Working paper – Page 2

Interoperability as a critical design choice for central bank digital currencies

Abstract: Interoperability is a key economic and technical consideration for payment systems. This paper explores the implications of interoperability for central bank digital currencies (CBDCs). CBDCs are digital representations of central bank money. A critical question is how those digital representations can interoperate with other CBDCs, private blockchains, and permissioned blockchains. By comparing prevailing CBDC interoperability models with interoperability in blockchain ecosystems, the paper finds that CBDC architectural choices are deeply intertwined with policy choices in a way not yet understood by the scholarly and policy literature. Widely discussed CBDC policy questions (such as whether a CBDC should be retail or wholesale, whether interest should be paid on CBDC holdings, and how privacy should be protected) are better understood as choices around interoperability. The paper concludes by connecting the CBDC policy debate to a parallel debate about fiat-backed stablecoin architecture and governance.

Trust and Governance in Collective Blockchain Treasuries

With Darcy WE Allen and Aaron M Lane. Available at SSRN

Abstract: Blockchain treasuries are pools of digital assets earmarked for funding goods and services within a blockchain ecosystem that have some public purpose, such as protocol upgrades. Ecosystem participants face a trust problem in ensuring that the treasury is robust to opportunism, such as theft or misappropriation. Treasury governance tools, such as expert committees or stakeholder voting, can bolster trust in treasury functions. In this paper we use new comparative economics to examine how treasury governance mechanisms minimise different types of costs, thereby bolstering trust. We interpret case studies of innovative treasury governance within this framework, finding that the costs shift throughout the lifecycle of an ecosystem, and those subjective costs are revealed through crisis. These changes lead ecosystem participants to choose and innovate on treasury governance.

Setting the reserve price for the Tracer DAO Gnosis auction

With Peyman Khezr

Introduction: Selling multiple units of a homogeneous good in an auction is one way of determining the market price. Uniform-price auctions have been used in many real-world markets because of their price discovery property: All winning bidders pay the same price (either highest losing bid or lowest winning bid). The question is how a seller could compute an optimal reserve price in a uniform price auction. First we should note that literature suggests a positive reserve price is usually better than no reserve price as it reduces the chance of underbidding by bidders. However, to compute the reserve price for a uniform price auction there are no clear criteria. In this note we follow the criteria given for the second-price auction as the best approximate of the uniform-price auction.

PDF available here

An economic theory of blockchain foundations

With Jason Potts, Darcy WE Allen, Sinclair Davidson and Trent MacDonald

Abstract: Blockchain (or crypto) foundations are nonprofit organizations that supply public goods to a crypto-economy. The standard theory of crypto foundations is that they are like governments with respect to a national or regional economy, i.e. raising a public treasury and allocating resources to blockchain specific capital works, education, R&D, etc., to benefit the community and develop the ecosystem. We propose an alternative theory of what foundations do, namely that the treasury they manage is a moat to raise the cost of exit or forking because the benefit of the fund is only available to those who stay with the chain. Furthermore, building and maintaining a large treasury is a costly signal that only a high quality chain could afford to do (Spence 1973). We review these two models of the economic function of a blockchain foundation – (1) as a private government supplying local public goods, and (2) as a moat to raise the opportunity costs of exit. We outline the empirical predictions each theory makes, and examine the implications for optimal foundation design. We conclude that foundations should be funded by a pre-mine of tokens, and work best when large, visible, transparent, rigorously managed, and with a low burn rate.

Available at SSRN.

Rentseeking in blockchain governance: the awkward transition from market decisionmaking to non-market decisionmaking

Abstract: Blockchains and applications built on blockchains are decentralised ecosystems that are nonetheless built by centralised firms. The typical launch and maturity of a blockchain ecosystem involves the transition from an entrepreneurial institutional arrangement characterised by market decisionmaking to a decentralised one characterised by non-market decisionmaking. This paper considers how to assess rentseeking in the context of blockchain governance. Rentseeking in blockchain implementations and ecosystems occurs when participants seek rewards or privileges in excess what would be considered a market contribution after a certain threshold of decentralisation. The paper considering two controversies in blockchain governance – the Zcash founders’ reward and the SushiSwap developer fund – which involved the intertwining of mechanisms to fund public goods with mechanisms to compensate founders for their entrepreneurial effort. The paper finds that the normative ideal of decentralisation in blockchain governance has a parallel function to the normative ideal of liberal governance in political systems.

Available at SSRN.

Quantum crypto-economics: Blockchain prediction markets for the evolution of quantum technology

With Peter P. Rohde, Vijay Mohan, Sinclair Davidson, Darcy Allen, Gavin K. Brennen, and Jason Potts

Abstract: Two of the most important technological advancements currently underway are the advent of quantum technologies, and the transitioning of global financial systems towards cryptographic assets, notably blockchain-based cryptocurrencies and smart contracts. There is, however, an important interplay between the two, given that, in due course, quantum technology will have the ability to directly compromise the cryptographic foundations of blockchain. We explore this complex interplay by building financial models for quantum failure in various scenarios, including pricing quantum risk premiums. We call this quantum crypto-economics.

Available at arXiv

Commitment voting: a mechanism for intensity of preference revelation and long-term commitment in blockchain governance

With Sinclair Davidson and Jason Potts

Abstract: Commitment voting is a mechanism for signalling intensity of preferences and long-term commitment to governance decisions in proof of stake blockchains. In commitment voting, the voting weight of a vote in any given election is determined by 1) the amount of tokens under a voters control and 2) the time that the voter is willing to lock their tokens up for that election. Winning votes are locked up for the nominated amount of time. Losing votes are released as soon as the election has results. Commitment voting requires voters to commit to the decisions they make while still allowing those who disagree with the majority to exit the community.

Available at SSRN and in PDF here.

The Hart asset at the heart of your organisation

With Sinclair Davidson and Jason Potts

Abstract: What assets does a firm need to hold to develop a profitable business model? A ‘Hart asset’ is an asset that a firm cannot strategically afford a rival firm to own or control due to the risk of hold up, and therefore must be held within the firm, and upon which a profitable business model can be built. We tie the Hart asset to the problem of complementarities in profitable innovation, and conclude with an example Hart asset in digital platforms.

Available in PDF and at SSRN

Trustless architecture and the V-form organisation

With Sinclair Davidson and Jason Potts

Abstract: Blockchain (distributed ledger technology) is an institutional technology that allows trust to be manufactured instead of being earned. Trust is an important component of business and trade and has previously been subsumed into information costs. It is only now that the importance of trust is being fully appreciated. Arun Sundarajaran has suggested that the creation of new forms of trust has driven the expansion economic activity throughout history. In this chapter we argue that the industrialisation of trust is going, again, to drive a massive expansion in economic activity through the emergence of new organisation forms that will deliver high-powered market incentives deep into what would appear to be hierarchical organisations. We are labelling these (as yet speculative) organisations forms the ‘V-form’ organisation. In this chapter we discuss the importance of trust, the evolution of trust, and the industrialisation of trust. We argue that current organisational forms have exhausted the levels of trust that have previously sustained them. Blockchain technology offers a new industrialised form of trust that can drive further economic activity.

Available in PDF or at SSRN.

Panic, Information and Quantity Assurance in a Pandemic

With Vijay Mohan and Marta Poblet

Abstract: During a pandemic or other disaster, public visibility of the supply chain can be useful for controlling the symptoms of coordination failure, such as panic and hoarding, that arise from the desire for quantity assurance by various sectors of the economy. It is also important for efficient coordination of the logistics required to tackle the disaster itself, with vital information flows to centralized agencies leading the response as well as to decentralized agents upstream and downstream in a supply chain. Publicly visible information about the supply chain at the time of a crisis needs to be secure, timely, possibly selective in terms of access and the nature of information, and often anonymous. Recent advances in distributed ledger technology allow for these characteristics to be met. Building digital infrastructure that permits visibility of the supply chain when needed (even if dormant during normal times) is essential for economies to be more resilient to black swan events.

Available at SSRN or in PDF here