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Blockchain Economics

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Blockchain Economics

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Contact information: MelanieSwan.com/contact.html.

 

Blockchain Economics book, 2019

 

Topics and References in Blockchain Economics:

 

Asset Registries. What is the potential economic impact of blockchain-based asset registries used to record, transfer, and verify asset ownership (home, auto, stocks, bonds, mortgages, and insurance) as well as to issues and preserve the integrity and authenticity of documents and records (e.g. passports, visas, driver’s licenses, birth and death certificates, voter registration, contracts, wills, patents, other legal documents, and medical records)?

 

Automation Economy. How can economic principles be used to foster an orderly transition to economies with a greater degree of automation and technological unemployment (jobs outsourced to technology): top-down design, bottom-up evolution, policies to incentivize certain outcomes? What are the economic advantages and drawbacks of GBIs (guaranteed basic income initiatives)? What does the future of work look like in a blockchain automation economy?

 

Competitive Markets and Resource Allocation. How are competitive markets and resource allocation instantiated in blockchain smart network economies? How do markets produce information to aid in the distribution of resources? Is the definition of markets (liquidity, exchange, price discovery) any different in the blockchain economy? Are other resource allocations methods now made possible?

 

Consensus Algorithms. What are the economic impacts of the different consensus algorithms used in distributed ledger technology? What are the right features of a consensus algorithm that would be both Byzantine Fault Tolerant and deliver Visa-scale processing (2000 transactions per second; Bitcoin currently processes on the order of 7 transactions per second)? Proof of Work (Bitcoin) is expensive and may not be the right solution for Visa-class transaction networks. Proof of Stake (Ethereum, Tezos, DFINITY, Tendermint/Cosmos, Stellar) is a complicated scheme of tiered voting by staked participants that partially seems like a reenactment of the agent-based power structures that distributed ledgers are trying to avoid. Are there other methods, still supported by mathematics and physics, that might more fully instantiate the consensus in the computational system?

 

Credit. What is the potential impact of blockchain technology on credit markets? Could there be open-source FICO scores, blockchain-based credit bureaus, and blockchains as the backbone of international credit agencies? What are the advantages and drawbacks of opening up credit markets to retail customers on a global basis? Individuals do not have to rebuild credit histories when living in different countries, and might access global credit markets as borrowers, but not everyone might want to join a global credit system (although one that is more transparent and user-controlled might be more welcome).

 

Cryptographic Asset Registries. What is the potential economic impact of blockchain-based asset registries being used to record, transfer, and verify asset ownership (e.g.; home, auto, stocks, bonds, mortgages, and insurance), as well as to issue and preserve the integrity and authenticity of documents and records (e.g.; passports, visas, driver’s licenses, birth and death certificates, voter registration, contracts, wills, patents, and medical records)?

 

Debt and Capital-raising. What does blockchain technology imply for the structure of capital-raising? Could capital-raising become more varied and granular? Traditionally, financing has been dictated by cost and economies of scale. Capital-raising has been in the uniform structure of a high-cost large lump sum effort, in which, if approved by investors, a large chunk of capital is disgorged and taken on as debt by the recipient (whether individual, corporation, or government). Debt burden (particularly medical and educational) is a significant societal problem at present. How could blockchain models help? Could there be more varied models of funding that link to more granular milestones for both additional capital-disgorging and debt-repayment along the way? Could access to capital come to be seen as a basic human right?

 

Decision-making. How might individual and group decision-making about goods and services production and consumption change in blockchain smart network economies? Traditionally, decision-making has been vested in human agents. Economic theories have attempted to describe the different kinds of observed behaviors; some of these theories include the agency problem, monopolies, cartels, cronyism, and game theory. In a blockchain economy, code-based entities (i.e. smart contracts, DACs (Distributed Autonomous Corporations; i.e. packages of smart contracts)) may also participate as market agents who make their own decisions and function independently in the economy. What are the implications for modeling the decision-making of code-based entities? For example, what is the game theoretic landscape of code-based entities? What are the consequences of a blended economy of both human and technology-based agents?

 

Discounting. Price discounting is a frequently used technique in a variety of areas of economic activity, for example forward-selling crop yields with 20-30% discounts to purchase supplies in the current time frame. How might practices concerning these de facto futures contracts (“DIYfutures”) that hedge risk in a coarse-grained manner change in a world of computational transactions? How could SME farmer and merchant attitudes toward uncertainty shift as a result?

 

Discovery. How are smart network goods and services discoverable by human and computation-based agents? How can smart networks deliver a new tier of qualitative goods and services targeting consumer aspirations beyond material survival needs (i.e. intangible social goods such as trust, choice, and autonomy)?

 

Externalities. What kinds of externalities and unintended consequences might arise in distributed ledger economies? What kinds of frameworks might be used to anticipate and manage unforeseeable shocks? What kinds of incentives are developing and how to these correspond to good-player or malicious-player behavior? How might cryptographic asset structures and smart contract futures protect against shocks? Is the overall implication of distributed ledgers that economies are more managed or are more free?

 

Fundraising. ICOs (initial coin offerings), token sales, and crowdfundings have changed the landscape of startup fundraising. The highly-connected global network economy has allowed nearly $2 billion of to be raised with ICOs as of August 2017 (Higgins, 2017). In the U.S., the SEC issued retroactive guidance that ICO offerings may be deemed securities, and thus subject to regulation (SEC, 2017). What are the implications of ICOs for the greater economy? Are other new methods of financing implied by smart network economies? For example, could there be automatic capital (markets so dependably liquid that there is “just-in-time” capital) that is pre-specified by investors to flow into qualifying projects on demand when they are posted and verified (like Kickstarter with smart contracts).

 

General Economic Principles: What is the implication of any of these other economic topics in blockchain smart network economies? Supply and demand; supply shocks; costs and benefits; rational expectations; price controls; externalities; unintended consequences; tragedy of the commons; free-riding; network effects; land, labor, and capital; free markets, government intervention, mixed economies; specialization, division of labor, production possibilities frontier; competition, collaboration, opportunity cost; incentives, rational choice theory.

 

Global Impact. On the one hand, blockchains could be a crucial tool for financial inclusion. Poverty might be alleviated more quickly with more opportunities for Grameen Bank-type microfinance loans, Heifer cows, Prosper loans, or a new class of development good, education smart contracts (like Kiva for literacy). Blockchains are a leapfrog technology in that it does not make sense to build out brick-and-mortar bank branches to the last mile of consumers in an era of digital financial services. Digital eWallets could be an expedient way to reach the two billion “unbanked” in the world (Pricewaterhouse Coopers, 2016). Likewise the impact of blockchain-based asset registries in emerging economies could be substantial. The World Bank estimates that 70% of the world’s population lacks access to land titling (Heider and Connelly, 2016), where property transfer systems have been identified as a crucial step for economic development (de Soto, 2003). On the other hand, connected smart network markets might mean that global risk is more concentrated. Others warn of precarization, as everyone worldwide must participate in the global labor economy, and might be constantly worried about their worth, and more sensitive to shocks in a marketized and financialized world with less emphasis on humanity.

 

Governance Services. What is the potential economic impact of a shift in our stance toward authority from “being governed” to “selecting governance services”? What are the economic consequences of governments reinventing themselves with distributed ledger services such as digital land title registries, voting systems, and blockchain-based public records repositories?

 

ICO Funding. ICOs (initial coin offerings), token sales, and crowdfundings have changed the landscape of startup fundraising. The highly-connected global network economy has allowed nearly $2 billion of to be raised with ICOs as of August 2017 (Higgins, 2017). In the U.S., the SEC issued retroactive guidance that ICO offerings may be deemed securities, and thus subject to regulation; and also the exchanges upon which they trade (SEC, 2017). What are the implications of ICOs for the venture capital industry and for the greater national and global economy more generally? Are other even more radical methods of financing implied by blockchain economics? For example, could there be automatic capital (markets so dependably liquid that there is “just-in-time” capital) that is pre-specified by investors to flow into qualifying projects on demand when they are posted and verified (like Kickstarter with smart contracts)?

 

Income. What is the impact of distributed ledgers on income distribution? How might distributed ledgers influence how the ownership of the factors of production is orchestrated? What are implications for income inequality and the digital divide? What policies might correspond to the kinds of income distribution that is desirable in society? Is a post-income society possible? What might people care about, compete for, and use as a proxy, if not income? What are the economic advantages and drawbacks of GBIs (guaranteed basic income initiatives)?

 

Income Inequality and Factors of Production Ownership. What is the impact of blockchain economics on income inequality, the digital divide, and factors of production ownership?

 

Industry-specific Impact: How are blockchains likely to develop in different industries? Which industries are likely to develop first, what are the obvious solutions (e.g.; international trade, freight forfaiting, supply chain management, bank transfer), and what might be more challenging (health EMRs)? How might specific industries reinvent themselves with blockchain technology? How can distributed ledgers change the economics of different industries?

  • ·         Financial services: single ledgers shared among banks for asset transaction and clearing
  • ·         Energy markets: real-time demand analysis, energy production, storage, and transmission
  • ·         Enterprise software: smart contracts embedding business logic and automating transaction execution amongst industry participants
  • ·         Internet of things: creating marketplaces of services directly between sensors and devices (M2M economy), automating workflows, coordinating micro-billing
  • ·         Health care: electronic medical records, imaging analysis, insurance billing claims
  • ·         Media: decentralized management and tracking of copyrights, increasing efficiency

 

Information. How do traditional means of understanding the operations of the economy through information asymmetries apply in blockchain economics?

 

Institutions. If a computationally-based society implies a diminished brick-and-mortar institutional footprint, what is the future role of institutions? Is it to manage contention? Is it to connect people for the purpose of transactions? Is it to lower uncertainty in society? To what degree is trust appropriately vested in institutions and how might it be recouped when lost? How might economist Douglass C .North’s theory of institutions, economic change, and transaction costs (2010) be manifest or reinterpreted in the blockchain economy?

 

Institutional Investing. What is the potential economic impact of institutional investor demand for exposure to the cryptographic asset class? The total market capitalization of cryptocurrencies is $157 billion as of September 2017, and per one forecast, estimated to grow to $2.3 billion by 2021.[1]  This means an exigency for institutional investors to allocate to the cryptographic asset class. Exposure could be through large positions ($20m+) coordinated by institutional exchanges, options exposure (if LedgerX’s CFTC-approved options launch on the CBOE or other exchanges), and ICO investing. Given potential investor demand, are speculative bubbles unavoidable, or how could a more orderly development of the cryptographic asset market ensue?

 

Land-titling. What are the economic consequences of cryptographic asset registries in the domain of land ownership? Are distributed ledgers merely an administrative detail, or do they imply a shift in the power structure of the way that high-value assets like land are transferred?

 

Long-tail (Personalized) Economics and Governance Services. Blockchains allow one-size-does-not-fit-all options in economic services. For example, instead of a cookie-cutter 30-year mortgage, a borrower might prefer a 22-year mortgage that better corresponds to personal life events such as a planned home downsizing once children are grown. Likewise municipality-provided services could be tracked more precisely to match public goods consumption with payment. What are the potential economic advantages and drawbacks of personalized economic and governance services? Are they likely to develop?

 

Measurement Metrics. What measurement metrics are relevant for distributed ledgers and digital network economies? GDP? Intangible social goods? How is measurement tied to behavior? How can policy and measurement be effective tools for producing outcomes?

 

Monetary Systems. What are principles by which to manage a national economy and fiat currency system in a world marked by an increasing amount of economic activity taking place in global borderless cryptocurrencies? How is the market for competitive currencies developing? How can fiat currencies with arbitrary controls compete with cryptocurrencies that have pre-specified programmatic features that cannot be changed and thus may engender more trust? What are the pros and cons of Central Bank Digital Currencies (CBDC)?

 

National Governments: Specialization and Regulatory Arbitrage. What are the economic consequences of countries engaging in regulatory arbitrage as a specialization strategy? One example is Gibraltar’s DLT (Distributed Ledger Technology) Registered Entity program (a response to regulated ICOs in the U.S.). What do programs such as Estonia’s e-Residency mean for national governments and worldwide businesses?

 

Network Economics. Can a comprehensive theory of network economics and smart network economics be articulated that specifies key features: digital goods and other attributes?

 

Open-source, Commons Goods, and Utilities. What are the different classes of digital goods and services in the smart network economy? How might open-source commons goods be specified? Are there new utility goods such as cloud processing and network storage? How are digital agents to be treated (e.g.; oracles, digital notaries)? What pricing, incentive, and reward models are appropriate for developing foundational network goods and supporting their maintenance? Blockchains are a form of a “network administrative good” in that they serve as a network accountant, verifying and logging transactions, and maintaining the ownership ledger. The decentralized storage market (providers such as Storj, MaidSAFE, and Sia) is an example of a new category of global public good, and possibly a utility, made possible by blockchain technology. Likewise cybersecurity, network storage, and cloud processing are growing “utility” industries in the digital network economy. What are appropriate regulatory models for smart network utilities, especially since their physical nexus and geographic reach is transnational?

Can there be free-riding and the tragedy of the commons with open-source digital goods?

 

Pricing. What is the economic effect of a world with highly dynamic pricing and smart resource self-pricing? Smart resource self-pricing is digital goods such as electrical energy that detect supply and demand directly from the network market in which they participate and price themselves accordingly. For example, an energy generation contract might have some basic intelligence built into it to determine the best time of day to put energy onto the grid, when prices are higher. What is the function of pricing more generally in distributed ledger economies? Does price continue to fulfill its traditional roles of serving as an information mechanism, a barometer of supply and demand, and an indication of competitive value? Are the same kinds of pricing models relevant in distributed ledger economies (i.e.; one-time sale, licensing, software as a service, transaction cost, volume discount, etc.)? How might pricing as a proxy for a variety of economic functions be reflected in distributed ledger economies?

 

Public and Private Chains. How are public and private chains developing and what are the economic impact, and risks and benefits of each model? Private chains are those in which user identity is known, for example industry-specific chains in which JP Morgan is clearing trades with Goldman Sachs. Public chains are those in which user identity is pseudonymous and possibly made even more private with cryptocurrencies like Zcash that use zero-knowledge proofs as the consensus mechanism. How is identity linked to economics?

 

Regulation and Legal Frameworks. How are cryptocurrencies to be regulated? How do legal principles and domains apply to transnational cryptocurrencies? What are the economic consequences of banning or embracing new technologies like cryptocurrencies? How can regulators use blockchain technologies as RegTech monitoring tools to assist with their supervisory activities? (RegTech is regulatory technologies, technologies that help with regulatory monitoring and compliance; analogous to FinTech (financial technologies)). How are FinTech, RegTech, InsureTech, etc. coming together in the computational finance domain?

 

Risk. What are the risks of blockchain technology (e.g.; technological (scalability), cybersecurity (hacking), regulatory and legal, perception, sustainability) and their economic implications? What new tools for managing uncertainty do distributed ledgers imply? What are distributed ledger models and methodologies that might help in assessing the technical feasibility, usability, security, risks, and impact of blockchain-enabled business models on the economy and society? How might systemic risk in peer-to-peer blockchain systems be evaluated?  

 

Scarcity. The scarcity of material resources was the biggest historical constraint in the production of goods. In some sense, a mindset oriented toward scarcity has dictated the entire structure of classical economics. However, digital goods are fundamentally different in that the marginal cost of the storage, distribution, and consumption of digital goods is zero. But scarcity is still a factor in the initial production of digital goods, and in attracting consumer attention. Therefore is scarcity impossible to escape, and perhaps a fundamental factor in economic systems irrespective of their materiality? Or can economics get beyond scarcity? What is the relation between distributed ledgers and scarcity? What is the salient unit of production in a digital goods smart network economy and how is scarcity a factor?

 

Size of the Firm. Inspired by Ronald H. Coase (Coase, 1937), what is the optimal size for coordinating productive activity in the economy? On one hand, distributed ledgers imply shifting asset transfer activity to the computational domain, and therefore a diminished brick-and-mortar footprint. Less friction in the transfer of goods means that less infrastructure is required to make it happen. The current infrastructural apparatus has been tailored to the current cost structure, but blockchains might allow for something leaner. On the other hand, blockchains also connote the possibility of a new tier of much larger-scale projects which might require very large scale infrastructure and coordination. These projects could include million-member genome banks, global energy production, storage, and distribution markets, fully-embedded business logic orchestrated by machine-to-machine smart contracts, real-time voting systems, and a much larger commercial space industry (asteroid mining, terraforming, settlement, and tourism). How can Coase’s theorems be interpreted as a blueprint for future project development?

 

Utilities, Commons Goods, Public and Private, Global and Local. Should different classes of digital goods in the smart network economy be delineated? For example there are information goods (oracles, digital notaries); utilities, and administrative, coordination, and network maintenance goods; and the network infrastructure itself. What are “utilities” in the smart network economy? Blockchains are an administrative good in that they serve as a network accountant, verifying and logging transactions, and maintaining the ownership ledger. The decentralized storage market (providers such as Storj, MaidSAFE, and Sia) is an example of a new category of global public good, and possibly a utility, made possible by blockchain technology. Likewise cloud storage and cloud processing are important and growing “utility” industries in the digital network economy, as well as cybersecurity. What are appropriate regulatory models for smart network utilities; how similar are they to physical world utilities?

 

Value Creation. How might distributed ledger technology be employed to better align value creation and rewards? Could smart contracts track and remunerate the downstream use of open-source software resources such as the Linux kernel? Foundational resources are crucial but well-formed models for their financing and acknowledgement do not exist.

 

References

Disclaimer: references are not intended to emphasize any particular school of economic thought over another.

 

           Blockchain Theory and Economics

Coase, Ronald H.  1937. The Nature of the Firm. Economica. 4(16): 386-405.

De Soto, Hernando. 2003. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.  

Heider, Caroline, and Connelly, April. 2016. Why Land Administration Matters for Development. World Bank. http://ieg.worldbankgroup.org/blog/why-land-administration-matters-development.

Higgins, Stan. 2017. $200 Million in 60 Minutes: Filecoin ICO Rockets to Record Amid Tech Issues. Coindesk.

Nakamoto, Satoshi. 2008. Bitcoin: A Peer-to-Peer Electronic Cash System. https://bitcoin.org/bitcoin.pdf. (original white paper)

Pricewaterhouse Coopers. 2016. The un(der)banked is FinTech's largest opportunity. DeNovo Q2 2016 FinTech ReCap and Funding ReView.

SEC. 2017. “SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities.” SEC Press Release. https://www.sec.gov/news/press-release/2017-131.

Swan, Melanie. 2015. Blockchain: Blueprint for a New Economy. Sebastopol: O’Reilly Media.

--------. 2016. “Decentralized Finance: Blockchains, Prediction, and Valuation.” The Economist. Finance Disrupted, New York NY. October 13, 2016.

--------. 2017. “Is Technological Unemployment Real?” In Surviving the Machine Age: Intelligent Technology and the Transformation of Human Work. Eds. James Hughes and Kevin LaGrandeur. London: Palgrave Macmillan.

--------. 2017. “Is the Blockchain Economy Ushering in a New World Economic Order?” Bitcoin Magazine. https://bitcoinmagazine.com/articles/op-ed-blockchain-economy-ushering-new-world-economic-order/.

--------. Submitted. “Economic Theory implications of Blockchain.” Technology Innovation Management Review. http://timreview.ca/.

Swan, Melanie and de Filippi, Primavera. Forthcoming. “Introduction.” Special Journal Issue: Toward a Philosophy of Blockchain. Metaphilosophy. New York: Wiley & Sons.

Szabo, Nick. 1996. “[Mental Transaction Costs] The Mental Accounting Barrier to Micropayments.” http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/micropayments.html

Takagi, Soichiro. 2014. Research Note: An Introduction to the Economic Analysis of Open Data. The Review of Socionetwork Strategies. 8(2):119–128.

--------. 2017. Editor. Chijo (Intelplace). No.121. Center for Global Communications (GLOCOM), International University of Japan.

Tasca, Paolo. (2015). Digital Currencies: Principles, Trends, Opportunities, and Risks. Bundesbank and ECUREX Technical Report. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2657598.

Waters, Nathan. 2017. “Blockchain Commons: The End of All Corporate Business Models: How to create value in the coming era of decentralization.” Medium. https://medium.com/peerism/blockchain-commons-the-end-of-all-corporate-business-models-3178998148ba.

 

Competitive Currencies, Free Banking

Friedman, Milton. 1969. The Optimum Quantity of Money and Other Essays. Chicago: Aldine.

Hayek, Friedrich. 1976. The Denationalization of Money – The Argument Refined. London: Institute of Economic Affairs.

HM Government of Gibraltar. Proposals for a DLT Regulatory Framework. http://www.gibraltarfinance.gi/downloads/20170508-dlt-consultation-published-version.pdf?dc_%3D1494312876.

Selgin, George. 1988. The Theory of Free Banking: Money Supply Under Competitive Note Issue. London: Rowman & Littlefield.

Smith, Vera C. 1990. The Rationale of Central Banking: And the Free Banking Alternative. University Park IL: Liberty Fund.

White, Lawrence H. 1996. Free Banking in Britain: Theory, Experience and Debate 1800-1845. London: Institute of Economic Affairs.

 

Digital Goods and Network Economics

Benkler, Yochai. 2007. The Wealth of Networks: How Social Production Transforms Markets and Freedom. New Haven: Yale University Press.

Illing, Gerhard and Peitz, Martin. 2005. “Understanding the Digital Economy: Facts and Theory Introduction.” CESifo Econ Stud. 51(2-3):187-188.

North, Douglass C. (2010). Understanding the Process of Economic Change. Princeton NJ: Princeton University Press.

Quah, Danny. 2003. "Digital Goods and the New Economy." London School of Economics. http://eprints.lse.ac.uk/2236/1/Digital_Goods_and_the_New_Economy.pdf.

Rifkin, Jeremy. 2015. The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism. New York: St. Martin's Griffin.

 


[1] http://www.marketwatch.com/story/blockchain-technology-market-growing-at-615-cagr-to-2021-2016-10-13-22203054

 

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