This is not reading material for kindergarteners. It is, however, for the benefit of kindergarteners and other young people who will live in a world where blockchain has much to do with their lives.
I have resisted writing about blockchain because it is complicated, with no good analogies. But since blockchain and its use will likely have a major effect on future generations, we must do our best to understand it and what it is expected to do.
A main goal of blockchain is to eliminate “intermediaries” such as banks, and since intermediaries have employees, blockchain will affect employment. More about this later.
Let’s start with a little history. While many of the general technologies involved in blockchain existed before 2008, it was in that year a person (or group of people) named Satoshi Nakamoto introduced the concept of Bitcoin in a white paper. The true identity of this person or group remains a mystery.
The goal of Bitcoin was to enable direct peer-to-peer payments without going through banks or credit card payment processors. At that time, blockchain was part of the Bitcoin system, but later emerged as a separate field. Blockchain is an entirely new type of record-keeping system.
Nakamoto faced a significant problem: convincing users that Bitcoins could be trusted as much as the U.S. dollar. It attempted to accomplish this by drawing on principles of cryptography coupled with a new record-keeping concept called distributed ledgers. These ledgers are located on many computers all over the world.
In blockchain terminology, ledgers are where transactions are recorded, and are grouped into “blocks.” The number of transactions in a block depends on their size. When a block is full, it is secured by cryptographic hashing and “chained” to the previous block in the ledger. It is digitally locked in place. This is the blockchain.
Numerous computers in a blockchain contain exactly the same information; this facilitates security. Let’s say Michael wants to sell Bitcoin to Alice. He executes this instruction, and it goes into a waiting room until it is transferred into a block. Then that block is digitally chained to the previous block. The blockchain verifies and records a change of ownership of Bitcoin from Michael to Alice, and cryptography executes the transfer. Bitcoin goes from Michael’s “digital wallet” to Alice’s.
The information for this transfer is recorded exactly the same way on all computers in the blockchain. If you wanted to divert Michael’s Bitcoin transfer to your digital wallet, this would require hacking into many computers all over the world. Once a transaction is entered into the blockchain, it is nearly impossible to change, although change is technically possible. This leads to trust and security, and Nakamoto’s problem is solved.
The use of Bitcoin is far different from Nakamoto’s vision. Rather than being a substitute for the dollar and credit cards, its main use has been for speculation. Wide Bitcoin price fluctuations inhibited it from being used widely for payments. Despite price fluctuations, criminals have apparently found Bitcoin useful for moving cash without regulatory scrutiny or taxation.
The success of Bitcoin caught the attention of many people who began exploring other uses for this new record-keeping system. They questioned what other intermediaries might be eliminated using blockchain technology. They wondered if there might be ways to overcome the price volatility of Bitcoin and create a true competitor for the dollar and credit cards.
Out of this exploration came the concept of stablecoins, which achieve price stability as a result of being secured by a highly liquid pool of investments such as U.S. Treasuries. Additionally, their value is usually pegged to the U.S. dollar, so one stablecoin equals one dollar in value.
Stablecoins are in no way backed by the U.S. government, at least not yet. Today there are several stablecoins in circulation, but not yet widely used as an alternative method of payment.
Next, someone in the blockchain world wondered if there could be a bank that was entirely digital using blockchain. Out of this came a concept called DeFi, that stands for decentralized finance. A DeFi blockchain ecosystem would digitally provide a range of banking services including lending, deposits, and perhaps insurance using blockchain technology. Such an ecosystem would have fewer employees, and skill requirements would be high for remaining employees. Algorithms and other tools will be required for tasks such as credit approval. However, creative digital tools already exist, and are used by online lenders for tasks like credit evaluation.
Banks are highly regulated, so when the concept of stablecoins and DeFi emerged, Congress recognized that a similar regulatory structure would be required. A leader in drafting this legislation has been U.S. Rep. French Hill (R-Ark.). He has played a major legislative role as chair of the House Financial Services Committee. Representative Hill has an extensive background in banking. As a result of congressional efforts, Congress recently passed the GENIUS Act that has been signed into law. The CLARITY Act has been passed by the House and awaits Senate approval. The GENIUS Act deals mainly with regulation of stablecoins. The CLARITY Act deals extensively with blockchain and explicitly defines DeFi concepts for the first time under U.S. law.
Blockchain has many other potential applications. In any situation where there is an intermediary, blockchain could be used to eliminate that intermediary. Walmart uses what is called a permissioned or consortium blockchain to track food shipment data. This can help eliminate or resolve disputes and speed response to recalls. Furthermore, in what is called Web3, it is proposed that blockchain be used to eliminate Internet intermediaries.
In an effort to stay away from the detailed mechanics of blockchain, I have resisted using the term “token,” but it is important to understand it.
Bitcoins and stablecoins are called tokens. Tokens are any digital representation of value, ownership, or rights that use blockchain for verification and security. Each token represents a real-world “asset” of some kind that can be traded or fractionally owned. I put the word “asset” in quotes because some tokens, in my view, are not worthy of that distinction.
You may have heard of non-fungible tokens, one of which was a stylized work of art sold by First Lady Melania Trump. You may not have heard of meme coins, but one of them is already publicly traded using an intermediary. I am not going to try to explain meme coins other than the fact that they start out as a joke and, again in my view, end up that way. Some of these tokens are quite useful and others are … well, they are just crazy.
So how might blockchain affect our kindergartners? To help think about this, let us limit our focus to finance and hypothesize a world where DeFi has become wildly successful in the world of banking. Some large banks will have morphed into DeFi’s; other banks will have gone away. Super-wealthy people and private equity will have used their deep pockets to fund the high cost of starting a DeFi and quickly ramped up their “bank.” Large bank buildings and bank branch buildings are unneeded and stand vacant.
As mentioned, a fully digital bank will have fewer employees, and the skill requirements will be high for those who remain. There are likely to be fewer regulatory jobs. Digital banks will likely be examined more with digital tools, less by people. Core system providers like Fidelity Information Services will need to adapt, since transactions are processed using blockchain, not their legacy computer systems. Other service providers to banks will suffer. The big picture is that DeFi will lead to fewer jobs and less need for real estate; there could be other unanticipated consequences.
There are alternative scenarios. Blockchain could fizzle away or be replaced by yet another new technology. Blockchain could become moderately successful and co-exist alongside the traditional banking structure. The fact that blockchain is already widely used, that Congress is enacting related legislation, and that big money is looking at blockchain opportunities leads me to believe blockchain will have a major impact on our kindergarteners.
Blockchain is happening in concert with growth of artificial intelligence. AI will likely have a similar effect on jobs and real estate. Blockchain and AI together are already large consumers of electric power, and demand is likely to grow significantly. The jury is still out on where all this power will come from, and who will pay for it. Will it be our kindergartners?
I expect more high net-worth individuals to explore DeFi opportunities for accumulating wealth. Will the existing problem of concentrated wealth be exacerbated by blockchain? Perhaps, but this is not certain. In finance it will depend on who owns successful DeFi ecosystems. If it is banks or other entities with shareholders, the effect on wealth concentration might be less. If it is one or more high net-worth individuals or private equity, the effect on concentration could be significant.
A world for our kindergartners with fewer jobs and further concentration of wealth is not pretty. The good news is we have time to make sure blockchain and AI benefit all, not just a few.
We need to invest in education and training to better equip our kindergartners for future jobs. We need to find solutions to the decline of our middle class. Without such a solution the middle class is likely to slip further into poverty due in part to blockchain. Many of our kindergartners will be in this future middle class, and we owe it to them to start working on solutions now.
Jerry Damerow of Little Rock is the principal of Damerow Consulting.
An employee watches an electronic signboard displaying the prices of Bitcoin and other cryptocurrencies on Nov. 21 at the lounge of Bithumb cryptocurrency exchange in Seoul, South Korea. (AP file photo)
A diner buys french fries in May at a shop that accepts bitcoin payments in the Kibera Slums in Nairobi, Kenya. While originally envisioned as a substitute for cash and credit cards, Bitcoin’s main use has been for speculation. (AP file photo)
