondary educations are unable to find productive employment, and are increasingly showing their agitation at this fact. Economists point to complex macroeconomic changes as the reason behind inflated youth unemployment, but maybe it is simpler than that. Perhaps on the wider scale, the costs of hiring new employees simply outweighs their economic benefit; maybe we are just experiencing the early symptoms of the arc of economic obsolescence reaching the level of the average educated worker.

Of course businesses need to hire some new people, but it only takes a small shift in the balance between the available pool of workers and the number of jobs openings to remove the pressure to offer competitive wages and benefits. All of this, and the automation revolution has not yet even started. Where are we going to be in five to ten years when every call center is automated, cars can drive themselves, and computers are consulting on medical disagnosis?

At the end of their talk, Brynjolfsson and McAfee offer some possible prescriptions for the automation revolution that they predict will hit over the next decade. They offer options such as a negative income tax, which would subsidize workers at the bottom of the pay scale who offer the least economic value. While the institution of a negative income tax or a basic income (a better option in my opinion) might go a long way to easing the effects of high structural unemployment, the problem with this might be summed up by a criticism McAfee himself delivers: What if this is a linear solution to an exponential problem?

When the horses went from benefit to cost, I am sure that the transition was not nice for those who worked in the industries which supported horses (let alone for the horses themselves). I am not optimistic that the transition of the average human worker from economic benefit to cost is going to be any nicer. As our baked-in beliefs about the value of work are increasingly at odds with our economic realities, I think things are going to get much worse before they get better. The social support systems that we now have in place, such as welfare, pensions and unemployment insurance are far to weak to deal with the extreme economic disruption that will be delivered by automation. Add to this the fact that much of the world has no such systems at all, and you can see how precarious our situation is.

It may not be today, and it may not be tomorrow, but sometime soon we will be facing unacceptable rates of unemployment, knock-on damage to the consumer economy, and significant outrage like that already happening in Spain and Greece. People will not wake up and realize how completely the game has changed until they can hear the noise. Put simply, whether we are talking about humans or horses the economic system places no intrinsic value in individuals beyond what work they can do. If a machine can do what you do cheaper and more efficiently, then it will.

Still, I must end by saying that we should not start smashing the looms; the great economic benefit of automation will ultimately outweigh its costs. Automation is going to offer untold economic surplus, but we must take that surplus and turn it towards creating a more humane system. Unless we find a means to institutionalize a basic humanity into our economic systems we will find that more and more of us are just being put out to pasture. 

All credit to a brilliant interview with Richard Gendal Brown for the quote I used in my title.

For the last several months I have been swept up with many others in the Bitcoin craze. Unfortunately, it seems that I am arriving somewhat late to this particular party, as the Bitcoin value has already gone from less than $20 to over $1000 in just one year. It would seem that people have accepted, at least for the time being, that a limited supply of purely digital money represents a legitimate store of value.

With a total store of wealth at over 8 billion dollars, the value of Bitcoin today is at least partially driven by speculators looking to cash in on the rise of the currency. Nonetheless, the importance of the technology that underlies Bitcoin and its value to society is anything but speculation. Bitcoin as a technology is deeply transformative, and stands next to other great innovations of the digital age like email or HTML (read: the web). As a currency, Bitcoin may soon become is becoming the first global currency, but this may be just the tip of the iceberg. The invention of a distributed cryptocurrency is nothing short of a revolution and it is going to change your life in ways you cannot yet even imagine. 

Here are some amazing things about Bitcoin:

1. Bitcoin is simple.

While it is an amazing technological innovation, the idea of Bitcoin is actually beautifully simple. The basic idea is that Bitcoins are sealed within a unique cryptographic locker (private key) located at a unique address within a constantly updating public ledger of transactions (known as the Blockchain). 

Imagine a book which records who holds every single bitcoin at any given time, but each page of the book is written with its own encryption. In order to spend their Bitcoins, a user must have their cryptographic key to unlock their Bitcoins from their page in the Blockchain. You could then send the ledger out to all of your friends so that you all have a copy of everyone’s encrypted information, but nobody will be able to change anyone else’s data without access to their individual key.  

(Disclaimer: This is an extreme oversimplification of how Bitcoin works and is meant only as an explanatory tool. In order to truly appreciate the magic of Bitcoin I encourage you to listen to someone much more familar with the subject than me – see here for a great crash course on the subject.)

2. Bitcoin is secure. 

As people trade their Bitcoins for whatever reason, they must use their private keys to unlock their Bitcoins and send them to a different address on the Blockchain.  In the example above, say Susan wants to buy a pizza from Bill, she can use her private key to send Bitcoins from her Bitcoin address to Bill’s Bitcoin address. At this point the information on Bill’s address can be updated to include the new Bitcoins, which cannot be transferred from Bill’s account until Bill uses his private key to do so. Even with very powerful computers there is no feasible means that a traditional computer can crack the encryption on any Bitcoin address. Once associated with a particular public addess, it is effectively impossible to move Bitcoins without their specific private key. 

3. Bitcoin is a distributed network.

A huge network of computers all around the world is constantly working to update the information on the Blockchain. In addition to this, the computers within the network also all check that all the new transactions on the Blockchain are indeed legitimate. Every 10 minutes the entire Blockchain is updated with the new transactions that have occurred and a new master state of accounts is set. 

In exchange for doing the computational work necessary to confirm the Blockchain, owners of these computers are rewarded with newly minted Bitcoins. This provides the incentive for the network to support itself and grow to meet the demand for Bitcoin transactions. The genius of Bitcoin lies in its ability to distribute trust across an entire network.  Because the Blockchain is simultaneously being confirmed by everyone across the entire network, there is no ability for one person or group of persons to falsify the public ledger. Thus, there is no need for a single trusted third-party to confirm everyone is acting in a fair manner.

4. Bitcoin is predictable.

The rate at which new Bitcoins are created is set according to the protocol. Over time the rate of production will slow, and eventually stop at 21 million coins. There will never be more than 21 million coins. Until the number of 21 million is reached, a decreasing number of coins will be minted by the network. The predictability of Bitcoin means that people can know exactly how many will be available at any given time, and can predict how this will affect their value over time.

5. Bitcoin is valuable.

Bitcoin is worth whatever the market says it is. While this is actually the case for all currencies, we often do not think of them this way. In reality, all currencies work this way. You can hold onto your dollar as long as you want, or ask to exchange your dollar for whatever goods you think that dollar should be worth. When we distribute that idea of value across an entire market, a consensus value emerges, and this is what the currency is worth. It is not clear what Bitcoin should be worth yet, but given its utility as a means of exchange across the world, that there is a limited supply, and that it is inherently predictable, it is likely that Bitcoin and/or similar cryptocurrencies will grow singificantly in importance and value over time.

6. Bitcoin is (almost) frictionless.

While there are small transaction costs built into the Bitcoin system , the cost is much smaller than that which is charged by other transaction systems, such as paypal, banks, or wire transfer companies. The transaction cost of a Bitcoin transaction is also a flat amount, so no matter what the size of the transaction, there is a similar cost (currently around the equivalent of 10 cents). Combining the very low cost of transactions with the high speed of transactions, Bitcoin offers an almost frictionless medium for the movement of value from one place to another.

7. Bitcoin is international

Value is a complex and inherently difficult thing to determine. How much is a glass of water worth? It depends on how thirsty you are. Similarly, the value of Bitcoin is not yet clear but if we look to those who are most thirsty for this kind of innovation it may be those living in developing nations who do not already have access to banks who will lead the charge towards the uptake of cryptocurrencies in the coming years. The power of a savings account which your local governement cannot reach (or inflate out of value) is of great worth to people who have never had one.

8. Anything can hold Bitcoin.

Because Bitcoin is simply a cryptographic protocol to associate a unit of digital wealth with a particular address on the Blockchain, anything that can hold the public and private keys can hold Bitcoin. This means that anything that can store the 256 bits of the private key (about 64 alphanumeric characters) and the 160 bits of the public address can store Bitcoins. A text file, a piece of paper, a coin, a stone tablet, you could even write it out on beach sand – literally almost anything can hold Bitcoin. Anyone who then has the public address for that Bitcoin account can send Bitcoins into it, so in this way Bitcoin allows you to send wealth directly into anything.

9. Anything that can send data can send Bitcoin.

Anything that is connected to the web can theoretically hold and trade bitcoins. In this way, it could be possible for your fridge to hold a certain amount of bitcoin and then trade for services. For instance, when you run out of groceries your internet enabled fridge could search the internet for the best price on milk, negotiate a deal, send Bitcoins to the local grocer, and have the milk delivered all without the need for your involvement, except maybe to put the milk into the fridge when it gets there.

While the example of the fridge buying your milk for you using Bitcoin might seem like a kind of a silly example but the fact that machines can directly trade value quickly opens up more exotic possibilities. One could imagine an autonomous car which drives around picking up passengers, charging them for its services, purchasing electricity to charge itself, bringing itself in for servicing, all using Bitcoin. This kind of automated car could theoretically accrue wealth over time with little or even no human involvement.

10. Cryptocurrencies could enable self enforcing cryptocontracts

Given that cryptocurrencies like Bitcoin create a means to transmit wealth based entirely on the transmission of data with almost no friction, this opens the opportunity to create self-enforcing contracts. The simplest example would be an escrow contract, wherein money is held in a contract between two parties until both agree the money, or some proportion thereof, should go either to one or the other person. In this way, the money would not be accessible to either party until an agreement can be reached, again with little or no transactional cost for either party.

Another simple example would be an insurance type of contract, wherein if a certain weather event occurs, say a snowfall of over 20 inches was predicted by 3 weather agencies, then an automatic payout could be made to a plow company. Another example would be a contract to pay an employee or contractor or a certain amount of money for achieving a set deliverable (such as increasing sales or web traffic).

These kinds of self-enforcing contracts would not be very different from what we have today, with the exception that they would be automatically enforced by the rules established in the contract. There could be clauses instated into the contract to allow arbitration through a certain legal system, but there is no implicit need for this.

When one really starts to contemplate what could be done with cryptocurrency based contractual agreements that can physically hold funds, and distribute them according to a mathematically defined set of rules could truly revolutionize every facet of our lives. These kinds of programmable applications of cryptocurrency may go beyond what Bitcoin is alone capable of, and is being pursued in the exiting new Ethereum project.

So what is most exciting about cryptocurrencies? The answer to this is almost certainly something that we have not yet even thought of, and this is why I can’t help but get more excited for the future of cryptocurrencies every day. In a world where it often seems impossible to find anything on which we can all agree, Bitcoin has found a way to distill value directly from that one thing on which we must agree, mathematics. 

Let’s face it, capital is winning. (watch this video if you haven’t already seen it)

The statistics show that the game of growing capital has been getting easier over the years, whereas that other game of finding a good career and slowly accruing wealth through honest labor seems to be only getting harder. The millenials are the best educated generation ever, yet their prospects for career security and wealth accumulation seem to be only getting worse. The baby-boomers love to poke fun of the younger generations, but seem oblivious to the fact that the game is rigged in favor of those with healthy investment accounts and against those looking to build new ones. 

Yes, it seems that now is a good time to make money if you already have money, and a bad time for making money if you don’t already have some. More importantly though, I do not see any likely shift away from this trend in the near or even medium term. In a future (present?), where the magic of automation allows wealth to be directly transmuted into productive capacity with a diminishing requirement to acquire human labor, I see no likely shift in the imbalanced advantage of capital over labor.

In the future there will be owners and there will be losers. 

Even if strong new social policies such as basic income become adopted, and I am very much optimistic that these kinds of programs should and will be adopted widely in the coming decades, I am not so optimistic to believe that they will be adequate to address the accelerating wealth gap. Ironically, basic income could actually serve to impede the biggest threat to the capital class, the ability of lower classes to accrue and grow their own capital investments. 

At its core, basic income is mostly envisioned as an economic mechanism to establish an absolute floor for the social safety net. Where exactly we decide to install that floor is a matter for debate, but it seems most believe that in order to maintain an incentive for work and entrepreneurship, basic income should be set close to subsistence levels. Enough should be provided for people to eat, clothe, and house themselves, but basic income is not likely to leave a great deal for savings.

Even if basic income exceeds this “basic” mandate and does provide more than enough funds for families to enjoy a comfortable life, it still provides no incentive for people to save. If people know that they can rely for the long term on a steady basic income every month, then those people may see no reason to save much money. Why would I save for retirement if I can be assured of receiving an adequate amount to meet my needs for the rest of my life?

Of course, there will always be some percentage of individuals who will have the foresight to save as much as they can, but I would simply suggest that this percentage might actually be smaller under a regime of basic income. The psychology of foresight might be the single greatest factor which differentiates the most successful individuals in life, there is no reason to think that basic income would change this in any way. Other tools such as education should be used to encourage people to have more foresight about their lives and make better long term decisions (but that is for another post).

So what is to be done about this?  Ultimately, I think that the long-term emergence of powerful technologies such as strong artificial intelligence and molecular-scale manufacturing will eventually make individual wealth somewhat irrelevant. For the medium-term however, without the total collapse of the capitalist system, something that I believe would be too painful to suffer through no matter what the ends, I do not see any likely end to the acceleration of wealth inequity. For the next two decades, people who own things will do well and everyone else will get by. 

Still, the message of the accelerating value of capital is not entirely doom and gloom. Yes, those who control huge sums of the world’s wealthy will benefit disproportionately from the automation revolution, but the more important disparity might actually be between those who can see the future and those who cannot. If your parents can’t understand how to use their email, how could they hope to make sound investment decisions in a world revolving around technological innovation? Similarly, those wealthy individuals who are heavily invested in the successful industries of today, may lack the maneuverability to respond to the kinds of disruptive technological innovations we are seeing with increasing frequency. 

So, perhaps the most important question is not how much you have to invest, but how well you can predict the coming landscape of innovation? Being able to predict which technologies are going to be successful has been of immeasurable value since the inception of the market. Despite its ebb and flow over the years, a balanced investment in technology companies over the last 30 years would have provided unprecedented gains. I expect that the future-smart investor can realize similar gains in even shorter time over the next few years.

So however meager your savings might be, do not despair. Invest what you can, because those of us in the technology generations, who understand technology better than the rest, stand to reap enormous gains. Those who can see the future and invest in it are going to be well positioned to join the capital classes in the coming years. As the old saying goes, if you can’t beat ’em, join ’em. 

The future is going to belong to those who can see it.