How Blockchain Will Reorganize Society

“Reification” describes how people reorganize around new technologies. The Iron Age, Industrial Revolution, Information Revolution, etc., provide abundant evidence of the reification of society. Blockchain technology will likely have a similar impact. The insurance industry is currently optimized for the existing collection of risk pools, data inputs and price signals. If people reorganize, so, too, would their risk exposures — perhaps toward positive risk, or perhaps not. Understanding the implications of these emerging conditions requires a brief history lesson on database architecture. In the early days of computer networks, machines that performed computations were connected with wires to other machines that stored data on some physical medium such as magnetic tape. Humans interacted with these machines by using finger symbols on a keyboard and changing reels of magnetic tape. These activities had very little to do with the computation actually being performed, yet they caused the drive toward reification. While we may not realize it, those same functions are still often performed today in one form or another every time we interact with a computer database. Like the expression, “A fish has no word for water,” many activities that blockchain technology renders unnecessary remain difficult to identify. See also: Can Blockchains Be Insured?   Over time, databases became so incredibly useful that companies and institutions stored all of their data in proprietary silos where they could control access to financial records, product specs, trade secrets, personnel files, customer data, sales projections, etc. The database for an aircraft manufacturer was structured entirely differently than a coffee shop chain — or an insurance company. The specialized linkages that formed between the data and the operations became unique to the organization and, in many cases, proprietary. This was also convenient in sequestering people whose skills were adapted to a particular data structure. The purpose of management was to let nothing in or out of the database without appropriate permission. It has been widely written how institutions have become defined, or “reified,” by their data structures. The problems with legacy databases became apparent when the need arose for one database to communicate directly with another database. This was impossible without human administration. With the advent of the internet and social media, widespread networking capability between computer nodes became exponentially more valuable, while the ability for computers to communicate with each other remained linear. While electrons moved at the speed of light, many systems remained limited to the speed of bureaucracy. In the 1990s, organizations introduced legions of administrators, intermediaries and brokers to help databases communicate with each other. More recently, database engineers invented special interfaces (APIs) that allow, say, Amazon to provide access to parts of its database to wholesalers or partnered retailers. APIs allowed for a wave of innovation associated with the e-commerce movement and much more. However, even APIs had significant shortcomings with the more formal “titled” transactions. In 2016, with all the APIs in the world, a real estate broker must still wrestle with several databases to complete a transaction. The broker must lead the buyer and seller around the multiple listing service database (MLS), coordinate a financial lenders database, adjust for property inspection database, secure via a property insurance database,  use an escrow service and title insurance database — all under strict government database regulation and their own corporate management database oversight. The agents must deliver all of these databases in relative unison to a single point in time to receive archaic ink “signature” and a time stamp. A small mountain of paper “papers” is then registered in public archives. And, still, the deal can still be reversed by a legal challenge. The process can take weeks or months with unnerving risk, cost frictions and price volatility. “This is all very weird, only we’ve become accustomed to it” – Vinay Gupta Unfortunately, as the value of data increases, so, too, are the incentives, probability and consequences of cheating, especially where the ability to cheat has been equally enhanced by new technology. Reified society then reacts by adding additional laws and regulations that may thwart innovation to a greater degree than the protection that those laws may provide. Today, asymmetric information, blanket legislation and selective enforcement are considered among the scourges of modern-day commerce. Keep in mind, this complexity STILL has very little to do with the actual thing that people are trying to accomplish. See also: Why Insurers Caught the Blockchain Bug What if we can get rid of all the complexity? What if we can eliminate the brokers and intermediaries; the bureaucracy and the administration; the noise and the friction; and the risk? Actually, this is a popular idea that has been attempted throughout history in various forms of governance and marked by the willingness, ability and degree of control of information. Obviously, there are many methods for applying control (or not applying control); most lie on a spectrum between a fully centralized organizational system and a decentralized organizational system. Blockchain technology would allow data sources to communicate securely with each other directly with no central authority, administration or brokers. The insurance industry needs to take this technology seriously to enhance society’s ability to organize their own risk pools — or the insurance industry risks irrelevance. (Adapted from Insurance: The Highest and Best Use of Blockchain technology, July 2016 National Center for Insurance Policy and Research/National Association of Insurance Commissioners Newsletter)