Blockchain: Proposition of a New and Sustainable Macroeconomic System

Analyzing the potential of blockchain in combination with the concept of a circular economy, the results of this research project indicate that blockchain could promote sustainable solutions by (1) enhancing business models that contribute to resource efficiency, (2) enabling reliable resource tracking, (3) making resource pricing effective and executable, and (4) introducing complementary currency systems that give an incentive for sustainable behavior. Based on the results of this work, the foundations for a new and sustainable macroeconomic system are outlined. — Author: Benedikt Christian Eikmanns

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Blockchain and the common good

Besides digital currencies, based on the blockchain protocol other applications are currently in development. In particular, the application of the blockchain technology in the areas of financial services, healthcare, smart contracts, and property identification seem promising.

Interestingly, even state governments have begun to experiment with the blockchain technology. For example, Estonia as a leading e-government is using blockchain for health records, judicial and security purposes since 2012 (e-Estonia, n.d.). Dubai implemented a “Global Blockchain Council” to discover potential blockchain applications for the private and public sector in 2016 (Dubai Future Foundation, n.d.). In the same year, the UK Department of Work and Pensions started experimenting with blockchain-based welfare payments (Cellan-Jones, 2016). Even the United Nations has announced to provide legal identity for everybody as part of the UN 2030 Sustainable Development Goals (Irrera, 2017). According to a survey conducted by IBM, 90% of government organizations plan to invest in blockchain in 2018 (Kwang, 2017). Obviously, the public sector is starting to understand and assess the technology for policy applications. However, the way that blockchain could be applied to benefit the common good and, more precisely, its potential for achieving a more sustainable economy has not yet been analyzed.

Four blockchain applications promoting sustainability

Figure 1: Blockchain applications for achieving sustainability

Application 1: Resource Efficiency Increase.

Application 2: Resource Tracking.

Application 3: Resource Pricing.

The creation of an automatized cap and trade system regulated by smart contracts to prevent policymakers from chasing self-serving political agendas is becoming a highly conceivable idea.

Even more interestingly, Edward Dodge is proposing an escrow mechanism on the basis of the blockchain technology (Dodge, 2015). In such a system, for every ton of CO2 deposits have to be made, which would be recorded as a digital asset on a blockchain. Those funds are kept in escrow until the sequestering of a ton of CO2, e.g., through reforestation or industrial carbon capture and sequestration (CCS) methods, is verified (ibid.). In theory, when all digital escrows have been claimed, all CO2 emissions produced during the existence of the escrow mechanism would have been absorbed. The benefit of such a system is its global effectiveness. Whereas current cap and trade systems solely punish “bad” behavior, this system also monetizes “good” behavior and competition for the escrowed resources would result in concentrated actions to save the environment. Generated funds flow directly and only into activities that counter the emissions — even across borders, which would also directly encourage participation of developing countries. It is a fair system, as those producing CO2 have to bear the financial burden and those caring for the environment would benefit. Advantages of using blockchain are clear; the use of blockchain is cost-effective, transparent and auditing measures can be implemented into the protocol, making monitoring and enforcement easier (ibid.). Through the application of blockchain oracles (data feeds that verify real-world occurrences), the fulfillment of CO2 reducing activities could be verified in an objective and decentralized manner. Furthermore, a decentralized and thus depoliticized system would substantially facilitate international cooperation between political actors and it would become easier to negotiate and agree on a carbon pricing system of global scale. Of course, practical issues of fraud, geopolitics, and the implications of large amounts of frozen assets on the escrow need further assessment. Nevertheless, the benefits of a blockchain escrow mechanism are obvious. The concept resembles (offline) deposit-refund systems that are already implemented for PET-bottles and beverage cans in some states, such as Sweden or Germany. With blockchain it might become possible to digitalize and implement more sophisticated systems (e.g. on consumer electronics or plastic). When supply-chain tracking applications become market-ready (see Application 2), it will be even possible to determine the deposit value on the basis of the materials used. The advantage of such an extended deposit-refund systems is that real-time monitoring becomes feasible, illegal dumping is disincentivized, and cost evasion is made difficult (Walls, 2011). Thus, blockchain could become an important tool for establishing an effective economy in the right scale.

Application 4: Complementary Currency.

The foundations of a new macroeconomic system?

Figure 2: Schematic illustration of resource flows in a circular economy[i]

As a result of blockchain technology, it will be generally feasible to track resources in the future (see Application 2). Thus, it will become possible to unambiguously identify a product’s input materials, including the material’s quantity, quality and origin. Also, information regarding a product’s biological or technical components could be tracked on a blockchain. Based on this knowledge, a sophisticated cap and trade system for resources could be implemented (see Application 3). The system would need to distinguish between natural and technical resources. Technical components would always be object to the cap and trade system. The levied prices for the use of technical resources could be adjusted to the ecological severity of the specific material. For instance, a ton of plastic could be object to higher taxes than a ton of sandstone. Furthermore, based on a blockchain-based system, which is able to track product attributes, it would be possible to adjust the tax according to the level of material degradation. For instance, a high-quality plastic producer that produces recyclable products would not be affected by the tax, as no degradation of material would occur. Contrary, when material is degraded by a producer, this would be recorded and a smart contract would trigger the resource tax. Thus, a cap and trade system in cascades that directly incentivizes the transformation towards a circular economy model would be established. Natural resources would be exempted from the system, if they can be safely disposed of in nature without any ecological concerns. If natural resources do not fulfill this aspect, the producer (or importer) would need to acquire digital resource certificates.

Based on the blockchain technology, it is imaginable to create a macroeconomic incentive system that promotes the transformation to a circular economy.

One step further, this cap and trade system could be enhanced by a blockchain-based escrow mechanism (see Figure 3). Thereby, individuals or corporations that care for the environment (e.g. by collecting plastic) would receive a direct financial benefit. Due to the government-backing, the value of claimed escrows would remain stable, thus fulfilling the characteristics of money as unit of account, store of value and medium of account. A financial system would have been created taking into account the logic of natural capital. Furthermore, a system such as this could alter fundamental financial principles. For instance, a demurrage could be introduced that would create a fundamental incentive for a transformation of the economic system from short-term towards long-term orientation (Lietaer, 2007). Moreover, the antagonistic relationship between financial value and ecological value would be mitigated in such a system.

Figure 3: Blockchain-based financial system promoting sustainability

All these processes would be automatized and controlled by blockchain-based smart contracts in the background. Thus, after the system has been established once, the system would neither increase transaction costs of an economy nor hinder trade. Certainly, there are other drawbacks and practical difficulties. For instance, the synchronization between digital and real world could be difficult. However, technical solutions, such as oracles, are already in development to counter those issues. Furthermore, in practice one would probably have to implement not only one single national cryptocurrency, but different national cryptocurrencies for every resource type. Nevertheless, first startups aiming to mitigate these types of issues are already evolving. For instance, the startup Bancor is developing a reserve cryptocurrency that enables the frictionless exchange of various tokens. Many more issues of practical and theoretical nature may arise, but the enormous potential of creating a government-backed national cryptocurrency may make this undertaking worth the challenge.

The blockchain technology is developing rapidly and in different directions as demonstrated by recent developments, such as Hyperledger, Ethereum or Bancor. Further innovative applications promoting a sustainable economy might evolve in the near future. Therefore, this work can only provide a snapshot of current developments in the blockchain space. Also, this work concentrated on giving an overview on an economic level. Further research has to be conducted on a technical level to prove the feasibility of the discussed concepts.

Remarks

Do you want to learn more about how blockchain will change our world?

  • Blockchain knowledge: We wrote a Medium article on how to acquire the necessary blockchain knowledge within a workload of 10 working days.
  • Our two blockchain books: We have edited two books on how blockchain will change our society (Amazon link) in general and the everything related to finance (Amazon link) in particular. Both books are available in print and for Kindle — currently in German and soon in English. The authors have been more than 20 well-known blockchain experts in startups, corporations and the government from Germany, Austria, Switzerland and Liechtenstein — all contributing their expertise to these two books.
Our two books: the first one on blockchain and the society and the second one on blockchain and finance

Authors

Benedikt Christian Eikmanns is consultant at Roland Berger. You can contact him via LinkedIn (www.linkedin.com/in/benedikt-eikmanns).

[i] Based on Ellen MacArthur Foundation et al., 2015.

Professor | Lecturer | Author | Investor | Frankfurt School Blockchain Center

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