Headline Verdana BoldThe future of exchanging value Blundering toward a decentralised futurePeter Evans-Greenwood, 28/10/2017

We're being sold a decentralised future, one where self-enforcing (smart) contracts and micro-transactions mediate our relationship with the world around us. Apparently this will democratise trust and reshape society, or so the streak of technological determines that runs through society tells us. Though while technology is a significant force shaping society, it is not the most important. There are deeper forces at work in society, and while blockchain is a sign post that the future will be different from the past, the future we're racing toward is not the one we're being sold.

The future of financial services – we’re told – is one where • micro transactions in crypto currencies enabled by blockchain • with social lending and global platforms (some of which might be distributed) • existing financial services will be disintermediated • established financial professions destroyed • sovereign currencies will be marginalised, reminders of a centralised past This isn’t necessarily so.

There’s a strong thread of technological determinism in society • We feel that we live in a technological age • … and the development of new technologies is reshaping society in their image

This thread might have even strengthened recently • Rise of the robots: Machine learning and automation of white collar jobs

We’re forgetting that • Technology change isn’t a one way street: technology changes society but society also changes technology • Our view is also coloured by the role technology has in our culture: the Gollum story

What we’ve been seeing at C4tE is that the balance between technological and social determinism has tipped to the social • The future will be shaped by a mixture of inherent human needs and cultural preferences • We can also see the outline of this future and it’s a lot more interesting than cryptocurrences etc. suggest

Who is Centre for the Edge then • Every team needs an explorer • ’nowists’ rather than ‘futurists’ • educators, in that we intervene, poking the community to help them adapt Our interest is in identifying and articulating the importance choices we have today that will shape the future

… and what we’re seeing is a confluence of social preferences come together to reshape the commercial landscape in unexpected ways • It’s a social change, not a technological one

“Although technology might be a prime element in many public issues, nontechnical factors take precedence in technology-policy decisions.” —Melvin Kranzberg’s 4th law

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Kranzberg, Melvin. “Technology and History: ‘Kranzberg’s Laws.’” Technology and Culture 27, no. 3 (1986): 544–60. doi:10.2307/3105385.

A common mistake is to think that solutions to technical problems are not subject to mushy social considerations Many social factors are involved in what are seen as purely technical decisions

It’s social pressure that shapes: • which technologies can be / are pursued • how they can be / are used

It’s rare that the ”objectively best” technology will be the one society adopts: • Copper-cooled engines, victim of the need for short term profit • VHS trounced technically superior Beta • genetically engineered crops • Ford Nucleon and the optimism of the 50s Technically ‘sweet’ solutions do not always triumph of political and social forces

This is particularly true now as we’re seeing social change rather than technological change • no new maths in blockchain / bitcoin • no new maths in AI

What we’re seeing is an environmental shift • which is something we’ll return to later

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It’s through this lens that we need to consider money: the means we typically use to exchange value

We’re told that we use money due to “the double coincidence of wants” • a pervasive assumption promoted by economists • ”we use money, as barter is awkward”

History is then seen as the incremental monetarization of society • it’s more convenient than the alternatives • it’s becoming ever more convenient as ‘technology’ improves • cash → credit instruments → electronic payments

Extrapolating out, technologists predict: • smaller, more ‘frictionless transactions’ • smaller, more targeted (crypto) currencies, application currencies (‘tokens’), personal currencies even Resulting in peer-to-peer exchanges via ‘distributed’ (blockchain) platforms • ‘Earning is learning’ et al

This is unlikely though, as we forget that money is a technology for exchanging value with someone you don’t or can’t trust

Before ‘money’ we used shared debt • implicit and uncounted, think rounds at the bar last night • small communities exchanging resources: farmer → baker → cobbler

Money did have a role • calculating damages: a unit of account • a way of extracting value from the unwilling: tax → Indian pound et al Indeed, ‘tax’ is money’s ‘killer app’

Exchanging value via money implied not trusting your counter party • hence ’dirty money’ and ‘filthy rich’ • hHence the prohibitions on lending in all Abrahamic religions This cultural aversion persists to this day • Skip

Surveys commonly find we want • fewer transactions, not more • a happy retirement, not financial products • a home, not a mortgage • etc … not more, finer-grained payments

So what pulled us into the monetary system?

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Un Galerie du Rayon de Modes, Le Bon Marché, Paris, 1920. Héliographie de N. D. Phot. Public domain.

We forget that retail is a constructed environment • the result of shifting from bespoke to mass market products • … from communities to commerce • … from buying from someone we know, to someone we don’t

We went from mentioning to our friend, the cobbler, that our shoes were wearing thing to • Need-want recognition • Search • Comparison & product selection • Exchange of goods: payment at the point of sale • (post-purchase regret)

Over the last 100 years or so, what we think of the modern retail experience evolved • Goods on display • Prices clearly visible (no negotiation) • Amenities (to attract the punters) … all finally coming together in Le Bon Marche in the late 1800s early 1900s (pictured)

5John Lewis store in Westfield Stratford City Shopping Centre, 2012. Source: Editor5807

John Lewis store in Westfield Stratford City Shopping Centre, 2012. Source: Editor5807 <https://commons.wikimedia.org/wiki/File:Stratford_City_Westfield_Shopping_Centre_John_Lewis_London_2012_Olympics_merchandise_2.JPG>

Moving forward to today…

Technology has made retail more efficient: • PoS systems (invented in the 70s by MacDonalds) • Plan-o-grams • category management • dynamic pricing • …

Online simply copies the offline paradigm • catalogues • shopping carts • checkouts

This model has been remarkably resilient, existing unchanged

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However, this is still the same model as Le bon marché • As retail • As online For all our technical sophistication, little has changed in the fundamental experience

We have forgotten that shopping is: • a constructed environment • a learnt experience

… until recently that is: • A confluence of factors has destroyed the mass market • … and is redefining the commercial market in the process

First – around 2005 – the consumer internet and express airfreight destroyed the mid market. Why compromise when you have: • the cheapest • the best (at the best price) Consumers now have more information than merchants • PacBrands et al

Then social media shifted this source of information: • from what the producers’ published • to group (peer) opinions

What this has done is redefine value at both ends of the market

7Source: Lisdavid89

On one side we have “high value”

Relationships that are heavily invested in: • communities • religions There’s a narrative / experience that the customer identifies with, and cost is a minor concern

Examples: • the exclusive music pack or backstage pass • the cobbler who learnt their father’s trade • the local butcher selling products from boutique producers • hand crafted furniture from sustainable forests

8Source: Lisdavid89

On the other we have “convenience” “Give me convenience or give me death” → Dead Kennedys • We don’t want to put a lot of effort in • We don’t want to make decisions • We don’t want to be bored • We want it cheap (though we don’t care about it being the ‘cheapest’) Ideally, we want it as a service

Examples: • music streaming: “I just need background music for my life” • $4 thongs at Target: for the holiday • Dollar Shave Club • Flexicar: I need to move something • Aldi: “I just need tomato sauce, don’t waste my time”

We’re all arbitraging the difference, and individually we’re doing it different ways

We’re also becoming more impulse driven at both ends of the the market, rather than searching • chance discovery of a service through our community

This can be seen in how the ‘payment’ is being unbundled • separating clearance and settlement • and moving them away from the till

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Space: moving from the PoS to somewhere else

Focused on optimising the payment — slicing a few seconds of — we’ve forgotten that the bulk of the customer’s wasted time is in: • going to the PoS • tallying the goods

We’re seeing a few examples of companies moving the PoS to the customer, rather than the customer to the PoS • Aisle buying

HiPay -> image • purchase via the customer’s phone and WeChat account • cash transmitted from to merchant’s account • Note that it’s common in China to leave home with only your phone and WeChat account

Apple Store App • purchase in-store via customer’s phone & iTunes account • aggregates purchases

Amazon Go

Moving this online is just a question of risk model

Source: HAO XING

Time: forward in time

Starbucks moved their loyalty scheme to a stored-value card • Customers add value to the cart • Use the card for purchases

Advantages: • Ties loyalty accumulation to purchase (one card, not two) • Creates a sunk cost: the customer has already purchased the coffee

Disadvantages: • Need to preload the card, making some transactions more complicated • Still tied to the PoS

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Time: back in time

Skip: skip the queue • Use the app to pre-order • Pickup-and-go • Pay every fortnight (not using the PoS)

Advantages • Skipping the queue (some people) • Avoiding “transacting” (many people)

We forget our cultural prohibitions against handling money • We don’t like having the transaction in the middle of the relationship • We prefer services where they payment happens “somewhere/somewhen else” • Uber is an example

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Next, these new models are not like the old models

we think of the future of our businesses as being the same, but online • online retail • online …

For example, consider grocery shopping • it’s looking increasingly unlikely that grocery shopping will move “online”

• it’s not a question of someone getting the model right • doing so assumes that the current model is working fine, but we need to upgrade execution

This ignores the fact that consumer behaviour is changing And we forget that our concept of ‘supermarket’ is based on the old location-based retail paradigm that is dying

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SubscriptionsHigh Value Convenience

Three text boxesIt’s looking more likely that the grocery market will fragment breaking into three • High value, multi dimensional value • subscriptions: low cost, low hassle, don’t force me to make decisions • ad hoc (Aldi, on demand delivery) for the corner cases

the old buying cycle is breaking down • the foundation of business

Business has been built around • Need • Search • Transaction

however, increasingly we no longer search

we’re building relationships with high-value merchants we’re converting purchases to subscriptions for the things we just need what’s left over – low-cost things we need occasionally – we’re after convenience

You need to create a new relationship with the customer • one not based on search or cost

There appears to be three on offer

religion: you form part of the customer’s identity, Apple, the local butcher • You have the primary relationship with the customer, not someone else’s product or brand • value is multi-dimensional • value is absolute – it’s your product or someone elses • you don’t care where the customer buys, as long as they buy your product

community: you facilitate the community that the consumer is part of • you and the client are in the same community • value is multi-dimensional • value is relative – to the community • you don’t care what the client buys, as long as they buy it from you

commodity: cheap, old skool • you need to be convenient to the customer when they want something • you need to be (reliably) cheap – ideally you want to be a habit • don’t force unnecessary decisions – and don’t bore the customer

We note that there’s good money to be made in all three models • Apple earns the majority of smart phone profits, with a minority position in the market • A community provides you with multiple income streams • The most profitable restaurants are the cheapest

Mobile payment terminal, in Fornebu, Norway. Source: HLundgaard.

The existing trust model — need, search, cash at the point of sale — will probably endure for quite some time.

However, simply moving the current paradigm to the digital world runs counter to consumer preferences. • Consumers don’t seem to want e-wallets, no matter how many times we present them. Even Apple Pay is having

trouble driving adoption, and is willing to pay $5 per user. • Despite optimising the payment (or hiding it with “gift wrapping”) we can’t ignore the fact that, in a world where

consumers “know” the firms they deal with, that consumers don’t want the payment in the middle of the relationship.

• We forget that the payment — cash — was a solution when customer and merchant didn’t know, or couldn’t trust, each other, and that is no longer generally true.

So if the old trust architecture is on the wain, then what is the new trust architecture?

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Blockchain(database)

Money (payments)

Identity (accounts)

Reputation (ratings)

Marketplace (catalogue)

At this point many people will be creating for blockchain • it decentralises / democratises trust, or so we’re told • ‘trust in the math’ rather than trust in the people

Through the magic can build Dapps that are more transparent and equitable

There are a few issues with this

Dapps will never be economic • distributed solutions are always less efficient than centralised ones • they will also be less performant, for the same reasons • these solutions improve sublinearly at best we can have the technical argument at the bar if you like

Value is created in the real world • Bitcoin only has value when you exchange it for something you want in the real world • touching the real world requires oracles & oracles have all the failings of real world services consequently • tokenising an asset doest change the nature of the asset: digital land titles are just land titles • regulation still applies • nothing is anonymous

Dapps don’t democratise trust • trust is a subjective estimate of how other actors’ future actions will meet your expectations • Trust is different to technology. We can’t democratise trust. Trust is a subjective measure of risk. It’s something

we construct internally when we observe a consistent pattern of behaviour. We can’t create new kinds of trust. Trust is not a fungible factor that we can manipulate and transfer.

• nor • If we want to rebuild trust then we need to solve the hard social problems, and create the stable, consistent and

transparent institutions (be they distributed or centralised) that all of us can trust. neither bitcoin nor Eth are examples of institutions that the majority of the population can trust

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Commonwealth Bank of Australia ten-shilling note (1954-60) circa 1954, pre-1960 (note), 2015 (image). Source: Image by Godot13. https://commons.wikimedia.org/wiki/File:AUS-29-Commonwealth_Bank_of_Australia-10_Shillings_(1954-60).jpg

Most problematic though, is the idea of introducing ‘tokens’ to fund many services • or even the creation of ‘personal’ currencies

For example: • Filecoin: p2p file sharing funded by a token • p2p payments: p2p payments funded via a token

It’s assumed that these currencies can be ‘pegged’ to something like AUD to avoid exchange problems • this is foolish and misunderstands how money functions

If you peg, then you need to defend the peg • you’ll need deep pockets • unless you control all the exchanges (impossible) • or you could create a private currency • but then you need to fund it (or recreate fractional banking)

Even then you need to deal with exchange rates: • you want to pay me in a p2p currency for your share of the pizza • but I’m not a user of the currency, and I’ll need to go to the bother of creating an account and converting it into a

currency I do use • so I value the p2p currency less that you do, and will demand more to compensate for the bother this is the same as using AUD somewhere it’s uncommon like South America • if a merchant accepts it (which most won’t) they’ll demand a higher rate to compensate for the inconvenience

All these additional currencies – and consequent exchange rates and required services – is a drag on the economy • we seem to forget that using currency comes at a cost

technology can’t solve these problems • even for personal currencies

the solution is to minimise the number of currencies in use • this is why we put an end to freelancing by nationalising currencies • hence: tax is a currency’s killer app

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So let us admit: distribution is not a magic bullet More to the point: there is no new technology in blockchain What we’re seeing is a social change

We’re back at Kranzberg’s 4th law

So if blockchain (technology) won’t shape our future trust relationships, then what will?

Well, in the short to mid term, there’s probably three, rather than one, based on the emerging trust relationships.

Social groups (platforms)

First, we might burry the payment in the social platform that consumers use to interact with the merchants, with settlement via a low-cost mechanism (BPay? NPP?). In many — all? — cases the act of ordering will trigger the payment, as with Uber. Our social platform(s) of choice become our remote controls for the world.

Trust — for both customer and merchant — has moved from currency to platform (though we still use a currency as a unit of value).

Payments are moving away from the point of sale, to happen seamlessly in the background. • “Buy it now” buttons on Pinterest. • Ordering products or services via a social platform: WeChat → Skip, Uber etc.

Even using the platform as a substitute for cash or a traditional payment

It will be interesting to see if Facebook, Twitter can make the leap.

Social groups (platforms) Payment for a service

Second, payments for products are being converted into subscriptions for services, with periodic settlement via a low cost settlement mechanism (BPay? NPP?)

This is simply a streamlining of the existing utility model.

Payments are moving away from the till to be seamlessly executed at the point where the product is consumed. • Music streaming • Dollar shave club … and so on

Social groups (platforms) A shared store of valuePayment for a service

Third, where customer and merchant have a less transactional relationship, payments may be via an evolved loyalty scheme, a shared store of value, with any settlement via a low-cost mechanism (BPay? NPP?) • Value is now multidimensional, rather than solely focused on transactions. • Customer and merchant know each other. • Both want the payment moved to the edge of the relationship.

A shared store of value — commitment by mutual debt — just like before the Industrial Revolution • Merchant rewards customer for prosocial behaviour, not just transactions • Customer commits “funds” to create a sunk cost and show commitment

Acts like a complimentary currency, which means that the banks might be best positioned to offer white-label services.

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Pipe vs platform

Market Firm

1924 Model T assembly lineEdward Lloyd's Coffee house, à Londres, par William Holland (1789)

The rational behind Dapps is that they’re the logical extension of the old tension between firms and markets

Coase told us that the choice between firm and market is driven by the cost of: discovery, coordination & contacting

Firms: • The old value chain – stuff goes from left to right • Producers find materials, create value, and deliver to customers • Miserly with communication/coordination as everything is predefined and mandated from above

Markets • Platform businesses -> the hot thing at the moment Producers and consumers gather in a market

More choice, but requires more communication • Uni Cal saved something like 50$ million moving their procurement process to a market

We’re seeing the ‘great unbundling’

Dapps are positioned as the next step • make everything ‘distributed’

23Village fair, Richard Brakenburgh, 1650-1700, oil on canvas - Villa Vauban - Luxembourg City

we forget that before the firm and the market we had the village • the baker brought the bread in the morning • the cobbler lived around the corner • etc

we didn’t need money as we didn’t need (as much) formal governance • vast majority of relationships facilitated via debt • double coincidence of wants is fiction • money only used when we didn’t know or didn’t trust someone, as with damages

it was industrialisation and the explosion of the mass market that pulled the vast majority of people into the monetary system

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MarketCommunity Firm

so we need to consider these on a continuum

communities were great, but they didn’t scale markets enable us to create communities around topics, but we need to go looking for them firm’s are efficient, but you can have any colour you want as long as it’s black

the amount of administration and formalisation required increases as we move right the volume of communication required decreases as we move right value becomes more narrowly defined as we move right

most of industrial history has been a shift from local markets to global firms more recently we’ve seen the shift from global firms to (global) markets, right-to-left • as communication technology has caught up it’s like we’ve shifted right, and then bounced off the end, and now we’re heading back the other way

the consumer shifts we’re seeing • value is multidimensional and relative • direct relationships rather than brands • etc suggest that we’d like to return to the village

the interesting question is what the ‘digital village’ might look like

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© 2017 Deloitte Touche Tohmatsu.Peter Evans-Greenwood Fellow, Deloitte Centre for the Edge