The concept of cryptocurrency, and more broadly, of decentralized consensus, represents a shift away from the old-world paradigm of centralized authority. My parents’ generation (and their parents’ generation) grew up accustomed to confiding their trust in infallible governments, fail-safe banks, and reputable degree-granting academic institutions to which they paid decades’ worth of savings so that their children would have a better chance in society. Although decentralized consensus is silently changing the economic underpinnings of our society, I regard cryptocurrency and decentralized consensus as safeguards of the democratic ideals espoused by our constitution. The reality is that cryptocurrency is here to stay. Paradigm shifts are a constant in human history, and I believe that the emergence of decentralized consensus will mark one of the most momentous paradigm shifts in human history.

My friends and I went to hear Andreas Antonopolous, a cryptography and cryptocurrency guru, answer Bitcoin questions yesterday. If I were to summarize the 2-hour meetup in one sentence, it would be the following: the details of how cryptocurrencies are traded are still maturing, but the concept of decentralized consensus is here to stay. Decentralized consensus holds the promise of democracy 2.0, something that’s remained a Utopian dream except in the tiny country of Switzerland. Decentralized consensus holds the promise of a better world where governments and organizations don’t steal from politically weak, defenseless individuals. As Antonopolous points out, we’re fortunate enough to have a benevolent government in the United States, but the majority of the world is not so fortunate. Decentralized consensus holds the promise of empowering people to exercise the power of their vote to truly make healthcare a human right. Before I expound on this latter point, I want to outline some technical underpinnings for the uninitiated, so bear with me.

Satoshi Nakamoto’s most remarkable achievement with Bitcoin is the cryptocurrency’s success in solving the problem of a decentralized public ledger. In the case of the US Dollar or any other currency backed by a governmental body or bank, there exists a central authority that acts as the ledger. Bitcoin’s brilliance lies in the fact that the ledger is public, encompassing potentially everyone and anyone. The blockchain ledger is the communal ledger that lends cryptocurrencies their value. It’s characterized by the following 2 criteria [4]:

  • Blocks are very difficult to discover (Difficulty Factor * 2^32 hashes)
  • Blocks are easy to validate

A Bitcoin comes into existence when a “miner” uses her/his machine (and therefore computing resources, disk space, and electrical energy) to generate new blocks that record cryptocurrency transactions. The block chain with the most cumulative computational work is accepted by consensus as the valid block. In other words,  physical energy (electricity) is converted into Bitcoins. Keep that in mind if you ever find yourself wondering whether or not cryptocurrency is “a thing.” The reward for mining Bitcoins diminishes with time, as the horizontal asymptote of ~21 million BTC is approached (around 2024).

This setup has a few interesting results with regard to game theory. While mathematicians reading this will quickly pick up on the fact that wielding >50% of mining power holds the theoretical potential to manipulate the currency, game theorists should also note that this system strongly incentivizes cooperation and veracity [2] (I won’t get into the details here, but I’ll refer you to a suggested reading list at the end of the post).

The Bitcoin protocol is not Turing-complete. Enter Ethereum, a Turing-complete protocol for scripting contracts in the blockchain. Ethereum is big. If you’re not a believer yet in Vitalik Buterin and his work, I encourage you to check out the whitepaper for an interesting read. Ethereum uses a Python-like scripting language (Serpent) to convert contracts into cryptographic building blocks. For the first time in history, parties entering into agreements are not at the mercy of inherently biased third parties. Ethereum marks an era in which algorithms — not banks, governments, or individuals — hold the power to validate and execute contracts.

One interesting result of this decentralization is the so-called Decentralized Autonomous Organization (DAO), in which each member is represented as a cryptographic public key [1]. A contract that exists as lines of code in a Turing-complete language means that we can go beyond simple two-party agreements, like this prenuptial agreement written in Ethereum, to a corporate-like structure that automates redistribution of internal capital among participants in exchange for services provided, assets, or computational power. Transactions can contain information like votes, changes in the contract (such as amendments), or adding/removing members [1]. Most importantly, this is all automated without reliance on an escrow or central authority.

The U.S. healthcare crisis has demonstrated how lawmakers, insurance companies, and healthcare systems are struggling to figure out a way to fairly distribute access to healthcare. The U.S. healthcare system was hurt by an incentive system that rewards procedures rather than quality of care and health outcomes. Recent changes in CMS reimbursement are starting to change this, prompting the emergence of Accountable Care Organizations that receive payment in exchange for providing healthcare to a fixed population, rather than on a fee-for-service basis. The healthcare system failed for the same reason the financial industry lost its credibility in the 2008 financial crisis: third parties succeed in manipulating an easily manipulable system in their favor. People were robbed blind.

I’ll give a simple example of what I’ll call Decentralized Autonomous Health Insurance. Let’s say individuals A through J enter an agreement with physicians X and Y, in which X and Y agree to provide healthcare to individuals A-J. Let’s say in this simplified example that X and Y are not reimbursed for their services, but by A-J’s health outcomes (in ancient China, physicians were paid when their patients were healthy, not when they were sick). Let’s also say that X & Y have a practice that accepts cryptocurrency as payment. Then, A-J and X&Y can pen a virtual contract with the following stipulations:

  1. A-J pay 20 Bitcoins per year to receive care from X & Y’s practice.
  2. The cost to X & Y of providing healthcare to A-J is deducted from the pool of Bitcoins in (1)
  3. X & Y will receive a minimum reimbursement of 10 Bitcoins per patient per year.
  4. If the cost of providing healthcare is less than 10 Bitcoins per person per year, the surplus is shared evenly between providers (X & Y) and patients A – J. This incentivizes patients A – J to take care of their health so they get a bonus at the end of the year, and it incentivizes X & Y to adhere to primary/preventative medicine best practices (including taking time to counsel patients).
  5. A-J can vote annually on which providers they want to provide them with healthcare.
  6. A-J can vote annually on important decisions that affect the distribution of healthcare services.

We might even imagine a scenario in which each patient’s medical record is encoded and distributed in a decentralized manner such that it exists as undecipherable bytes among millions of computers around the world, rather than behind the walls of a single healthcare system. For example, a chip could keep track of our health habits and automatically append these data to our blockchain-based medical records. These data (such as smoking and exercise habits) could then be integrated into the communal contract, so that sedentary smokers have to pay more Bitcoins per year than active non-smokers in order to receive care from X & Y. In this model, individuals’ health (not access to healthcare!) is the internal capital. Everyone is both a payer and consumer of healthcare, and everyone has the power to vote on the bounds and conditions of care provided. This type of Ethereum-based Decentralized Autonomous Health Insurance would have no administrative overhead, no bureaucracy, and no board of directors to decide who is healthy enough to be insured.

I’m less interested in the exact economics of the hypothetical example above than in the broader concept of decentralized consensus and the self-fulfilling social contract. It’s time to decentralize health insurance the same way cryptocurrency is decentralizing currency.

Cryptocurrency and Ethereum are a new social and technological frontier, which haven’t really reached mainstream yet. These young protocols still have to pass several important tests (such as reliable security mechanisms) and prove their scalability before they become widely used, but I’m optimistic. The future will be one shaped by knowledge, and less so by historical inertia. Decentralized Autonomous Organizations hold the promise of just distribution of scarce resources, including the most vital one of all: access to healthcare.

References:

  1. Ethereum Whitepaper
  2. Vitalik Buterin’s blog
  3. Bitcoin: Open source P2P money
  4. Brian Warner’s technical introduction to Bitcoin

 

[First published on my Quora blog on May 7th 2014]

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