The Highest and Best Use for Blockchain Technology

[ingenesist]

Actually, the mortgage crisis was precipitated by the inability to reconcile leveraged value with actual real value of homes and properties.  This is entirely an engineering problem - land surveyors, building condition, verification and validation of real conditions, etc.  They had a few trillion in loans but no way to assess their true value.  You'll remember the debates around "Mark to market" which means that the market devalues the homes which makes a bank insolvent not unlike a mass withdrawal - or "not Mark to Market" which means that the purchase price is the actual price - thereby ripping off all of the people who are caught below market. These problems occurred because there was no way to adjust the property value for the actual physical condition / definition of a property.  This, again, is an engineering problem.   

Here is a post that I wrote called Zertify Zillow Zestimates which suggests that variance on calculated value can exceed +/- 25% over actual.  http://www.ingenesist.com/zertify-zillow-zestimates-on-blockchain/

[Thom]

3. The probability of the peril must be known and must be the same for all people participating in the pool.  Otherwise, someone is subsidizing someone else in some way.  To solve this problem, reinsurance mutualizes these mutuals in the exact same way.

I don't know what "reinsurance" is, I never heard of that before. You're right tho, that my primary concern about insurance is spreading the cost of risk to people outside of the risk pool they truly are in common with. I don't see that as an engineering problem. One problem is in how a "risk pool" is identified. Like you said there are many factors that affect risk, and then you add to that the policy makers and politicians who manipulate qualification requirements to address their agendas (look at how they changed the laws to allow people to qualify for home loans that didn't have the means or stability to sustain their mortgage payments, and what that did to Freddy Mac's underwriting) and you have a real mess. I don't see that changing until people find a way to get away from the corrupting influence of government.

Perhaps what you're trying to build is in fact an alternative to the mainstream processes and institutions that comprise the insurance industry. If so fantastic! You will have a tough time getting around the policy makers & politicians, just like cryptocurrency has in circumventing money transmission laws. It's tricky, and difficult to convince people of the benefits and persuade them their risk is in their own fear.

[ingenesist]

Thanks Thom;

Actually, insurance started out as a decentralized "mutual" agreement between independent actors.  Say 10 people each had a small cottage in the woods.  They each had an exact replacement cost of 100 dollars.  Over time, they noticed on average, 1 of the 10 homes burned down due to forest fire.  Each owner needed to have 100 dollars saved up in case their house burned.  This 100 dollars could not be used for investment or buying food.  Therefore, the community had 1000 dollars that was stagnant.  Then one smart guy came along and said, "what if we all throw 10 dollars into the pot an whosever house burns that year.  Now, the community can release 900 dollars into the local economy.  That is the decentralization of risk.

The key is that 1. each house must have the same replacement cost, each house must have the exact probability of being lost by the exact same peril.  3. The probability of the peril must be known and must be the same for all people participating in the pool.  Otherwise, someone is subsidizing someone else in some way.  To solve this problem, reinsurance mutualizes these mutuals in the exact same way.

The problems is not the concept of insurance, it is almost impossible to find pools large enough to with all of these criteria to cover the risks that they face.  So they start diversifying risks, a pool of houses in a flood plain would balance a pool of houses in a fire zone as long as the numbers work.  Or a tornado in the spring can balance blizzards in the winter.   

As you can imagine, and especially with so much money at stake, transparency can get a little thin.  Further, the insurance company does not really care if your house is going to explode settling on the gas line, they only care that the risk is priced correctly.  They have little motivation to eliminate risk.  So yes, there are problems with insurance, but not the problems that you suspect.  These can be corrected with engineers operating on a blockchain. 


 

[Thom]

Abstract: The hallmark of a great society is the ability to capitalize it’s needs, not it’s arbitrage opportunities.  The Highest and Best Use for Blockchain Technology must be to reduce the cost of capital by decentralizing risk, not necessarily money…yet

The highest form of decentralization is every person is an active actor, and their burden of risk is what they elect for themselves. Ideally everyone is responsible for their own decisions and their own actions which means they should bear the burden of those decisions, including financial costs.

However, when I hear a phrase like "decentralizing risk" what it generally means is transferring some of my risk to someone else so I don't have the burden of being 100% responsible for my choices. It allows people to make bad choices and have others pay the cost.

Insurance coverage can also have the same affect if premium rates are not calculated accurately to reflect the actual cost of the risk. Those calculations are not specific to each premium payer they are rather based on statistics and behavioral averages, so they are guaranteed to be inaccurate in many cases on the fringes of the bell curve.

Best example of how insurance encourages bad decisions and where the risk is not assessed accurately is for homeowners insurance for real estate on coastal property. Sure the premiums are higher, especially if there is history of losses. However, how may homes would never be built if insurance coverage wasn't available there? And when disaster strikes have enough funds been collected from policy premiums to cover the benefit payouts, or does the company have to cover those expenses by raising rates somewhere else, thereby socializing the risk to others that didn't elect to build a home on risky ground?

I just don't see how it's beneficial to society in the long run (i.e. to a sustainable society) to socialize risk as opposed to encouraging direct responsibility for those who choose risky behavior or make bad decisions. Taking away that feedback interferes with learning from mistakes and is not an optimal, sustainable process. But dang, it sure works out well for some!

Control systems or schemes that encourage socialistic behavior discourage individual freedom and interfere with individuals' growth.

[ingenesist]

Thanks everyone - I'm looking forward to hearing more.  The paper sets up a bullet proof analysis that pretty much implied that they're barking up the wrong tree with Banks. 

For xeroc, I guess the point is 24/7 trading what?  funds?  At some point that needs to represent something in physical in time and space.    That's exactly where the logic crumbles in cryptoville, in my opinion.  But we can fix that.

[xeroc]

wow. Good article. Looking forward to the paper.

Some input:

"The hallmark of a great society is the ability to capitalize it’s
needs, not it’s arbitrage opportunities."

You could point out how useful global scale order books are that anyone
can trade in 24/7.

Another point you almost mentioned is this: Imagine you want to help
build infrastructure projects around the globe. How would you transfer
funds from one place to another place efficiently? This is where
blockchain tech could be leveraged *today*.

[Ben Mason]

Fantastic ideas and I couldn't agree more with the responsibility upon us to get it right. I also agree that the backbone, including critical infrastructure must be tackled in order to achieve the full systemic benefits of blockchain. The ultimate benefit from which all other benefits are derived is the assured integrity of information over time.

Any idea tackling the transition to blockchain from the point of view of integrity is BitShares friendly! Once fiat confidence collapses, a degree of sound money will have to be reintroduced, whether blockchain money is used or not. There are more important, more intrinsic systems that require decentralisation.

[ingenesist]

Abstract: The hallmark of a great society is the ability to capitalize it’s needs, not it’s arbitrage opportunities.  The Highest and Best Use for Blockchain Technology must be to reduce the cost of capital by decentralizing risk, not necessarily money…yet

http://www.ingenesist.com/highest-best-use-blockchain-technology/

This is basically the introduction and conclusion to a 6500 word whitepaper that will be published in the NAIC Quarterly Journal June 2016.  It will also evolve to become a position paper by the NSPE Fintech Task force.  I'd like to make it "bitshares" friendly.  Looking for ideas, comments, or questions.  Thanks.