Outsourcing vertical integration: Distributed ledgers and the V-form organisation

With Sinclair Davidson and Jason Potts

Abstract: This paper introduces the V-form organisation, a new form of firm organisation where vertical integration is outsourced to a decentralised distributed ledger (a blockchain). V-form organisations rely on the coordination of a (trusted) third party. It looks specifically at two instances of V-form organisation being established on the IBM-Linux Foundation Hyperledger permissioned blockchain. The paper concludes with four recommendations for strategic management about how to adjust to a V-form world, and four recommendations for policymakers.

Available at SSRN

Crypto Public Choice

With Alastair Berg and Mikayla Novak

Abstract: This paper presents ‘crypto public choice’ which examines the economics of collective decision making in the functioning of blockchain protocols and among related communities of users. We introduce the blockchain community to public choice theory and show how it can be applied to the study of this technology. Public choice offers an extensive literature that can be applied to blockchain design, can interpret the actions of different types of blockchain users, and can explain governance problems and challenges in each of the blockchain protocols. Blockchains are institutional technologies which provide new ways in which to produce public goods including consensus over shared facts and the security of property rights. Collective decision making by users of blockchain protocols relates to consensus over the contents of a shared ledger, as well as the initial design and subsequent upgrading of these protocols.

Working paper available at SSRN

Institutional Discovery and Competition in the Evolution of Blockchain Technology

With Sinclair Davidson and Jason Potts

Abstract: Blockchains are an institutional technology for facilitating decentralised exchange. As open-source software, anybody can develop their own blockchain, ‘fork’ an existing blockchain, or stack a new blockchain on top of an existing one – creating a new environment for exchange with its own rules (institutions) and (crypto)currency. Since the creation of Bitcoin in 2008, blockchains have proliferated, each offering iterative institutional variation. Blockchains present a discrete space in which we can observe the process of institutional discovery through competition. This paper looks at the evolution of blockchains as a Hayekian discovery process. The public nature of blockchains – most blockchains offer public transaction – allows us to observe experimentation and competition at an institutional level with a precision previously unavailable compared to other instances of institutional competition.

Available at SSRN.

Identity as Input to Exchange

With Alastair Berg, Sinclair Davidson and Jason Potts

Abstract: Identity is an integral part of all but the most trivial economic, social and political transactions. Using transaction cost economics, we determine that identity costs are a distinct and measurable subset of transaction costs. In certain transactions, such as credit arrangements, identity costs are incurred at considerable expense for commercial and compliance based reasons. Vertical integration can be seen through the lens of identity cost economising, including in the financial sector, due to high costs of complying with KYC regulations as well as commercial risk management. Such organisational structure is also contingent on available identity technologies. The introduction of blockchain and distributed ledger technologies in identity applications may see new models of institutional structures develop.

Working paper available at SSRN.

Liberalism is Enduring and Urgent

Abstract: Liberalism is a philosophy of political economy that offers enduring principles about how we should seek to interact in groups and in human society more generally. Far from being outdated or archaic, those principles offer more convincing and powerful responses to our current challenges than any competing philosophy. While populism claims to offer straight-forward solutions to some of the difficulties of globalisation, it offers only half-hearted remedies for weaknesses in the operation of representative democracies, and populism has little capacity to reckon with the wave of technological changes set to revolutionise the global economy. Liberalism, by contrast, is uniquely suited to clarify and tackle these challenges. It offers coherent responses to globalisation, dissatisfaction with representative institutions, and technological change. This is not to say that all is well in the house of liberalism. There is an opportunity, if not to reconstruct, then to refresh and retarget liberal thinking on these issues.

Available at SSRN

Beyond Money: Cryptocurrencies, Machine-Mediated Transactions and High Frequency Bartering

With Sinclair Davidson and Jason Potts.

Abstract: As blockchain technology is adopted into modern economies, the underlying institutional protocols will evolve. In this paper we set out the reasoning behind how this will likely take us to an economy beyond both money and money prices. Money facilitates human-human exchange in the presence of cognitive limitations. However in the near future personal artificially intelligent machine agents will be able to conduct exchanges with a matrix of liquid digital assets (such as cryptocurrencies). We call this process high frequency bartering. The existence of markets without money present complex public policy challenges around privacy and taxation.

Working paper available on SSRN

Ledgers

With Sinclair Davidson and Jason Potts

Abstract: This paper develops the ledger-centric view of the economy. Ledgers provide an underlying infrastructure for exchange by allowing actors to prove, validate, and verify property ownership. In this sense ledgers map economic, political and social relationships. This paper provides some theoretical distinctions to frame the analysis of the economics of ledgers. First we offer a philosophical and institutional definition of ledgers. Second we provide three analytic categories of ledgers (general, actual, and perfect). Third we offer a ledger theory of the firm as a map of relationship between labour, capital, production processes, and information, and emphasise the economic significance of ledgerisation in the history of entrepreneurial firm creation. Fourth we draw some implications of our theory for the development of complex economies. This paper is based on the theory of institutional cryptoeconomics which was developed to understand the economic implications of distributed ledger technologies.

Working paper available on SSRN

A Genuine Commercial Justification for Interchange Fees

With Sinclair Davidson and Jason Potts

Abstract: Ronald Coase famously argued that “if an economist finds something – a business practice of one sort or other – that he does not understand, he looks for a monopoly explanation”. So it is with credit card interchange fees. Intellectual confusion has led to the phenomenon of interchange fees being misdiagnosed as being a monopoly problem leading to inappropriate policy intervention. Following George Stigler’s path breaking analysis of the US Security and Exchange Commission he claimed that financial regulation was “founded upon prejudice and … reforms are directed by wishfulness”. In our opinion, Australian regulatory attitudes towards interchange fees should be placed into the same category: reforms initiated by ignorance and anti-bank prejudice.

Working paper available on SSRN

Some public economics of blockchain technology

With Sinclair Davidson and Jason Potts

Abstract: Distributed ledger technology emerged in 2009 as the protocol behind bitcoin, a cryptocurrency with origins in the ‘cypherpunk’ community who sought to use cryptography to secede from government control of money. Bitcoin’s pseudonymous inventor, Satoshi Nakamoto said Bitcoin would be “very attractive to the libertarian viewpoint” and many in the crypto-anarchist community saw, and still see, cryptocurrencies as a means to free citizens from the monetary depredations of governments. But from these revolutionary secessionist origins, it has become apparent that not only are there many possible use cases of distributed ledger technology for government, but that government action through both regulation, legislation, and public investment might be a key factor in the adoption and development of this technological innovation. Governments can use blockchain technology to exploit the service efficiencies they may bring. But also, and perhaps counter-intuitively given their revolutionary origins, blockchain applications are likely to need government cooperation to facilitate adoption and the development of the blockchain economic system.

Working paper available at SSRN.

Blockchains Industrialise Trust

With Sinclair Davidson and Jason Potts

Abstract: Blockchains are the distributed, decentralised ledger technology underlying Bitcoin and other cryptocurrencies. We apply Oliver Williamson’s transactions cost analysis to the blockchain consensus mechanism. Blockchains reduce the costs of opportunism but are not “trustless”. We show that blockchains are trust machines. Blockchains are platforms for three-sided bargaining that convert energy-intensive computation into economically-valuable trust.

Working paper available at SSRN.