Should I use a blockchain?

With Sinclair Davidson and Jason Potts. Originally a Medium post.

Blockchain as a business model can be imagined in one of two ways. It can be thought of as being a new general purpose technology. This category of technologies includes electricity, transistors, computers, the internet, mobile phones, and so on. To this way of thinking a blockchain can be represented as the next generation of the internet.

But if this is how people come to think of a blockchain we believe that many are going to be disappointed. Here the blockchain would be — what economists call — a factor augmenting technology. This is the standard economic story about how technology drives economic growth. People adopt a new technology because it reduces the productions costs associated with producing a given output. Technology ‘economises’ on scarce resources. We do more with less. This is the better-stronger-faster-cheaper model that we have come to associate with new technology.

But there is a problem with this approach to blockchains.

It is not immediately obvious that a blockchain is better-stronger-faster-cheaper for many general purpose uses. If managers are looking for improvements to their back room operations they will likely be underwhelmed by what a blockchain has to offer. There are many existing database software solutions that will very likely outperform a blockchain.

Another way to think about blockchains is as an institutional technology. As The Economist magazine insightfully suggested some years ago the blockchain is a trust machine. We have argued that blockchains industrialise trust. This is where the gains to using blockchain technology originate — not that it economises on production costs, but that it economises on transactions costs — especially trust.

When Satoshi Nakamoto solved the Byzantine general’s problem he also provided a solution to what economists call the coordination problem. Historically economists have recommended the price system, bureaucracy and managerial hierarchy as solutions to coordination problems. Now we also have the blockchain.

That blockchains are fundamentally an institutional rather than a technological innovation is not mere semantics. This distinction matters because it focuses attention on what is actually driving the creative-destruction this innovation generates.

What has changed is the technology of economic coordination and governance.

In the real world there is a trade-off between the price system and bureaucracy and hierarchy. The price system provides clear incentives — prices and profits determine what should be produced, how it should be produced, and who will produce it. In bureaucracy and hierarchy, however, those high-powered incentives are missing. But large scale economic activity generates large transaction costs and a lack of trust means that prices and profits can’t weave their magic.

This is where blockchains have a competitive advantage — the decentralised ledger technology provides a platform for coordination where transactions costs are dramatically reduced and trust industrialised. In an environment of complex economic activity that previously relied on bureaucracy and management we can now have prices and profits doing their magic.

Those adopters who think blockchain is just another backroom business tool are missing the main game. The blockchain is going to be your business model.

Opportunities for crypto-havens to capture business

With Sinclair Davidson and Jason Potts.

Blockchain technology is set to drive a new era of global public policy competition. In May 2018, the premier of Bermuda, David Burt, announced to the 8,500 attendees of the Consensus blockchain and cryptocurrency conference his country’s new Digital Asset Business Act and Initial Coin Offering Act. This legislation is intended to establish Bermuda as a premier destination for blockchain business by providing regulatory certainty around new business models.

But Bermuda is hardly the only jurisdiction seeking to attract blockchain firms. Singapore, Switzerland, Dubai, Estonia, subnational jurisdictions and dependencies like Illinois, Zug, the Isle of Man and Gibraltar are all positioning themselves to capture blockchain services. In October 2017, the then prime minister of Slovenia, Miro Cera, declared the country was “setting itself up as a blockchain-friendly destination.”

What we are seeing right now is an aggressive policy-driven grab to become a world leader in blockchain technology, and to capture some of the enormous value that this can unlock. Where once we saw global tax competition – as small nations attracted investment with business-friendly tax and regulation policy – now we are able to watch the green shoots of global blockchain competition. Blockchains are a unique technology, and that uniqueness presents some unusual public policy challenges. They offer us a new platform to organize economic activity: to make trades, to arrange production processes, to store information about assets and property ownership. Blockchains provide an economic infrastructure on which parallel technological developments, such as artificial intelligence and machine learning, the Internet of Things, 5G, and automation, can be built.

We expect to see a great deal of economic activity that currently takes place in firms, in markets, even in government, to be displaced by distributed ledger technology. Blockchains will tie organizations together that have currently cooperated only through market exchange, or by the force of regulation. It will lead to demergers, as large firms realize that a decentralized ledger is an alternative to complex multidivisional corporate structures.

But we have spent hundreds of years building complex taxation and regulatory systems around these institutions. The dominance of large firms has led governments to impose anti-trust laws. Principal-agent problems between owners and firm managers has led to the introduction of complex schemes of directors duties and manager controls. Securities law is built around the dominance of the public offering, taxation law around a sharp distinction between currency and other assets, and labor law around the employer-employee divide.

As a new technology of governing economic activity, blockchain applications pull at the threads of all these traditional regulatory frameworks. Globally, there are still deep uncertainties over the most basic questions around cryptocurrencies, such as when they are taxed, and as what: currency or security? The initial coin offerings that have brought so much money into the industry exist in a legal gray area almost everywhere in the world.

Blockchains are an incredibly young technology – just ten years old. Distributed autonomous organizations, decentralized labor markets, blockchain-secured intellectual property assets and blockchain-enhanced international trade will raise complex issues about fundamental regulatory structures, like labor, competition, and companies law – structures which have been reasonably fixed for the better part of a century. As more applications around economic problems, such as identity management, charities, healthcare, finance and global trade, are developed and introduced into the real world, they will face a spiraling number of regulatory and policy barriers that will need to be overcome. We face decades of regulatory uncertainty and demand for reform.

This is where crypto-friendliness matters. Crypto-friendliness does not mean the government needs to subsidize, plan or control blockchain technology. The sector is awash with funds: a happy by-product of the enormous speculative investment in cryptocurrencies that has occurred over the last eighteen months. No government planner could predict how this technology is going to develop, and given its global nature, no regulator has a hope of controlling it.

But blockchains do require governments to facilitate adoption. Because of the many ways blockchain use cases interact with existing regulatory frameworks they will need the help – or at least the acquiescence – of public policymakers to reform those frameworks to suit. The biggest regulatory risk in the blockchain space is uncertainty. Right now, those uncertainties are about how crypto-assets will be taxed, how and when they will be treated as securities, and the levels of disclosure around anti-money laundering and know-your-customer rules.

Governments that want to attract blockchain firms to their jurisdictions need to be resolving those uncertainties as soon as possible.

A crypto-friendly government is one which is not only focused on resolving current uncertainties but is able to credibly commit to facilitating the sorts of regulatory reforms needed in the future. Technological change is unpredictable. We do not know what blockchain applications are going to be the most successful and disruptive. Consumer demand is unpredictable. Governments should ensure, as far as possible, that regulation is both predictable and adaptive, that shape-changes in regulatory regimes do not occur, and that yet there is adequate space for entrepreneurial experimentation.

Which governments are likely to be the most crypto-friendly? At the first instance, the governments which have already demonstrated themselves as business-friendly environments are obvious candidates for blockchain friendliness. The ingredients of long-run economic growth – liberal, responsive institutions, the rule of law, limited government, regulatory modesty, and low taxes – are as important for blockchain firms as they are for other industries. The Isle of Man, for instance, has long been an established global leader in gambling and e-gaming, thanks to a deliberate effort on its part to establish welcoming and certain public policy. The Isle of Man is now a thriving site of blockchain innovation. As this suggests, blockchain technology presents a historically significant opportunity for the Cayman Islands, and any other jurisdiction which has a reputation for business-friendly policy. The last few decades of global tax competition have shown that smart policy can shape the geography of global capitalism just as strongly as labor or natural resources. Blockchains are a decentralized network but their developers, entrepreneurs and users exist in a real world, subject to real laws. Crypto-havens can capture that business.

Blockchain: An Entangled Political Economy Approach

With Darcy Allen and Mikayla Novak. Published in the Journal of Public Finance and Public Choice.

Abstract: This paper incorporates blockchain activities into the broader remit of entangled political economy theory, emphasising economic and other social phenomena as the emergent by-product of human interactions. Blockchains are a digital technology combining peer-to-peer network computing and cryptography to create an immutable decentralised public ledger. The blockchain contrasts vintage ledger technologies, either paper-based or maintained by in-house databases, largely reliant upon hierarchical, third-party trust mechanisms for their maintenance and security. Recent contributions to the blockchain studies literature suggest that the blockchain itself poses as an institutional technology that could challenge existing forms of coordination and governance organised on the basis of vintage ledgers. This proposition has significant implications for the relevance of existing entangled relationships in the economic, social and political domains. Blockchain enables non-territorial “crypto-secession” not only reducing the costs associated with maintaining ledgers, but radically revising and deconcentrating data-conditioned networks to fundamentally challenge the economic positions of legacy firms and governments. These insights are further illuminated with reference to finance, property and identity cases. Entangled political economy provides a compelling lens through which we can discern the impact of blockchain technology on some of our most important relationships.

Fast track available at the Journal of Public Finance and Public Choice

Blockchains and constitutional catallaxy: an EOS case study

With Alastair Berg. Originally a Medium post.

The EOS mainnet launched earlier this year.

In EOS we are witnessing the emergence of what Ludwig von Mises and Friedrich Hayek would recognise as constitutional catallaxy — open source constitutional orders in which participants are continually developing the rules of the game even after the game has started.

EOS operates under a Delegated Proof of Stake (DPoS) consensus mechanism, with 21 Block Producers (BPs) overseeing the validation of transactions. As an open source constitutional order, the jurisdiction of these BPs has been guided by de jure constitutional arrangements. In the pre-launch phase of EOS, documentation was drafted and debated outlining an EOS Constitution, while users were to include a hash of that document in their transactions to acknowledge their understanding and acceptance of it.

However, open source constitutional orders like EOS also have stakeholders who may exercise de facto authority in the absence of formal procedural rules or technical constraints.

The launch of the EOS mainnet provides examples of how de jure and de facto constitutional arrangements can diverge. While no token holder vote has taken place on the EOS Constitution (via their proxies — BPs), de factosovereignty was quickly exercised through the banning of seven (and later many more) accounts following a conference call between BP representatives and a body known as the EOSIO Core Arbitration Forum (ECAF).

As a result of this call, BPs chose to exercise de facto sovereignty and freeze these accounts. Only retroactively did this dispute resolution body ECAF issue a statement which indicated their support of the actions of BPs.

Similarly, 6 weeks after launch, an announcement was made to fundamentally change the way in which economic value is distributed across the EOS protocol. On July 28 Brendan Blumer, CEO of block.one (the organisation which developed the EOS mainnet), announced changes in the way EOS inflation is to be allocated. This will see new EOS tokens being distributed to users who stake tokens and vote for BPs, in addition to the rewards BPs receive for overseeing the validation of transactions.

These actions have drawn support as well as opposition. Some have called it a successful demonstration of off-chain governance, while some see it as jurisdictional overreach by emergent institutions.

In previous articles, we have argued that blockchains are a lot like countries. These (usually) open source protocols are constitutional orders which define how individuals interact and transact — complete with their own currencies, property, laws, corporations and security systems.

Blockchains, along with nation states, attempt to coordinate action in a world of incomplete information and opportunism — while computer scientists and economists have different vocabularies, Byzantine fault tolerance and robust political economy are the same thing.

Systems of governance for blockchain protocols are not new — the genius of Satoshi Nakamoto was to allow the Bitcoin network to reach consensus when two equally valid blocks are presented by miners, in effect solving the double-spend problem.

Yet now we can observe the emergence of — and have debate over — other governance arrangements in blockchain protocols. (Who writes and has permission to change the law (code), who enforces the rules, the role and method of voting, the role of developers and token holders, on-chain and off-chain governance etc).

What’s interesting is that these are analogous to the debates that individuals had during the emergence of nations. Consider the United States. With little to guide them but the musings of philosophers and radical thinkers, individuals grappled with a myriad of competing principles and interests as they set the ground rules for how their new constitutional order was to be governed.

Previously, constitutional orders emerged from revolution, civil war, conquest and other usually violent means — much like the constitutional order that emerged in the 13 American colonies.

In the real world, the emergence of institutions — as well as the jurisdiction which they exercise power over — can take many years after their formal establishment. The Supreme Court of the Unites States has the now familiar power of judicial review, evaluating the constitutionality of legislation and executive action. However it was only 16 years after it was established that the Supreme Court granted itself the power to declare acts of Congress unconstitutional as a result of Marbury v. Madison. Similarly, the role of the President has significantly expanded over time, with the term the Imperial Presidencyaccounting for the increased powers gradually vested in the US executive since the administration of George Washington.

The US Constitution has similarly been amended, challenged and otherwise interpreted in a myriad of different ways over its lifetime, demonstrating a real-world divergence and interaction of de jure and de facto constitutional arrangements.

Constitutional catallaxy

Likewise, blockchains are constitutional orders governed by social norms as well as technical constraints. The de jure constitutional order which governs how BPs represent EOS token holders, and the ways in which disputes are resolved, are ultimately subject to the exercise of authority by those who have the means.

What we are seeing is a process of constitutional entrepreneurism — constitutional catallaxy — in the establishment of new economies. The institutions that coordinate activity in these economies change and adapt to both the technological limitations built into the protocols, as well as the mutual expectations and power of interacting stakeholders.

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

Imagining the Blockchain Economy

With Sinclair Davidson and Jason Potts. Meanjin, vol. 77, no. 2 (winter)

For the first few years after its invention, the laser was described as ‘a solution in search of a problem’. Now lasers are everywhere. They’re used to scan barcodes, remove tumours and analyse chemical compounds. But initially no-one was quite sure what to do with this new technology. We have the opposite problem today. We’re facing down a wall of radical inventions and innovations that we can easily imagine will transform our world.

Take autonomous cars—the most public and obvious change that is now just years, perhaps months away. Autonomous vehicles are already being used across our transport networks. Driverless trucks shift iron ore out of mines. Driverless trains move minerals across the Pilbara. Pilotless cargo ships send goods across the planet. Self-driving vehicles for consumers will change the way we commute, how we travel, how we relate to distance, sprawl and density.

Autonomous vehicles are possible because of advances in a few fundamental under-lying technologies—smart sensors, data mapping, artificial intelligence, machine learning and neural networks. Autonomous vehicles need high-resolution maps of the world around them, so cartographers are building digital maps of the world that are close to a 1:1 scale and dynamically updated. Some autonomous systems teach each other about obstacles and unmapped hazards in real time—the computer in an autonomous system draws its intelligence from the network, not just its own power. Machine learning and neural networks are set to be endemic in every industry, every supply chain, every ‘production function’ (as the economists would say) in the economy.

In the next decade we’re going to see biological and chemical breakthroughs join these advances in computer science. Biological innovations—such as CRISPR gene-editing technology—allow us to tackle disease and human ailments at the most fundamental biological level. When the economic historian Joel Mokyr was in Melbourne in early December, he told his audience that these nondigital innovations and inventions are just as likely to shape our future—in work and as a community—as any of the more prominent digital inventions.

The regulatory and public policy hurdles facing these changes are of course immense. Consider again the challenges posed by autonomous vehicles. Road rules have to be restructured. Infrastructure may have to be redesigned. Figuring out the legal liabilities of vehicles that are in accidents is a huge issue. Who is to blame in an accident: the driver, the company that wrote the autonomous software or the network of other drivers and other autonomous units that mapped the obstacles? How we regulate gene editing, robotic ships, distributed autonomous organisations, cryptocurrencies, 3D printers so powerful that they can print illegal firearms, and so on will be a problem for federal and state parliaments for decades to come.


New technologies always have distributional consequences. Jobs are replaced or eliminated in some sectors and not others. Some workers find themselves in a bull market, some in a bear market.

In an excellent book, Changing Jobs: The Fair Go in the New Machine Age, Jim Chalmers and Mike Quigley outline from a social democratic perspective how artificial intelligence, automation and robotics might change the industrial relations system, effect the education system and influence patterns of inequality in Australia. Chalmers is the member for Rankin in Queensland and Quigley a former telecommunications executive. Their book represents what is hopefully the start of a parliamentary reckoning with long-term technological trends.

Chalmers and Quigley don’t tell a hackneyed ‘robots will take all of our jobs’ story. They try to reckon with the now inevitable: any job that is repetitive or can simply be represented by an algorithm will very shortly be automated. The jobs in those categories are blue-collar and white-collar. Low-end white-collar jobs such as call centres have already been automated. High-end white-collar jobs such as many legal industry jobs are also likely to be automated.

The first question is, what happens to the people who now perform those roles? This is a problem, but not a new one. We have managed these sorts of structural shifts before—sometimes well, often poorly. A combination of reskilling (both publicly subsidised and privately funded), social welfare investment and (unfortunately) premature retirement is the usual approach.

An equally pressing question is how to prepare new workers for this new age. Chalmers and Quigley rightly put a lot of emphasis on education, and the sorts of education they foresee as necessary for an era of disruption. The key skills the authors identity are the ability to self-educate, formal maths and science education, and proper statistical thinking. The problem with any recommendations about the future of education is it is hard to plan for a future that has never been less certain. Happily Chalmers and Quigley do not insist all Australian students learn to code. This proposal (which incidentally is Labor Party policy) is faddish and short sighted. More people should learn to code, of course. Computer programming is going to be increasingly in demand. But just as everyone who drives a car doesn’t need to know how an internal combustion engine functions, coding will remain subject to specialisation and the division of labour.

The third question Chalmers and Quigley address is inequality. They reject, rightly in our view, the idea of a universal basic income (UBI)—a fixed standard ‘welfare’ payment given to all citizens regardless of their employment status. Though they do not make this argument, the theoretical appeal of a UBI is that it is given to everyone unconditionally and replaces the vast majority of other transfer payments. The political system being what it is, no such theoretically pure policy is ever likely to pass the Australian Parliament, and an imperfect UBI may be worse than no UBI at all.

Rather, Chalmers and Quigley propose a range of less ambitious reforms to the existing social welfare system. For instance, they recommend ‘a “social safety net” that uses big data for good in the social security system’, more emphasis and attention paid to caring roles and bringing people with disabilities into work, and income smoothing for taxation purposes. They are oddly sympathetic to Bill Gates’ idea of a tax on robots. Robots, of course, can’t be taxed—only their owners can. When does a ‘machine’ become a ‘robot’? Are algorithms robots? Nevertheless, their interest in a robot tax represents the limit of their radicalism.

Changing Jobs is a very valuable contribution from a parliament that is hardly awash with deep thinking about the future. We can only hope that some enterprising liberal or conservative politician is thinking about these ideas as well. But to our minds Chalmers and Quigley make a key fundamental error—one made by nearly all of the best thinkers on this topic from Nobel Prize winners down. That is an assumption that the institutional structures of the society will remain fixed while new technologies are squeezed into them.

Consider again the idea of a tax on robots. Gates would like to peg the tax to the salary of the worker that the robot replaced. If the worker was earning $50,000 a year, then the robot tax would be equivalent to the income tax that worker would have paid. The assumed economic dynamic seems to be this: one robot joins the assembly line, one person leaves the assembly line. But the factory remains. Yes, the factory may be relocated to China or Bangladesh. But it remains as a discrete unit of production: four walls, large and expensive equipment, and a single corporate owner.

We don’t think this is how it will be. Along with robots, automation, machine learning, gene editing and neural networks, we are now seeing a revolution in how our economic institutions are structured. This revolution in governance will have profound effects on how we as individuals and communities interact with old and new technologies and institutions. But to explore this we have to talk a little bit about blockchains.


Blockchains are the underlying technology that powers cryptocurrencies such as bitcoin. A lot of ink has been spilled trying to identify who the bitcoin inventor, the pseudonymous Satoshi Nakamoto, is. But more important than Nakamoto’s personal identity is the community from which he emerged—a group of ‘cypher-punks’ or ‘crypto-anarchists’ who in the 1990s and early 2000s were experimenting with the use of cryptography (as one prominent member, Timothy C. May, declared) ‘fundamentally [to] alter the nature of corporations and of government interference in economic transactions’.

What did Nakamoto invent? Digital currencies are vulnerable to the ‘double spending problem’. Any digital item is easy to copy. If we want to create a digital currency, what stops a holder of a unit of digital currency from copying it and spending it twice? Previous solutions to the digital spending problem relied on having some central authority validate transactions to ensure money wasn’t being spent twice. Nakamoto’s invention was the blockchain—a mix of existing technologies that allowed a distributed ledger of digital currency to be updated securely without any need for a trusted centralised authority.

It turns out that blockchains can do much more than power digital currencies. Block-chain technologies developed in just the last couple of years allow people to write contracts that self-execute, form organisations securely and across national borders, and shift records of ownership and property at close to cost and instantly anywhere in the world.

Blockchains are fundamentally a technology of governance. They are not perfect. Right now blockchains are expensive to run and often risky to use. The history of blockchains starting with bitcoin is, undeniably, a history of scandal, criminal activity, fraud, incompetence, speculation, a fair bit of disappointment and massive uncertainty. But it is not unusual for any new technology, especially one so open to the public, to be targeted by fraudsters and opportunists.

Blockchains are significant because (if nothing else) they are a proof of concept for a form of economic governance that we didn’t know was possible. We know now that it is possible to run a decentralised ledger—a ledger spread across a computer network—without the need for any single central authority in charge. And it turns out that ledgers are everywhere in the economy. After bitcoin we now know that money can be thought of as a ledger of ownership. Indeed, much of what governments do is manage ledgers—ledgers of property titles, ledgers of taxation obligations, ledgers of entitlements, ledgers of citizenship.

But firms are ledgers too. Firms are networks of contracts and capital arranged in a way that produces economic goods. Imagine a firm as a list of relationships that maps who works in what department, who has responsibility for what production, which machines and production inputs are owned (and where to buy more of them), and how primary inputs move through the firm to become useful things to sell to others. That’s a ledger.

Firms are hierarchical because their ledger has to be managed, operated and updated. New economic conditions, changes in the costs of inputs, changes in consumer tastes, changes in the workforce all demand a managerial class to make strategic decisions that can filter down the hierarchy. Alternative corporate forms—such as workers cooperatives—have not thrived at any scale because they have been unable to make the sort of strategic moves at which traditional large firms excel. Blockchains offer a new way to structure a cooperative firm: to achieve decentralised consensus about economic and strategic priorities among workers with a common interest.

We’re used to seeing technological change in production. Electricity, the internet, lasers, penicillin, the aeroplane, mobile phones—all have had huge effects on our lives, but we sort of know how to integrate them into our thinking, even as they rip up industries and certainties as they go.

But we don’t see technological change in governance very often. Arguably the last revolution in governance was the invention of the corporation—the joint stock company of the seventeenth century that became the governing structure for corporate and financial capitalism in the twentieth century. Perhaps we could say that representative democracy (the parliament) is another such structure of governance.

Distributed systems allow production to be distributed too. Those single four-walled factories could be obsolete. Why own expensive capital equipment when you can easily and flexibly rent access to equipment when needed? One interesting blockchain application is Golem: a decentralised, distributed network that allows users to rent idle computing power on any computer signed up to the network anywhere in the world.

The owners of that computing power are paid with Golem’s native cryptocurrency GNT. Since the Second World War firms have been installing supercomputers for computationally intensive tasks; now that sort of investment can be spread globally across thousands of idle, less powerful, less costly computers. And it can be done without the need for a trusted authority or firm to manage the service.

This sort of application is not trivial. Hollywood needs a massive amount of computer power to render complex CGI scenes. Academic researchers need access to powerful computers to exploit the huge volume of data now available. As economic activity becomes digitised—more and more of us now spend our lives producing while sitting in front of an LCD monitor—the possibilities for this sort of simple decentralisation and disaggregation of capital investment grow. The demand for cloud computing is a big factor underpinning the competitive dominance of firms such as Amazon and Google. In these early blockchain experiments, we can see a vision of a future where those large firms compete against open protocols.

The technological revolution we face consists of revolutionary production technologies matched and empowered by revolutionary governance technologies. Mass production is ceding priority to mass customisation. We will order custom products sourced from across the globe by suppliers that are being coordinated not necessarily by people but by artificially intelligent, automatically self-executing production lines.


Popular writing on the future of work is not exactly blind to changes in economic governance. When we talk about the gig economy, the sharing economy or the increasing casualisation of the workforce, the growth in independent contracting (real or ‘sham’), we are really talking about changes in the structure of the firm, changes in the way we relate economically to each other, to our ‘employers’, and to the disaggregation of the mid twentieth-century big corporate form.

The sharing economy refers to the idea that mobile phone technology can be utilised for short-term use of idle resources (cars, drivers, rooms). It’s controversial for many social democrats in part because it still looks a lot like a variation of the employer–employee relationship. Uber is still a company, Airbnb is a company. But those institutions are now on the cusp of change. Even Uber, the great disrupter, can be disrupted. If you want a vision of the blockchain economy, imagine a decentralised Uber, where drivers and passengers find each other on the street, securely and safely, without the need for a big American company to manage their interaction. That’s what May meant when he talked not just about preventing government from intervening in the economy, but undermining big corporations as well.

In this context, the questions raised by Chalmers and Quigley are even harder to answer. Even high-tech, highly educated, highly skilled workers fully versed in coding are going to be facing an economic landscape that looks completely different from what we have now. Even fundraising and venture capital—the way we finance new projects—will be done in new ways. The ICO craze in the second half of 2017 (an ICO or ‘initial coin offering’ is a way of financing blockchain applications through the sale of the cryptocurrencies that power them) was rife with scams and frauds but nonetheless offered a vision of how even the fundamentals of industrial structure are up for grabs. Learning to code will not offer our children the institutional certainties that our parents or grandparents may have enjoyed.

Governance technologies present their own challenges from the perspective of inequality. Inequality is in part a function of what economists call the ‘superstar effect’. Superstars such as Beyoncé and Mark Zuckerberg fill out the extreme tails of the income distribution spectrum thanks to their global platforms and recognition. Globally decentralised markets powered by distributed networks raise the possibility of superstars in all walks of life. When it is possible to hire the best programmer, accountant, doctor, consultant, lawyer or manager on the planet and integrate them seamlessly into local economic activity, the world’s best are going to enjoy the sort of incomes that were previously reserved for sports stars and musicians. The effect on measures of inequality in this world would be significant.

The blurb of Changing Jobs asks, ‘how should we prepare ourselves, our children and our grandchildren for the changing world of work?’ But before we can prepare we need to understand. Revolutions in governance have their own logic and consequences. Public debate in Australia comes nowhere near these questions—noble exceptions such as Chalmers and Quigley notwithstanding. Long-term reckoning with future trends has been insipid. We can think of the Gillard government’s Asian century, perhaps (if we are being charitable) the Rudd government’s National Broadband Network, and the Howard government’s intergenerational reports. But our political system isn’t even that agile now.

This may come to be a problem. We will inevitably muddle through, but economic transitions are costly and often traumatic. Well-targeted government reform—which will be ceding responsibility as often as assuming it—is not a tool we want to be without. Technological revolutions have made human society richer and better to live in. In the nineteenth century technology pulled us out of the sluggish growth that was until then the natural state of human society. The revolution we have described here is exciting and will make us better off. But we need to be ready for it. •

Also available at Meanjin and informit

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.

The rational crypto-expectations revolution

With Sinclair Davidson and Jason Potts. Originally a Medium post.

Will governments adopt their own cryptocurrencies? No.

Will cryptocurrencies affect government currencies? Yes.

In fact, cryptocurrencies will make fiat currency better for its users — for citizens, for businesses, for markets. Here’s why.

Why do we have fiat currency?

Governments provide fiat currencies to finance discretionary spending (through inflation), control the macroeconomy through monetary policy, and avoid the exchange rate risk they would have to bear if everybody paid taxes in different currencies.

As George Selgin, Larry White and others have shown, many historical societies had systems of private money — free banking — where the institution of money was provided by the market.

But for the most part, private monies have been displaced by fiat currencies, and live on as a historical curiosity.

We can explain this with an ‘institutional possibility frontier’; a framework developed first by Harvard economist Andrei Shleifer and his various co-authors. Shleifer and colleagues array social institutions according to how they trade-off the risks of disorder (that is, private fraud and theft) against the risk of dictatorship (that is, government expropriation, oppression, etc.) along the frontier.

As the graph shows, for money these risks are counterfeiting (disorder) and unexpected inflation (dictatorship). The free banking era taught us that private currencies are vulnerable to counterfeiting, but due to competitive market pressure, minimise the risk of inflation.

By contrast, fiat currencies are less susceptible to counterfeiting. Governments are a trusted third party that aggressively prosecutes currency fraud. The tradeoff though is that governments get the power of inflating the currency.

The fact that fiat currencies seem to be widely preferred in the world isn’t only because of fiat currency laws. It’s that citizens seem to be relatively happy with this tradeoff. They would prefer to take the risk of inflation over the risk of counterfeiting.

One reason why this might be the case is because they can both diversify and hedge against the likelihood of inflation by holding assets such as gold, or foreign currency.

The dictatorship costs of fiat currency are apparently not as high as ‘hard money’ theorists imagine.

Introducing cryptocurrencies

Cryptocurrencies significantly change this dynamic.

Cryptocurrencies are a form of private money that substantially, if not entirely, eliminate the risk of counterfeiting. Blockchains underpin cryptocurrency tokens as a secure, decentralised digital asset.

They’re not just an asset to diversify away from inflationary fiat currency, or a hedge to protect against unwanted dictatorship. Cryptocurrencies are a (near — and increasing) substitute for fiat currency.

This means that the disorder costs of private money drop dramatically.

In fact, the counterfeiting risk for mature cryptocurrencies like Bitcoin is currently less than fiat currency. Fiat currency can still be counterfeited. A stable and secure blockchain eliminates the risk of counterfeiting entirely.

So why have fiat at all?

Here we see the rational crypto-expectations revolution. Our question is what does a monetary and payments system look like when we have cryptocurrencies competing against fiat currencies?

And our argument is that it fiat currencies will survive — even thrive! — but the threat of cryptocurrency adoption will make central bankers much, much more responsible and vigilant against inflation.

Recall that governments like fiat currency not only because of the power it gives them over the economy but because they prefer taxes to be remitted in a single denomination.

This is a transactions cost story of fiat currency — it makes interactions between citizens and the government easier if it is done with a trusted government money.

In the rational expectations model of economic behaviour, we map our expectations about the future state of the world from a rational assessment of past and current trends.

Cryptocurrencies will reduce government power over the economy through competitive pressure. To counter this, central bankers and politicians will rail against cryptocurrency. They will love the technology, but hate the cryptocurrency.

Those business models and practices that rely on modest inflation will find themselves struggling. The competitive threat that cryptocurrency imposes on government and rent-seekers will benefit everyone else.

It turns out that Bitcoin maximalists are wrong. Bitcoin won’t take over the world. But we need Bitcoin maximalists to keep on maximalising. The stability of the global macroeconomy may come to rely on the credible threat of a counterfeit-proof private money being rapidly and near-costlessly substituting for fiat money under conditions of high inflation.

A hardness tether

Most discussion about the role of cryptocurrency in the monetary ecology has focused on how cryptocurrencies will interact with fiat. The Holy Grail is to create a cryptocurrency that is pegged to fiat — a so-called stable-coin (such as Tether or MakerDAO).

But our argument is that the evolution of the global monetary system will actually run the other way: the existence of hard (near zero inflation, near zero counterfeit) cryptocurrency will tether any viable fiat currency to its hardness. No viable fiat currency will be able to depart from the cryptocurrency hardness tether without experiencing degradation.

This in effect tethers fiscal policy — and the ability of politicians to engage in deficit spending in the expectation of monetising that debt through an inflation tax — to the hardness of cryptocurrency.

The existence of a viable cryptocurrency exit tethers monetary and fiscal policy to its algorithmic discipline. This may be the most profound macroeconomic effect of cryptocurrency, and it will be almost entirely invisible.

Cryptocurrency is to discretionary public spending what tax havens are to national corporate tax rates.

Cryptodemocracy and its institutional possibilities

With Darcy WE Allen, Aaron M Lane and Jason Potts. Review of Austrian Economics, 2018.

Abstract: Democracy is an economic problem of choice constrained by transaction costs and information costs. Society must choose between competing institutional frameworks for the conduct of voting and elections. These decisions over the structure of democracy are constrained by the technologies and institutions available. As a governance technology, blockchain reduces the costs of coordinating information and preferences between dispersed people. Blockchain could be applied to the voting and electoral process to form new institutional possibilities in a cryptodemocracy. This paper analyses the potential of a cryptodemocracy using institutional cryptoeconomics and the Institutional Possibility Frontier (IPF). The central claim is that blockchain lowers the social costs of disorder in the democratic process, mainly by incorporating information about preferences through new structures of democratic decision making. We examine one potential new form of democratic institution, quadratic voting, as an example of a new institutional possibility facilitated by blockchain technology.

Available at the Review of Austrian Economics. Earlier working paper available at SSRN.

Supply Chains on Blockchains

With Sinclair Davidson and Jason Potts

Blockchain technology is shaping up as one of the most disruptive new technologies of the 21st century, facilitating an entirely new decentralised architecture of economic organization. While still experimental, it is disrupting industry after industry, beginning with money, banking and payments, and now moving through finance, logistics, health, and across the digital economy. These waves of innovation are being driven by both new entrepreneurial startups as well as by industry dominant firms reimagining and rebuilding their business models and services to use blockchain technology. Trade platforms and supply chains are shaping up as the major use case for blockchain technology, and we explain here how this may lead to a second phase of globalisation.

Breakthroughs in the technology of trade can have far-reaching consequences. Sailing ships and steam ships, refrigeration and aircraft were all watersheds in the making of the modern world, but two technologies of trade delivered us the modern era of globalization: these are (1) the shipping container, and (2) the WTO (formerly known as the GATT).

The invention of the shipping container in 1956 led to a revolution in international trade, birthing a new phase of globalisation. Blockchains, invented in 2009, promise a similar revolution. Blockchains offer a fundamental architectural change in the way firms and governments manage international trade, with enormous efficiency and productivity gains.

But, just as the shipping container required significant investment to bear fruit—and came up against the interests of the unions, regulators and ports—blockchain-enabled trade will require substantial upfront investment in new systems and will inevitably challenge existing interests. In the 1950s the shipping container was the solution to the problem of the high expense in money, time, and security to load cargo in and out of ships. Handling costs were high, operations were slow, and theft was rife.

Today the constraints on trade consist of the ever-increasing complexity of the data, records, payments and regulatory permissions that accompany goods as they travel across the world. Every good moving along a supply chain is accompanied by a data trail, often still as paperwork, to track bills of lading, invoices of receipt and payment, origin, ownership and provenance, as well as compliance with vast schedules of trade prohibitions and environmental regulation, taxes and duties.

The shipping container is a physical coordination technology, while the WTO is an institutional coordination technology. At the Blockchain Innovation Hub we believe that blockchain technology – as tradetech – is shaping up as the third great technology of trade.

The Cost of Information and Trust

Blockchain technology can solve a major and growing problem with the global trading order – namely the problem of information. Every time a good or service moves, information moves with it. The quantity of information associated with each product continues to grow, and the costs of dealing with this information, from compliance, auditing, verification – trust, in a word – is becoming a greater and greater share of the costs of the global trading system.

This information includes provenance and inputs – the information on a label. It includes trade-finance, bills of lading, shipping and handling information, security clearance – the commercial and administrative information. It includes the documentation of where it’s been and where it’s going, and who has handled it and who hasn’t. And it includes all the information that each country requires in relation to customs and duties, biosecurity, labour and environmental regulations, compliance with various treaties – a vast rigmarole of auditing and compliance, each of which is necessary, desirable and costly. With each day, the information burden increases, not decreases.

As the information cost of trade increases, it is not simply enough to digitize everything, because the real problem is that we need to be able to trust the information that is there.

Tradetech

Globalisation 2.0 will be built on tradetech, and the crucial infrastructural component of tradetech is blockchain. Blockchain technology, which is a distributed, append-only, peer-to-peer, trustless secure ledger, is almost custom-made for trade-tech. It provides an infrastructural platform upon which to build a new information architecture for globally tradable goods – and to do so in a way that is fully digital, tamper-proof, low-cost, end-to-end secure, verifiable, transparent, scalable and computable. What cryptocurrencies did for money tradetech will do for globalization.

Tradetech will integrate the benefits of fintech into trade networks. Crypto-based models of payments, trade finance, insurance and other risk management tools will be automated. Tradetech will integrate the benefits of regtech into trade networks. Verification and compliance with local regulations will be automated. Tradetech will power-up logistics technologies with blockchain affordances such as smart contracts, decentralized autonomous organisations (DAOs), and the full technology stack that includes AI integration.

So we think of blockchain as a next-generation infrastructural technology for the global movement of goods and services. Service exports have the same constraints with respect to compliance with certification, credential verification, and quality standards assurance. These same problems apply generally to the movement of people too. We are still yet to weave together a seamless global system of identity documents, education and trade certification and permissions, and taxation and other public liabilities.

Example: Benefits for Australia

Tradetech facilitated supply chains could to bring significant advantages to Australia, and her trading partners. This is win-win because there are both consumers and producers on each side.

For Australian exporters, there are at least two obvious advances. Tradetech facilitated Australian Agriculture will significantly boost the quality of provenance claims as to origin and quality of product. When this transparent verifiable information passes at much lower cost to final consumers, more of that assurance value passes back to suppliers, boosting primary producer income.

We are starting to see this already with start-ups in the primary export industry, for instance with Beef-ledger, Agridigital and Grainchain. We will also likely see the benefits of similar assurance in advanced manufacturing, such as in aerospace, medical devices, pharma and other high value bespoke manufacturing where quality is paramount and certification is costly. Or in other areas that rely heavily on intellectual property, such as creative industries.

Blockchain based tradetech will benefit producers and consumers by lowering the cost of providing and processing high value information that rewards legitimate quality production and minimizes
rent-extraction along the way.

Crypto Free Trade Zones

Blockchain-based next-generation trade infrastructure opens the prospect of a next generation of crypto free trade zones. These may overlay existing trade zones – within bilateral or multi-lateral zones – with a standard protocol for information handling. This would lower the transactions costs of trade, which economic theory predicts would increase the quantity of trade, and therefore value creation.

But blockchain trade areas could also build on private supply chains and infrastructure, as with consortia such as the IBM-Maersk-Walmart alliance, or with the recently announced adoption by FedEx of blockchain technology. This is the difference between say email (an open standard) and Facebook (a proprietary model). The strength of the closed network model is that it incentivizes investment. But it creates power, and invariably requires regulation to constrain that power. And regulation in turn stifles innovation.

We need to start thinking about how we want free trade to evolve in the blockchain era. Global open standards should be our ambition, because this brings the maximum prospect for growth and innovation. But open standard protocols are challenging to get started, because it can stumble on a coordination problem at the outset. This is why in order to build the next generation of globalization on blockchain infrastructure we will need to solve the open standards coordination problem.