Blockchain and AI are growing together into a new economic infrastructure. In a conversation with Financial Investigator, Jeroen M. Tielman (Head of Institutional Relations at Theta Capital) outlines how these technologies reinforce each other and enable new economic models.
This article is based on a conversation with the FInancial Investigator. You can find the article here.
What is blockchain? And are blockchain and AI related?
‘Blockchain is a decentralized digital ledger that enables us to transfer value directly over the internet, without a central intermediary. Strangers can conduct business with one another directly on a global scale because the reliability of transactions is built into the blockchain’s infrastructure itself.
A good example is stablecoins, where dollars can be transferred as quickly and easily as sending an email for a fraction of a cent, and anyone anywhere in the world can participate in economic activity on an equal footing.
This new blockchain infrastructure layer forms the natural backbone of an AI-driven economy: it makes identity and authenticity verifiable, enables AI agents to engage in economic activity and enter into contracts, and programmatically defines permissions and restrictions.’
Where do you already see the synergy between AI and blockchain taking shape in practice? And where does the potential lie?
‘We identify four areas:
- Authenticity and provenance of information—for example, by cryptographically signing and recording news articles on a blockchain, it becomes possible to distinguish—in a way that anyone can verify—between authentic and manipulated information.
- Economically rational AI agents As AI agents become economically active on their own, blockchain serves as the underlying infrastructure through which they gain access to financial resources and enter into contractual relationships, and through which explicit restrictions and preconditions can be established and enforced.
- Intellectual property as input for AI AI systems are increasingly powered by intellectual property. Blockchain provides the infrastructure on which intellectual property (IP) can be registered, allocated, and compensated.
- Decentralized alternatives to AI raw materials Blockchain networks are increasingly competing with centrally controlled companies that supply the critical resources for AI: data, energy, and computing power. Protocols such as Grass (data), Daylight (energy), and Gensyn (computing power) are introducing new models for unlocking these resources. An important side effect is that they actively counteract the increasing centralization that AI brings with it.
Blockchain is said to replace the trust traditionally provided by intermediaries with “trust-as-code.” What exactly does this mean, and what does it imply for sectors where trust is still deeply entrenched?
‘In the current situation, payments require an intermediary, such as a bank. This involves complex processes such as custody, verification, authorization, identification, and—for international transactions—foreign exchange and routing. These steps result in costs and delays. The sectors where blockchain will have its first impact are those where the ‘cost of trust’ in our current system is highest, such as cross-border payments that can cost several percent of the value and take days to process. Using blockchain, these payments with stablecoins cost only a fraction of that and take place immediately, day and night.’
This forces banks, for example, to reinvent themselves. Many of the services over which they held a monopoly will migrate to the new blockchain infrastructure layer in the coming years.
You argue that roughly one-third of the economy is essentially “trust-based.” Why is this particular part of the economy so vulnerable to disruption by blockchain technology?
‘In today’s economy, the trust-based role is fulfilled by an intermediary that combines functions such as registration, custody, management, and/or transfer of various types of assets, including money, shares, property rights, and other registered assets. Just as with payments, these functions are relatively labor-intensive, with the associated margins for error.
An important tool for overcoming these drawbacks is ‘smart contracts.’ These can not only monitor contractual agreements but also execute them automatically. Economic processes carried out on the basis of contractual agreements can thus be fully automated. Wherever a ‘middleman’ or a supervisory function is used, blockchain-based technology can and will make its debut.’
Just as with the internet and mobile technology in the 1990s, it’s difficult to predict the ultimate scale of this development. Which parallels do you find most relevant for investors?
‘The most significant parallels are the construction of an entirely new, economically vital infrastructure and the strong synergy with other innovative technologies. Technologies that were initially viewed as separate—such as the Internet Protocol, mobile telephony, SMS, and broadband—became increasingly intertwined. The eventual introduction of the ‘handheld computer’ (such as the iPhone in 2007) reinforced this synergy, leading to entirely new revenue models, such as social media and the e-commerce revolution.
In the mid-1990s, companies paid billions for radio frequencies for telephony and rudimentary data traffic. The assumption at the time was that only 20% to 25% of landline call minutes would migrate to mobile. No one foresaw that the mobile phone would transform into a handheld device that we sometimes even devote hours of attention to each day, thereby forming the foundation for a global advertising market via social media. In that regard, the potential of blockchain is far more significant: the possibility that a third of the global economy will eventually operate via “blockchain rails” far exceeds the impact of the early shift from landline to mobile minutes.
For investors with a long-term vision, the synergy between blockchain and other technologies, such as AI, warrants serious attention to both the underlying infrastructure and the new economic models emerging from it. These are the developments for which long-term investors were made, with a stoic gaze fixed on the horizon, averse to the fads of the day.’
You argue that the most attractive opportunities lie precisely in the early venture phase. Why? Isn’t that phase also the most uncertain?
“The early recognition of the potential scalability in applications of—in this case—a new technology is at the heart of venture capital. Consider Amazon, which in the 1990s saw the internet not merely as a medium for information, but as the foundation for a global store for everything and everyone.
The major difference from VC for traditional companies lies in the capital requirements over the lifecycle of a blockchain protocol. In Amazon’s case, the proceeds from the IPO were primarily used to build physical infrastructure, for inventory financing, and to expand distribution capacity. With blockchain infrastructure and applications, financing revolves primarily around software development and reaching a critical mass of users.
Whereas a traditional company repeatedly needs capital to finance growth in necessary physical goods and personnel, the ‘capex life cycle’ looks distinctly different in blockchain. Infinitely scalable software largely takes over the role of physical resources and human labor here. This cycle is therefore shorter and less capital-intensive.”
In short
- Blockchain replaces the ‘middleman’ in economic processes
- Blockchain is essential for AI: it verifies the identity and authenticity of, for example, data and AI agents, and monitors permissions and restrictions.
- AI and Blockchain will form the foundation of new economic processes.
- Blockchain is first being deployed where the costs of the ‘middleman’ are highest, such as in international payments.
- The synergy between blockchain and other technologies such as AI deserves serious attention from professional investors.