The Great Blockchain Dilemma

Many insurance companies have a deep sense that they should be part of the blockchain movement but are not quite certain how to approach its implementation. Once you pull back the curtains, there appears to be two sets of mutually exclusive incentives underpinning the blockchain technology movement. One of them could be the greatest thing that ever happened to insurance; the other may be systemically toxic to everything insurance stands for.

A productive and sustainable economy requires stability – i.e., low volatility or no volatility. The insurance industry, by definition, must be able to identify predictable events that remain no more or less volatile over a long period of time. The value proposition of all insurance products depends on the ability to pool risk exposures appropriately and to diversify risk away. These conditions limit the insurer only to those products in which conditions are assured. The incentives of the insurance business seek to reduce volatility, categorize risk exposures appropriately, and to mitigate risks where applicable. Anything less is called gambling.

On the other hand, speculation may be needed to maintain the efficiency and grow the blockchain. Speculation is often the sole basis of valuation for digital tokens and depends on high volatility to attract gamblers for lack of better means to bridge the capitalization gap. Yet the creation and distribution of digital tokens is only a residual artifact of the blockchain use case, not the core use case. In order for the blockchain to maintain itself, the value of the digital token must exceed the cost of maintaining the blockchain. By contrast, a centralized organization would simply pay an IT department from operating revenue to maintain the system; whereas, a decentralized organization, by definition, must be autonomous.

The Great Blockchain Dilemma is clear: volatility and stability are mutually exclusive.

The current blockchain / crypto-currency landscape is plagued by this dichotomy. Incentives are laid out to optimize for speculation, yet the great vision of blockchain is one of a new economic paradigm ushering in an era of economic fairness and stability. Both of these things cannot happen at once.

For example, investment banking and corporate decision-making is driven by quarterly profits. The incentives on Wall Street have become tragically short term. The current view of blockchain is a miracle drug that can eliminate large swaths of human administrators while also increasing the performance of data structures.

Not surprisingly, large banks have come together to form a consortium to define blockchain standards for transferring value within their industry. But this may be short sighted.

The hallmark of a great society is the ability to capitalize its needs, not its arbitrage opportunities.

While the case for creating a shiny new super currency is compelling, the primary objective should be to induce stability in the outcomes of events articulated on a blockchain. The value of the tokens must represent true human productivity of a physical nature. Otherwise, nobody else would be willing to perform work in exchange for it. With a broad social agreement, digital currency can then achieve the state of mutual reciprocity and traded widely across an economy without friction.

Therefore, the highest and best use for blockchain technology is the insurance industry, and not necessarily banking because insurance can eliminate volatility. Properly deployed, blockchain technology can reduce the cost of capital by decentralizing risk. A developed economy is distinguishable from a less developed economy by the stabilizing force of insurance, not the volatile nature of money