How does crypto shape the digital revolution?

Author: Mario Laul, Placeholder Research Analyst

Compiled by: Gu Yu, Bu Er

In this article, I will collectively refer to blockchain and Web3-related innovations as Crypto and categorize them as part of the digital revolution. The digital revolution began in the late 1960s to early 1970s, with the emergence of packet-switched networks, microprocessors, and other digital technologies, leading to the widespread adoption of personal computers and the internet.

On this basis, I would like to extend and elaborate on the discussion of the digital revolution through the following three aspects:

• A brief theoretical overview of the two main phases of technological revolution;

• A comparison of the organizational and institutional transformations of the last industrial revolution (centered around oil, automobiles, and mass production) and the current information revolution (centered around digital information and communication technologies);

• An exploration of how Crypto, as a populist reform movement and an aggregator of innovations, shapes global institutions and governance as the digital revolution further develops.

In this book, I will use "ICT" as an abbreviation for digital information and communication technology, and "ICT revolution" as an abbreviation for the digital revolution. From here on, "Crypto" will refer not only to cryptographic technology itself but also to all innovations related to blockchain and Web3 technologies.

I. From Installation to Deployment

The wave-like cycle model is a relatively popular theoretical model of economic development. This model contains many variables, each focusing on a different set of driving factors, including demographics, credit/debt, trade, and political cycles. The foundation of innovation economics is Joseph Schumpeter's theory, which primarily emphasizes entrepreneurship and innovation.

In the tradition of Schumpeterian thought, Carlota Perez is renowned for her contributions to the theory of technological revolutions and shifts in technological economic paradigms. She divides the development of modern economic history into five stages, each driven by different revolutionary technologies. These technologies were initially adopted only in a few major countries before gradually spreading to other parts of the world.

For example, in the early 20th century United States, oil, automobiles, and modern mass production methods made urbanization and a consumerist lifestyle possible. By the end of this century, innovations in ICT triggered a new round of changes in production relations and methods.

In Perez's model, each shift in economic paradigms is triggered by a "big bang" event. Such "big bang" events are typically key technological advancements, such as Stephenson's Rocket steam locomotive, Ford's Model T, or Intel's 4004 microprocessor.

The lifecycle of a technological revolution can be divided into four parts: invasion, climax, synergy, and maturity. The first two parts constitute the installation phase of the technological revolution. During this period, new technological paradigms and key industries are still in formation, and due to individualism and lagging regulation, the distribution of innovation benefits can be uneven.

According to the theoretical model, the latter two parts constitute the deployment phase of the technological revolution. During this period, production capital (i.e., non-financial enterprises engaged in the actual production of goods and services) tends to dominate, ideally achieving a more equitable distribution of economic benefits through progressive institutional reforms and negotiated social contracts.

Figure 1: Lifecycle of Technological Revolution

A key proposition of the theory of shifts in technological economic paradigms is that while the prerequisites for the new paradigm are already in place during the installation phase, the broader social and institutional changes it brings can only be realized during the deployment phase.

This is because the potential of a technological revolution needs to be fully unleashed through prolonged learning and iteration, particularly through synergies between different innovation clusters. Typically, changes in the technological economic field are more easily stimulated by entrepreneurial initiatives and competitive pressures, whereas changes in social institutions require extreme political and cultural pressures, or even a crisis, to break free from existing structures and habits.

Ultimately, however, new technological and organizational paradigms will render the original rules more standardized and take root throughout society, compelling even the most conservative institutions to adapt.

As the technological revolution progresses, the original economic and social logics will become increasingly outdated, and the "new normal" as the starting point for the next wave of innovation may fundamentally alter the entire existing economic system, creating a cyclical pattern.

Figure 2: Interchanging Three Domains in Technological Revolution

The above summary may seem somewhat rigid. In reality, each technological revolution has many distinct characteristics. In the case of the digital revolution, Crypto can be seen as a response in the early deployment phase, enabling more digitally native institutions, lifestyles, and forms of governance. More importantly, understanding how Crypto influences the early digital transformation of the socio-economic landscape is crucial.

II. Large-Scale Production Deployment and the ICT Revolution

Two main forces drive the digital revolution into the deployment phase: first, the continuous iteration and large-scale adoption of core innovative technologies, establishing new paradigms across various aspects such as business organization, consumer life, and social institutions; second, the challenges and opportunities brought by public policy. Although these two forces are separate, they have been interacting continuously: the invention and adoption of new technologies influence policy-making, which in turn affects technological development, especially the distribution of costs and benefits of innovations.

In the first two-thirds of the 20th century, developed economies around the world, led by the United States, adopted the technological and organizational principles of the mass production paradigm, such as the application of Taylorism in assembly line management across the industrial sector, leading to the standardization and mass production of an increasing number of consumer goods.

In the latter half of the mass production revolution, more and more public sectors began to adopt organizational practices pioneered by private companies, evolving into complex "department" structures similar to large corporate hierarchies. International organizations such as the United Nations and the World Bank are examples of this.

In addition to supporting the housing market, the government became a major source of production demand through public procurement of physical infrastructure. The relatively strong position of labor unions made it difficult for productivity growth to decouple from wages, while welfare and unemployment insurance programs helped mitigate the impacts of economic downturns. In summary, the positive synergy between technological advancement and public policy enabled most Western countries to achieve decades of stable and inclusive growth.

In the last 30 years of the 20th century, particularly with the rise of the internet boom in the 1990s, developed economies began to enter a new stage of development, transitioning to an information technology-intensive and globally integrated economic order.

According to Perez's theoretical model, the bursting of the internet bubble in the early 2000s merely represented a rough midpoint of the digital revolution, with the overall deployment phase still ongoing. She wrote, "Financial capital has completed the intensive dissemination of the new paradigm and the installation and testing of new infrastructures. It is now time for production capital to take the lead, guiding the world society into a deeper transformation through the expansion of production and demand."

Undoubtedly, the impact of information and communication technology on world society over the past two decades has been transformative. Although there remain significant social and geographical disparities in the adoption and use of ICT technologies (the so-called digital divide), it has enabled billions of users globally to exchange and access information at low cost and almost instantaneously. Its key infrastructure consists of digital networks connecting data centers and personal computing devices, rather than the large-scale construction of transportation networks such as shipping docks, airports, and highways during the industrial revolution.

It is worth noting that the spread of the new technological economic paradigm is not an orderly process. Within the decades-long S-curve of each technological revolution, there are countless individual S-curves of technological development. These technologies often only become revolutionary after maturing and can easily disrupt a series of prior innovations in industries still in the integration process. Recent examples include social media, smartphones, cloud computing, the Internet of Things (IoT), deep learning, and blockchain technology.

Marc Andreessen famously stated, "Software is eating the world," which is perfectly embodied in Perez's concept of the "new normal."

Every sustained technological revolution poses an existential threat to established ways of doing things. While new economies and technologies become a reality, they also lead to mismatches with existing institutional, social, and regulatory frameworks. Over the past few decades, this mismatch has been a significant source of social and political tension.

As Perez noted, each deployment phase has the potential to become a "golden age" for most people (at least in core countries), provided that appropriate guidance is given to the new distribution of benefits. In the post-environmental crisis era, new technologies open a new path forward, addressing the inherent flaws in distribution systems by mobilizing different stakeholders and necessary resources. However, the vision of this path is difficult to achieve universal consensus and is similarly influenced by political debates and struggles.

Regarding fundamental policy reforms, despite extensive public discussions surrounding issues such as income and wealth inequality, job insecurity, and environmental degradation, the actual steps taken have been incremental. Furthermore, the scale and importance of the global financial sector have not diminished due to the crisis; rather, the global economy seems to be increasingly financialized. While it is still too early to assess the comprehensive social and economic impacts of the latter half of the ICT revolution, it is undoubtedly far more complex than the idealized model suggested by Perez.

Over the past two decades, the continuous iteration and large-scale adoption of information and communication technology is an undeniable fact, regardless of whether the associated social and economic outcomes align with individual expectations or the political consensus of other social organizations; this process is still ongoing. Recently, truly ICT-based organizational forms have begun to emerge.

III. Crypto and the ICT Revolution

The definition of Crypto and the summary of its social significance are often compared to blind men touching an elephant, as different perspectives can yield different descriptions, often difficult to encompass fully. The most common interpretations of Crypto can be divided into two categories: "cryptocurrencies" and "cryptographic technologies."

The former focuses on the impact of Crypto on currency and finance, particularly its potential to disrupt the roles played by traditional state governments and other central institutions in these areas. In contrast, the latter interpretation is more ambitious, emphasizing the impact of Crypto on any digital system or service that may benefit from a more decentralized, secure, and user-centered information management model.

The perspective presented in this article combines "cryptocurrencies" and "cryptographic technologies," referencing Perez's two-phase model of shifts in technological economic paradigms, attempting to explain how Crypto fits into the digital revolution.

More specifically, by viewing Crypto as part of a populist reform movement, financial innovation, and the overall trend of institutional innovation, it will be positioned alongside blockchain-related innovations in the deployment phase of the digital revolution. Of course, this interpretation is merely a hypothesis, and its accuracy can only be definitively assessed after ICT gives way to the next technological revolution.

IV. Crypto as a Populism

Historically, each turning point in the development of a technological revolution has been a window of reform where the existing institutional order faced controversy and questioning, thus providing favorable conditions for political and social movements to leverage public dissatisfaction with the status quo. To understand the interrelationship between Crypto and Perez's model, it is important to consider the ideological driving factors behind it. These driving factors are not unified and are accompanied by worldly motives, the most obvious of which is greed for money.

In fact, the discourse surrounding the core value propositions of cryptocurrencies is rife with direct criticism of the dominant players in the financial and digital technology sectors. Therefore, it is reasonable to describe Crypto as a populist reform movement, partly due to its dissatisfaction with the existing financial system.

In addition to its critical stance toward existing institutions, Crypto also expresses a belief that innovation and incentives, if properly guided, can provide the foundation for a more advanced, prosperous, and inclusive economic system. However, concluding that Crypto is a thoroughly progressive reform movement based solely on this is also erroneous.

As a favorable condition triggering social and political reform movements, the main challenge for Crypto lies in how to provide a sustainable solution to replace the original institutional structure without being overwhelmed by traditional forces. While certain areas of Crypto have long focused on the digital and creative economy, so far, its transformative potential in the currency and finance sectors has attracted the most interest and activity.

V. Crypto as Financial Innovation

From a strict financial perspective, Crypto seems to contradict Perez's idealized deployment version, in which highly speculative and self-referential financial forms are reduced compared to financial forms more closely tied to the production of actual goods and non-financial services.

However, at least two reasons explain why using this framework is too limited to analyze Crypto and its emergence. The first focuses on the relationship between finance and production capital, more generally on the adoption of ICT since the early 2000s and its actual economic impact. The second viewpoint sees crypto-financial innovation as fully aligned with Perez's theory—indeed, Perez's theory explicitly predicted this.

First, the consequences of the internet stock market crash and the global financial crisis ultimately had almost no impact on reducing financialization, which is certainly true. In many major countries, the scale of the financial sector and the importance of financial instruments in facilitating economic processes have not diminished. Relatively speaking, financial capital has not ceded ground to production capital (which has been declining in many Western countries due to deindustrialization), and the boundaries between the two have generally become more blurred.

This is partly due to the impact of loose monetary policies on the financial sector, partly due to the weakness of post-crisis reforms in curbing financialization, and partly because digital technologies (including Crypto) have greatly improved the opportunities for retail and institutional participants to access financial knowledge, tools, and markets. Additionally, the ICT revolution coincided with the global rise of technology-focused venture capital and internet crowdfunding, which subsidized ongoing experimentation and growth in both traditional fintech and the crypto space, especially after the global financial crisis.

However, the relative scale of the financial sector should be viewed in the broader context of the social impact of information and communication technology. In absolute terms, over the past two decades, the role of production capital in the large-scale deployment of digital infrastructure, products, and non-financial services has been impressive.

Second, although the use cases for Crypto have more broadly expanded into information management, so far, the application of blockchain and related technologies in the currency and financial services sectors has been the most influential. It is widely believed that from the early 1970s to the global financial crisis (the installation phase of ICT), there was indeed financial innovation. However, concluding that Crypto is a post-crisis financial innovation is incompatible with Perez's model.

Here is how Perez describes the typical nature of financial innovation and reform after mid-term turning points:

"Although they are more likely to originate from governments or world institutions, some new rules in the financial sector are self-imposed, precisely to avoid the need for government regulation. They usually involve new frameworks for banking and monetary practices. Secondly, they establish the rules of the game to regulate business and labor relations, as well as regulatory innovations at the international level. However, each set of regulations is unique because it needs to match the specific characteristics of the paradigm to which it adapts… The formulation of accounting and disclosure legislation is often aimed at avoiding specific abuses revealed during the last frenzy."

"In order to help achieve this new prosperity of deployment, monetary, banking, and financial practices will also need to innovate to operate smoothly within the new paradigm. As with all innovations, the date of introduction is less important than the time of intensive dissemination… Each installation period of a major wave has brought multiple innovations in the financial sector. During the deployment phase, spreading the paradigm to an increasing number of economic sectors may require these tools, as well as other projects tailored to emerging business practices. These may include innovations in types of currency, banking services, and credit or financial forms, which create favorable conditions for the comprehensive adoption of the new paradigm across each country and the entire world economy. They will be closely related to public policy measures that establish the rules of the game and the framework for banks and financial institutions."

When discussing the record of applying information and communication technology to finance over the past two decades, the above paragraphs offer two different interpretations that make both traditional fintech and crypto technology possible.

On one hand, Crypto is completely contrary to policy-driven financial reform and cannot be seen as a self-regulatory attempt by current financial institutions. Although crypto-financial services are becoming increasingly popular in certain social sectors of both developed and developing economies, they are still far from mainstream application.

On the other hand, Crypto is often precisely defined as "a new framework for banking and monetary practices," fully leveraging the unique technological and organizational capabilities created by the ICT revolution, arguably more powerful than traditional fintech. While traditional fintech is digitalized, it remains rooted in conventional business methods.

The core values and organizational principles of Crypto are free open-source software, decentralization, resistance to censorship, permissionless access, and a sufficient level of transparency that allows anyone with basic technical skills to audit and verify information.

Thus, another alternative conclusion to the above is that Crypto is capable of realizing the most ICT-native forms of financial services that exist today, thereby creating the potential for fundamental consistency within the global financial system under the information and communication technology paradigm.

Admittedly, by traditional financial standards, crypto-financial services remain marginal. However, crypto technology was inherently digitalized and globalized from its inception, making regulation and constraints through traditional state-embedded frameworks challenging. This presents considerable organic growth potential for crypto finance, depending on addressing some key barriers to its mainstream adoption.

Most importantly, these barriers include scaling with minimal trade-offs in security, decentralization, and privacy; improving unfamiliar user experiences; reducing the still relatively high risks of financial loss due to fraud, hacking, or software vulnerabilities; and ensuring necessary system stability.

The fact that regulating Crypto through traditional means is challenging does not mean that regulation will not play a central role in determining its future. The following aspects of the dynamic relationship between regulation and Crypto are particularly important:

First, traditional regulatory actions may encourage or hinder the development of Crypto and may continue to target centralized service providers, such as fiat currency access platforms, custodians, and exchanges, but also companies closely related to core software development or the marketing of specific crypto-financial protocols and services.

Second, Crypto serves as a compelling function, pushing traditional financial and regulatory institutions to explore new technologies and organizational models, with the growing interest in central bank digital currencies being the best example, attempting to integrate crypto with traditional finance and the processes of the real economy.

Third, Crypto expresses the idea that "code is law"—that is, software can replace traditional legal codes, not only providing legal grounds as legal texts but also increasingly replacing traditional legal codes in administrative and enforcement aspects by determining the types of actions that may be taken in a digitally saturated world. Behind Crypto's apparent anti-regulatory stance lies a vision of a world highly regulated by software protocols—this is the digital equivalent of bureaucratic procedural rules.

A common criticism of Crypto is that it rarely offers truly innovative financial products, merely recreating everything that already exists on the blockchain. To a large extent, this is true. However, aside from all the new software involved, the core innovation of crypto is not the product but the process and institutional innovations related to free and open-source software development, decentralization, open access, composability, programmability, automation, and distributed governance.

All these concepts can be seen as exemplars of the ICT revolution, contributing to the realization of "truly knowledge-intensive production and lifestyles," as Perez anticipated twenty years ago. Therefore, to fully understand the social significance of crypto, it is important to recognize its potential impact on digital organization and the coordination of internet-native societies and economies, not just in currency and finance.

VI. Crypto as Process and Institutional Innovation

The diffusion of technological revolutions is a decades-long process involving numerous revolutionary technologies, with clusters of innovative activities expanding and maturing around these technologies at different stages. There are some core general technologies that are continuously improved throughout the revolution (such as digital computers in the ICT revolution), as well as a series of disruptive technologies that only emerge after the early technologies have matured sufficiently (such as cloud computing and smartphones).

At the same time, as the revolution progresses, many technologies become commoditized, unit costs decrease significantly, and more and more people not only learn to rely on the new capabilities brought by technological innovations but also begin to view them as the only "normal" way of contemporary social life, work, and organization.

In the ICT revolution, "normal" is digital. However, over time, the exact nature of digital has undergone significant changes in the complex, co-evolutionary dynamics between technology, consumer behavior, and the activities of investors, private companies, and public institutions.

Crypto is one of the latest key developments, and this evolution is still ongoing, giving rise to a series of entirely new experiments centered around digitally tracked information on distributed ledgers. While the initial focus was on constructing currency in the form of cryptocurrencies, this experiment has rapidly expanded to reimagine how various other types of digital infrastructure and services are built, deployed, managed, and consumed.

Crypto as process innovation primarily focuses on information management (including formats, storage, transactions) and governance (including software and organizational development). In its most ambitious future vision, by harnessing the power of technology to make these processes more transparent, decentralized, and autonomous, Crypto aims to complement and, in some cases, fundamentally disrupt existing monetary, legal, and digital platform institutions. Thus, Crypto can be viewed in Perez's terms as an exemplar of the ongoing deployment phase of the ICT revolution, which includes the emergence of ICT-native organizational forms and the broader integration of existing and emerging institutions with the ICT paradigm. More specifically:

The openness and permissionless nature of public blockchains allow them to rival public infrastructure or utilities. However, while most public infrastructure is fixed in specific locations and typically directly or indirectly controlled by democratically accountable entities (i.e., governments), Crypto, as digital infrastructure, is inherently global and controlled by a decentralized private sector.

This does not mean that individual networks or services cannot or will not have relatively large footprints in specific regions, nor does it mean that democratic checks and balances or accountability are fundamentally incompatible with crypto. However, in principle, Crypto has had a global impact from the outset (depending on internet access) and is explicitly designed to resist centralized control by governments or any other groups or organizations.

Crypto creates a very open and dynamic environment for running digital governance experiments, not only in governing blockchain-based networks and protocols but also in using these networks and protocols as governance tools in other environments.

Crypto supports new forms of online coordination and community building, including decentralized autonomous organizations (DAOs), which were impossible before the invention of public blockchain networks. These communities and organizations are unique to the economic systems formed around assets, contracts, and relationships tracked through the blockchain.

In addition to blockchains and free and open-source software protocols, DAOs are essential institutional innovations for crypto technology. DAOs can be defined as organizations that combine automation with crypto-economic incentives and human collaboration. As digital organizations, most DAOs are not limited by specific locations and have an open policy regarding membership: anyone can join, contribute to the DAO, and gain rights and resources allocated by the DAO.

Ideally, the organization of a DAO is such that no individual can fully control its assets and governance, while collectively, participants can still make decisions and take actions to guide its development.

Despite the differing purposes and activities of DAOs, this naturally leads to various challenges faced by each DAO. The most pressing universal challenge can be summarized in the following question: How can DAOs fulfill key organizational functions (such as mobilizing and allocating resources, hiring contributors, distributing tasks and decision-making authority, resolving conflicts among different stakeholders, ensuring tax and legal compliance, etc.) while remaining true to the core principles of crypto?

To address this challenge, many projects are currently developing technical infrastructures and standards specifically tailored to the needs of DAOs. Meanwhile, DAO governance is becoming increasingly specialized, best practices are beginning to emerge, and the most influential DAOs are starting to attract the attention of regulators.

Assuming that blockchain networks and DAOs are immune to the typical failure modes of traditional institutions is sociologically naive. However, ignoring the genuine innovations brought about by the combination of blockchain with advanced ICT infrastructure is equally shortsighted: the ability to coordinate and transact globally by relying on decentralized digital networks rather than centralized legacy institutions. This not only represents the electronic information and communication technology revolution but, more broadly, is an evolution of technology toward globally networked automated systems.

VII. Conclusion

Inspired by the new Schumpeterian theory of shifts in technological economic paradigms, the above description of crypto can be summarized in the following six propositions:

• Crypto is not a technological revolution. It is another cluster of innovative activities supported by ICT (cryptography, computing, software, distributed networks, etc.) and can therefore only be classified as part of the ICT revolution.

• Cryptocurrencies are, to some extent, a passive, technologically populist reform movement. In terms of its critical stance toward existing institutions and the inherited economic power relations from the first half of the ICT revolution, Crypto is a typical representative of the early deployment phase.

• By supporting more ICT-native financial forms (digitalized, global, programmable), Crypto poses competitive challenges to existing financial institutions, accelerates their digital transformation, and drives financial and regulatory reforms tailored to the information age.

• Crypto is primarily a process and institutional innovation. By combining the existing capabilities of ICT with innovations in decentralized consensus and coordination mechanisms, Crypto enables ICT-native organizational forms, not just in currency and finance.

• Crypto represents a continuation of the administrative digitalization and automation triggered by the information and communication technology revolution. By achieving more decentralized and censorship-resistant forms of automation, Crypto opens new prospects for global governance and can thus be seen as a central theme of emerging automated political economies.

As the ICT revolution matures, its most enduring legacies are gradually revealing themselves. Whether Crypto is merely a peculiar sideshow, an important complement to centralized digital platforms, or a more fundamental and far-reaching breakthrough with existing institutions remains to be seen.

However, regardless of Crypto's ultimate role, future social structures will undoubtedly become more digitally mediated, globally integrated, and automatically replicated. Therefore, the challenges of governing society will increasingly overlap with the challenges of governing digital technology systems, which will outlast their creators and their objectives, empowering and constraining future generations.