Instant Settlement: The Construction Industry

As I delve deeper into the realm of Bitcoin and the Lightning Network, I am consistently struck by the potential benefits it holds for humanity. The realization of how inefficient and broken our societal structures are due to the limitations of fiat currency becomes increasingly apparent to everyone. While the spotlight often shines on the monetary aspects of Bitcoin, my exploration into the Lightning Network, spurred by my work at Breez and our company’s visionary goals, has unveiled an aspect that remains largely unspoken. This hidden gem promises significant benefits for humanity, yet it requires the careful alignment of various building blocks before its full potential can be realized.

I will try to illustrate individual pieces of the vision that I have for changing human behavior through the Lightning Network. Those will be examples of different visions for different industries, how they will be disrupted from their current operations, and ways of delivering the benefits of Lightning to each one. I’m not sure how many industries I’ll talk about because the more I think about it, the more I see that it’s connected to everything, just like Bitcoin. But I will cover as many as needed so the disruptive potential can resonate with more people.

Disclaimer: I am not an expert in any particular industry so the examples can be improved even more from people who are experts in them. The idea is to get the disruptive potential across so people can build on them; so do not get hung up too much on the details. 

The Current Problems In Construction

First I need to define the problems, inefficiencies, and frictions before going into the disruption and the solution. I will talk about a construction project for a building because it is really easy to grasp for this example. There are a few groups of people in the industry that are relevant for this example: Buyers of the building, Planners (these are the people that are responsible for the visual, functional, structural, and mechanical aspects of the building – Architects, Designers, and Engineers), construction company owners, supervisors, and construction workers. Within the existing system, each of these stakeholders operates with distinct incentives aimed at optimizing individual gains, resulting in a complex interplay of motivations and a partial overlap between them.

The incentives that we will keep in mind are – quality, time, and money.

The buyer wants the building to be built to the highest quality for the least amount of time for the agreed price with the construction company.

The planners will create their plans but they do not care if the building is built at all if they get paid money just for drafting the plans.

The construction company wants to build it as fast as possible for the lowest price (often meaning lowest quality) possible at the agreed-up price.

The supervisors could be individually incentivised based on bonuses and penalties from the construction company. If they have a penalty for subpar work that will be their incentive to want the highest quality so they can approve it easily. If they have a bonus for early completion they will optimise the work to be fast and would not care so much about the quality. Even if they have both incentives in place they are still partially invested. Their main income is something separate, those are just bonuses.

Construction workers want to build as slowly as possible and they do not care so much about the quality. They receive money for time and not actual work so the slower they build it the more profit for their efforts they get.

Looking at the individual incentives of each party involved, it becomes evident that people in the construction industry are consciously or unconsciously pursuing divergent goals. To illustrate, imagine a sports game where different players are motivated by distinct incentives: defenders aiming to put the ball outside the field, midfielders prioritizing maximum passes, attackers focused on scoring the most goals, goalkeepers rewarded for saving the most shots, and coaches for the most words shouted from the bench. You can imagine that will not be an optimal team performance when they step on the field. The team winning should be prioritized over any individual player’s performance.

Constructing Unity: Resolving Frictions and Realigning Stakeholders in the Building Industry

In addition to these incentive misalignments, various other factors contribute to friction in the construction industry. Notably, there is an issue with workers’ handling of tools and machinery, which are typically owned by the construction company. This lack of ownership often leads to inadequate care, resulting in accelerated tool wear and increased costs for the company. Tensions between workers and the company may escalate, with instances of tools being intentionally damaged or stolen out of frustration. Moreover, disparities in tool quality can lead to resentment among workers, questioning why some have access to new and better tools while others are assigned worn-down equipment.

Compounding the challenges in the construction industry is the issue of changes requested by the owner after a structure is built. Small alterations, such as moving a window half a meter to the left, do not result in additional payment, and the construction company absorbs these costs. This practice not only disrupts the workflow but also leaves workers discontented as they invest effort in redoing tasks without receiving any extra compensation.

Furthermore, when planners fail to design a component correctly, and builders construct it to specifications only to face subsequent issues, there is a notable absence of accountability on the planner’s part. Instead of rectifying their mistakes, planners are often re-hired to redesign the element properly, creating an additional set of plans. Paradoxically, this process results in the planner earning more money, despite their initial error. The burden of the mistake is shifted to others, emphasizing the lack of accountability in the current system just because there is a disconnect between the construction task completion and payment.

The construction of a building is a time-intensive process that spans beyond a few hours, and to manage the substantial financial risk involved, construction companies typically structure payments in installments. However, this approach is not without challenges. It introduces a dilemma where the construction company may be constructing portions of the project without having received full payment, or the buyer may be paying for elements that have not yet been built. This inherent tension triggers a continuous cycle of negotiation and renegotiation between the construction company and the buyer, revolving around what aspects are included in the overall price and what falls outside of it. This ongoing dialogue underscores the complexities and uncertainties inherent in the payment structure within the construction industry.

The root cause of the multifaceted issues in the construction industry lies in the lack of alignment among stakeholders. Drawing inspiration from Sun Tzu’s wisdom in The Art of War “He will win whose army is animated by the same spirit throughout all its ranks.” You can’t expect to win in any project if the whole team is facing in different directions, with different motivations and goals.

Bitcoin and the Lightning Network present an opportunity to bridge this gap, providing instant settlement for work done–a transformative shift that could foster a more unified and harmonious approach within the construction industry. To address these issues, a potential solution emerges with the advent of Bitcoin and the Lightning Network. Unlike traditional payment systems, these technologies eliminate the delay between completing physical tasks, such as placing a brick, and receiving compensation. This instantaneous reward system has the potential to align the interests of all involved parties, fostering a shared purpose and collaborative effort towards common goals within the construction sector.

Now that we have this technology for instant settlement like never before, the benefit of getting paid over Lightning for all the physical tasks will drastically reduce the time delay and it will have a ripple effect in so many ways. In my role at Breez, I have a unique vantage point, witnessing the dedication of Lightning developers as we and other companies strive to make this technology effective. Now let me paint a picture of what will happen in the construction industry but outside of the fiat system and plugged into the Lightning Network.

Settling the payment instantly when the work is done – changes everything.

The Workers’ Reputation and Compensation

I am envisioning a bottom-up transformation, where workers in the construction industry would transition from receiving payment for time working to being compensated for completed tasks. Whether it’s constructing a wall, assembling windows, or installing the electrical system on a floor, each task earns instant payment. This shift eliminates the need for time-based bonuses, as workers are motivated to complete as many tasks as possible to accumulate satoshis. The focus for supervisors transitions solely to quality, with payments contingent on meeting established standards.

By operating on a task-by-task payment model, companies no longer need to maintain a workforce on the payroll. Instead, tasks are posted for upcoming construction, and individuals can apply, complete tasks, and receive immediate payment for each execution. This approach minimizes the risk of overpaying someone for subpar or slow performance. There’s reduced uncertainty in the payment for the worker. Non-payment results in discontinued work from the worker, creating a self-regulating system.

As workers accumulate more tasks, their skills improve, enabling faster task completion. A reputation system, documenting task history including time efficiency and quality, develops. This reputation becomes a valuable asset, making it easier for skilled workers to secure tasks and approval. To be clear the reputation will be a history of all the tasks that they did, the time it took them, what was the quality at the end, did they have to redo their work to meet the desired final result. Ultimately, this shift to a task-focused, instant payment system transforms the dynamics of the construction industry, fostering efficiency, quality, and a merit-based workforce.

Tools of Empowerment – Unleashing Efficiency and Accountability

With compensation decoupled from time, individuals have a strong incentive to expedite tasks. The optimal way to achieve this acceleration is by utilizing proper tools in maintained and in prime condition. In a Bitcoin standard environment, individuals can progressively invest in superior tools, fostering a personal incentive to acquire and own these resources. In a competitive scenario where two workers apply for a task, the one equipped with superior tools gains a significant advantage, completing the task much faster than their counterpart.

Alternatively, if a company provides tools for a task, a parallel assignment system is implemented–just like the task itself, tools are designated to specific individuals. To increase accountability, workers must submit a deposit upon taking company-provided tools. This deposit substantially heightens their responsibility for the tools’ maintenance. Upon task completion, if the worker breaks the tools, the company utilizes the deposit to procure replacements, leaving the damaged tools with the worker. Returning the tools in the same condition prompts the company to refund the deposit and reclaim the tools. If the company declines to refund the deposit, the worker retains the tools, creating a strong incentive for workers to invest in and use their own tools, rather than relying on company-owned equipment. This transformative approach encourages a culture of personal responsibility and ownership in tool usage.

In the current system, organizing workers presents a significant challenge. Oftentimes one person is actively working while eight are merely observing. Supervisors are burdened with the task of monitoring and optimizing resource allocation, differentiating between those slacking and those hustling to expedite the job. However, the system I propose transforms this dynamic. Workers become self-organizing entities, driven by the prospect of earning 100% of the “sats” for an individual task. In this new paradigm, workers collaborating on a task receive a shared payment, but the efficiency gains from self-organization can significantly reduce the time required. A senior worker might choose to take on a larger share, say 70%, while assigning a less experienced colleague to handle less skilled aspects – the grunt work. This creates an equitable distribution of payments for the completion of the work. Alternatively, if a worker possesses specialized tools, they may negotiate a larger portion of the payment. Inefficiently organized teams face the risk of not securing future tasks, compelling them to either refine their coordination or face unemployment. The role of the supervisor is streamlined, focusing solely on the completion of tasks with the stipulated quality standards, rendering much of their traditional responsibilities obsolete with this framework.

Blueprints in Action: Real-world Accountability and Hands-On Expertise

In the proposed system, planners undergo a fundamental shift in their compensation structure. While they receive an initial 20% (the percentage is an example, it could be any percent) payment upon completion of the blueprint, the majority of their compensation is contingent on the successful execution of the construction project according to the specifications outlined in their plans. This transformation aligns their incentives with the real-world outcomes of the construction process.

To ensure accountability and quality control, planners are required to be physically present on-site during the construction phase. This hands-on involvement in overseeing the translation of their blueprints into reality serves a dual purpose. Not only does it allow them to verify that workers are adhering to the plan, but it also empowers them to make real-time adjustments and improvements based on practical insights. This direct engagement with the construction process fosters a deeper understanding of what works in practice, accelerating the planners’ learning curve.

Planners protect their work and stay committed by using cryptographic signatures on their blueprints and confirming their role in the project. If the buyer terminates the contract while following the agreed-upon plan, planners should receive the remaining 80% of their payment. This approach ensures planners are more than detached blueprint creators; they actively participate in turning their designs into reality. This eliminates the practice of charging for plans without actual construction, emphasizing the goal of completing the project, not just receiving payment.

Balancing Autonomy and Expertise for Seamless Project Completion

In this future with instant settlement, construction companies will play a crucial role in overseeing the entire project. Despite the increased self-organization of workers and greater responsibility on planners, there remains a need for a centralized entity to ensure the seamless completion of the entire construction process. This entity will be responsible for coordinating and tracking all resources required for each stage of the construction, as well as attracting the right individuals to perform the tasks at the right time. The beauty is that a centralized entity could be the buyer of the finished construction. This way they are not going to pay a company to supervise and leverage this self-organizing system for completing the project themselves.

While many aspects of this oversight could be managed through a comprehensive app, the complexity of construction projects may require the expertise of a dedicated construction company. Buyers, who may not be experts in construction management, are likely to prefer hiring a professional company to ensure the successful delivery of the project. Similar to the current model of lightning nodes, where anyone can set up a node but some prefer to pay fees for professional management, buyers may opt to pay construction companies for their expertise in managing the project efficiently.

While some individuals might choose to use the app and manage the construction process themselves to avoid additional fees, they would also bear 100% responsibility for the result. The role of construction companies, in this scenario, becomes that of experts who streamline the construction process and provide a valuable service for those seeking a more hands-off approach.

Task-Centric Harmony – Streamlining Construction Projects with Instant Settlements

In this model, the construction company essentially functions as a supervisor overseeing the project, and all individuals involved act as freelancers responsible for specific tasks. Supervisors focus on checking and ensuring the quality of completed tasks. If a task meets the required standards, supervisors mark it as completed, photograph and report it in the app, allowing the individuals involved to receive their instant payments in satoshis and move on to the next tasks.

The payment-per-task system not only streamlines the workflow but also reduces the risks associated with large payments for the overall project. For example, if a buyer is unfamiliar with a construction company’s reliability in maintaining high-quality standards, they can conduct daily tours with supervisors. Based on the quality observed, the buyer approves and transfers funds for specific tasks that will be made for the next day.

If the buyer decides to make changes or request a task to be redone, they must consider the associated extra cost and time delay. The construction company provides a clear price for each additional task, and upon the buyer’s agreement, the settlement occurs instantly. This approach ensures transparency and fair compensation for everyone involved in the project.

The flexibility for any party to terminate their relationship at any time significantly enhances the stability of the entire system. The worker can stop working if he is not paid for their last task. The supervisor or planner can refuse to pay them because the worker can’t deliver quality. The buyer can refuse to pay for the same reason, or if they feel they are overpaying, they hire another company. The company can stop working because they did not receive the payment for the tasks completed that day.

The risk of discontinuing value/service delivery at any point or level is significantly lower because there is minimal prepayment, and minimal work is done before receiving payment. This ease of termination fosters a dynamic system where all entities involved are highly motivated to optimize their performance and deliver construction projects at the agreed-upon quality or even surpassing those standards. The ability to swiftly address concerns and make changes contributes to a more efficient and accountable construction process compared to traditional fiat-based systems.

This is the effect of introducing instantly settled payments and split payments in the construction industry. A person who is in the construction industry can paint an even more accurate picture of how to optimize it than me because he knows so many more details that the instant settlement dynamic can solve than I ever would. The key now is for someone within the industry to recognize the direction in which the future is heading and take the initiative to develop an app that can seamlessly coordinate all stakeholders. Fortunately, adapting existing apps from the fiat system to incorporate the Lightning Network has become remarkably straightforward, requiring minimal comprehension of Bitcoin or the Lightning Network, much like the conventional banking system. The focus shifts to leveraging instant settlement payments to resolve long standing issues.

Now let’s go build that app.

This is a guest post by Ivan Makedonski. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.