Popular topics: blockchain | free speech | regulation | privacy | taxation

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.

DeFi governance needs better tokenomics

With Sinclair Davidson, published in Coindesk, 13 April 2021

The controversy surrounding the launch of the Fei stablecoin protocol last week reveals a lot about DeFi’s problems with tokenomics. We know what a governance token offers its holders – the right to vote on changes to fees, and the protocol itself. But what should these rights be worth? 

The Fei protocol is engineered to maintain stability against the U.S. dollar by charging a penalty for selling and a bonus for buying the Fei token when it is below the $1 peg. It is an innovative design, albeit highly experimental. But as Fei has drifted further and further from the peg since launch, early buyers found themselves in the unfortunate position of being unable to liquidate their positions without taking substantial loss. 

By the end of the week, Fei suspended the penalties and rewards to try to stabilize the protocol. Until then, these mechanisms were functioning exactly as intended. Careful investors would have seen everything spelled out in the Fei white paper.

We might say this is a simple “buyer beware” story. But it is complicated by the simultaneous airdrop and distribution of Fei’s governance token, TRIBE, that was intended to allocate control rights over the protocol itself. In practice, buyers were trading an appreciating asset (ETH) for a stablecoin (FEI) to get access to the real prize: TRIBE.

In the crypto and DeFi industry many think that governance is just about voting. Voting is important of course – it is the governing part of governance. But it is only a part. In the traditional corporate world, governance rights come with a complex and coherent set of rights and obligations clearly tied to the underlying value of the firm. 

Share ownership represents a right to the cash flow of the company, and a residual claim over the company’s assets if, for whatever reason, it is wound up. The structure of these rights are the result of hundreds of years of evolution in corporate governance. 

If voting rights and the rights over the cashflow and the assets of the firm are misaligned, there can be perverse results. In crypto, we shouldn’t just want governance token-holders to vote. We should want them to vote well – making governance choices that are shaped by their interest in increasing the value produced by the protocol, and their knowledge that they will benefit directly from those choices. 

The initial “investors” in Fei are not really investors in FEI at all. They are customers who spent ETH to buy FEI. And there is an important difference between being a customer and an owner. The difference between being able to complain – to Tweet about how you’ve been wronged – and the ability to do something to recover your money. Because of the design of Fei’s “protocol controlled value” pool of ETH, FEI holders have no residual ownership claim over the ETH, just the right to sell their new FEI on a secondary market.

What governance rights FEI holders have is only as a result of being airdropped TRIBE, a fork of Compound’s COMP token. Like COMP and many other DeFi governance tokens, TRIBE gives voting rights, but does not allocate cash flow rights. 

True, TRIBE holders might in the future vote for protocol amendments that allocate those rights. Even so, the token at best represents an option to participate in unspecified governance that might result in cash flow, but might not. 

The crisis happened because an unexpectedly large number of people bought into FEI to get TRIBE, and then tried to sell out of FEI. That’s understandable: nobody wants to hold a stablecoin in a bull market. This rush for the exits triggered Fei’s penalty and reward nosedive. 

There is a subtle but critical lesson here. If the unique selling proposition of your crypto-economic system is predictability and stability – as it must be for a stablecoin – having the initial demand for that coin driven by a highly speculative governance token that will offer ambiguous future rights is asking for trouble. 

Indeed, it is a lesson that ought to be considered by all token designers in the DeFi world, not just stablecoins. The decision not to specify how value accrues to governance tokens is not just risky for investors. It is risky for the protocol itself.

For example, online chatter suggests that if Fei’s future had been put to a governance vote over the course of the week, there would have been substantial support for distributing its enormous ETH treasury back to FEI buyers. This would have recouped individual losses, but probably also have wound the protocol up entirely.

The Fei protocol is trying to do a lot of innovative work at once. If it turns out to be a success, it won’t have been the only successful protocol that had a rocky bootstrapping phase. But it should offer future protocols a critical lesson in tokenomics. 

Governance tokens are one of the most interesting innovations in DeFi. They seem to offer a fast path to decentralization, handing over control from entrepreneurs to a distributed community as quickly as possible, at, after, or even before launch. But the role of governance cannot be an afterthought – a bolt-on that can be pushed to a governance token and left to unknown future decision-makers.

Governance is the philosophical and economic heart of the blockchain and cryptocurrency industry. After all, decentralization is nothing if not the decentralization of governance. As Fei shows, dumping protocol governance onto a speculative token with unclear cash flow and ownership rights introduces a lot of instability into already ambitious protocols.   

Social media has huge problems with free speech and moderation. Could decentralised platforms fix this?

Published at The Conversation. With Marta Poblet and Elizabeth Morton

Over the past few months, Twitter took down the account of the then-President of the United States and Facebook temporarily stopped users from sharing Australian media content. This begs the question: do social media platforms wield too much power?

Whatever your personal view, a variety of “decentralised” social media networks now promise to be the custodians of free-spoken, censorship-resistant and crowd-curated content, free of corporate and political interference.

But do they live up to this promise?

Cooperatively governed platforms

In “decentralised” social media networks, control is actively shared across many servers and users, rather than a single corporate entity such as Google or Facebook.

This can make a network more resilient, as there is no central point of failure. But it also means no single arbiter is in charge of moderating content or banning problematic users.

Some of the most prominent decentralised systems use blockchain (often associated with Bitcoin currency). A blockchain system is a kind of distributed online ledger hosted and updated by thousands of computers and servers around the world.

And all of these plugged-in entities must agree on the contents of the ledger. Thus, it’s almost impossible for any single node in the network to meddle with the ledger without the updates being rejected.

Gathering ‘Steem’

One of the most famous blockchain social media networks is Steemit, a decentralised application that runs on the Steem blockchain.

Because the Steem blockchain has its own cryptocurrency, popular posters can be rewarded by readers through micropayments. Once content is posted on the Steem blockchain, it can never be removed.

Not all decentralised social media networks are built on blockchains, however. The Fediverse is an ecosystem of many servers that are independently owned, but which can communicate with one another and share data.

Mastodon is the most popular part of the Fediverse. Currently with close to three million users across more than 3,000 servers, this open-source platform is made up of a network of communities, similar to Reddit or Tumbler.

Users can create their own “instances” of Mastodon — with many separate instances forming the wider network — and share content by posting 500-character-limit “toots” (yes, toots). Each instance is privately operated and moderated, but its users can still communicate with other servers if they want to.

What do we gain?

A lot of concern around social media involves what content is being monetised and who benefits. Decentralised platforms often seek to shift the point of monetisation.

Platforms such as Steemit, Minds and DTube (another platform built on the Steem social blockchain) claim to flip this relationship by rewarding users when their content is shared.

Another purported benefit of decentralised social media is freedom of speech, as there’s no central point of censorship. In fact, many decentralised networks in recent years have been developed in response to moderation practices.

Mastodon provides a set of guidelines for user conduct and has moderators within particular servers (or communities). They have the power to disable, silence or suspend user access and even to apply server-wide moderation.

As such, each server sets its own rules. However, if a server is “misbehaving”, the entire server can be put under a domain block, with varying degrees of severity. Mastodon publicly lists the moderated servers and the reason for restriction, such as spreading conspiracy theories or hate speech.

Some systems are harder to moderate. Blockchain-based social network Minds claims to base its content policy on the First Amendment of the US constitution. The platform attracted controversy for hosting neo-Nazi groups.

Users who violate a rule receive a “strike”. Where the violation relates to “not safe for work” (NSFW) content, three strikes may result in the user being tagged under a NSFW filter. If this happens, other users must opt in to view the NSFW content, for “total control” of their feed.

Minds’s content policy states NSFW content excludes posts of an illegal nature. These result in an immediate user ban and removal of the content. If a user wants to appeal a decision, the verdict comes from a randomly-selected jury of users.

Even blockchain-based social media networks have content moderation systems. For example, Peepeth has a code of conduct adapted from a speech by Vietnamese Thiền Buddhist monk and peace activist Thích Nhất Hạnh.

“Peeps” falling afoul of the code are removed from the main feed accessible from the Peepeth website. But since all content is recorded on the blockchain, it continues to be accessible to those with the technical know-how to retrieve it.

Steemit will also delete illegal or harmful content from its user-accessible feed, but the content remains on the Steem blockchain indefinitely.

The search for open and safe platforms continues

While some decentralised platforms may claim to offer a free for all, the reality of using them shows us some level of moderation is both inevitable and necessary for even the most censorship-resistant networks. There are a host of moral and legal obligations which are unavoidable.

Traditional platforms including Twitter and Facebook rely on the moral responsibility of a central authority. At the same time, they are the target of political and social pressure.

Decentralised platforms have had to come up with more complex, and in some ways less satisfying, moderation techniques. But despite being innovative, they don’t really resolve the tension between moderating those who wish to cause harm and maximising free speech.

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.

Tracer: Perpetual Swaps

With Ryan Garner, Lachlan Webb, Jason Potts and Sinclair Davidson

Abstract: To date no platform offers permissionless market deployment of perpetual swaps. Existing offerings require governance approval and/or developer support to deploy new markets. Herein we propose a generalised perpetual swap protocol that avoids all third party requirements. The Tracer Perpetual Swap system is a Factory compatible template that offers customised market deployment without permissions. The smart contracts contain mechanisms that allow markets to operate at significantly lower cost to participants. We have designed a riskless liquidation mechanism via a slippage reimbursement receipt, rendering the act of liquidation risk-free and the cost to liquidated traders competitively inexpensive. As a result, users can trade at higher leverage and open positions with minuscule investment sizes. The Tracer Perpetual Swap is a piece of financial infrastructure that can be accessed by anybody with an internet connection. Using this infrastructure, any graphical user interface, financial institution or individual can access global market exposure in the decentralised economy.

Available at the Tracer website and in PDF here.

Financial rules for the algorithm age

Published in the Australian Financial Review

A lot has changed in cryptocurrency since the last bull run in 2017. And these changes have made the regulatory regime that emerged in Australia since the invention of bitcoin look decidedly creaky – if not completely incoherent – and a serious barrier to fintech innovation and investment.

For the most part, Australian policymakers have preferred to squeeze digital assets into existing regulatory frameworks rather than create new frameworks.

For tax purposes, cryptocurrency has been treated as a traditional financial asset subject to capital gains tax – unless it is used in regular transactions, then it is treated like currency. An initial coin offering, where tokens are sold to early investors and users, is generally treated as a share offering or managed investment scheme.

This was the right approach. Entrepreneurs may not have loved the heavy compliance burdens, but at least those burdens were well understood. And we have avoided regulatory disasters like New York’s “BitLicense”, which led to cryptocurrency firms fleeing the city almost the moment it was introduced.

But where in 2017 cryptocurrency users and investors were limited to a relatively small number of digital assets trading on a couple of centralised exchanges, a new class of decentralised finance (DeFi) products have enabled the development of complex financial products and services that are completely decentralised. DeFi completely undermines Australia’s regulatory approach to cryptocurrency and blockchain.

Everything from loans to derivatives to exchanges are being rebuilt as autonomous digital products outside the traditional finance system. These are not niche innovations. Some estimates have upwards of $50 billion locked up in DeFi products right now.

Consider one of the most innovative financial services in the DeFi space: automated market makers. These AMMs allow users to trade one digital asset for another without going through a traditional central orderbook. Investors – “liquidity providers” – put assets into a pool. People who wish to trade one asset for another make exchanges with the pool, which reprices each asset automatically to keep the pool in balance. Investors get fees and bear risk if the external price of the assets change.

AMMs are a brilliant innovation and a regulatory nightmare. Let us start with tax. The Australian Taxation Office treats any token-to-token exchange as a capital gains event, where profits and losses incur a tax liability is incurred, just like a normal exchange of financial assets. This regime makes sense for traditional finance. But it creates huge burdens for DeFi.

Imagine a relatively simple DeFi investment – putting bitcoin in an AMM. First, you have to bring your bitcoin onto a smart contract network like ethereum. Bitcoin can only truly exist on the bitcoin blockchain, so you vouchsafe your coins with a provider who then mints a digital representation of your bitcoin on the ethereum network. You deposit this “wrapped bitcoin” token (and usually another token) into the AMM. You get a receipt – just another token – that represents your share of the pool.

Each of these exchanges are capital gains events. None of them are denominated in Australian dollars. Even the most diligent DeFi user will inevitably make mistakes when trying to account for the capital gains and losses. Few users even realise they are actually performing a token-to-token exchange when they make AMM investments. It is hard to describe the capital gains treatment of DeFi as a functioning part of the tax system at all.

The tax regime may be a compliance nightmare, but at least it is navigable. There are even harder compliance questions in our imagined DeFi investment. For instance, what actually is an AMM, in law? It looks a lot like a managed investment scheme – that is probably what ASIC will think. Like a traditional managed investment scheme, investors pool money in return for profits and don’t have day-to-day control of the investments. But if an AMM is a managed investment scheme … well, it doesn’t have a manager. Algorithms can’t hold financial licences. Nor on a censorship-resistant blockchain can they be shut down.

There are solutions to these problems. Capital gains events should be limited to when cryptocurrency is converted to fiat or used to buy goods or services. My colleagues Darcy Allen, Aaron Lane and I have called for a new exemption to the managed investment scheme framework – what we call “autonomous investment products”. Where a product is entirely algorithmic, has no ongoing responsible party, and is completely open source and auditable by investors, the heavy compliance burdens of a managed investment scheme don’t make sense.

But these solutions will almost certainly require legislative change. Until now, Australia’s cryptocurrency policy has been made via regulatory guidance. That approach has reached its use-by date. Fintech innovation can’t be left to suffocate under regulatory uncertainty and incoherence.

Response to Questions on Notice: Senate Select Committee on Financial Technology and Regulatory Technology

With Darcy W.E. Allen and Aaron M. Lane

Response to questions on notice at Senate Select Committee on Financial Technology and Regulatory Technology.

The capital gains taxation regime as it applies to cryptocurrency
is no longer appropriate

The Australian Taxation Office’s position that cryptocurrency is an asset for capital gains tax purposes and that every exchange between two cryptocurrency tokens should be treated as a “disposal” creates substantial regulatory compliance burdens on taxpayers, hinders fintech adoption, and achieves no policy objective.

This treatment of tokens poses unique challenges for cryptocurrency users. As each tokento-token exchange is treated by the ATO as a capital gains tax event, taxpayers are required to record gains or losses in the Australian dollars. However, token-to-token exchanges often occur at multiple times removed from Australian dollar-denominated markets. For many cryptocurrency tokens, liquid token-AUD exchange markets do not exist. In addition, the volume and complexity of some of these token exchanges make precise accounting of gains and losses on a per-transaction basis unrealistic, even for honest taxpayers seeking to fully ensure compliance.

Token-to-token exchanges of cryptocurrencies and other digital assets are foundational to the development of the digital economy, contributing to price and business model discovery. The current capital gains tax treatment to token-to-token exchanges imposes significant and unnecessary uncertainty and regulatory burden on cryptocurrency users, investors and the blockchain industry more generally.

The capital gains tax regime may have been appropriate five years ago when the cryptoeconomy was smaller, less complex and when there were relatively few places to make token-to-token exchanges. However, recent developments make the current policy regime inappropriately narrow and imposing. For example, the rise of decentralised finance (‘defi’) means that token-to-token exchanges are now commonly occurring through a vast ecosystem of decentralised protocols that operate at multiple levels removed from Australian dollar-denominated markets and provide no easy-to-use tools for the granular record keeping required by the ATO.

Additionally, the tokens that are being exchanged are also changing as the cryptoeconomy has developed. Defi activity can result in tokens being locked up in exchange for ‘governance’ tokens. Tokens that represent claims on other tokens through smart contracts – often necessary to acquire in order to participate in economic activity across multiple blockchains – can trade at a premium or discount. Treating these token-to-token swaps as capital gains events serves no policy purpose, and adds significant ambiguity and uncertainty to the Australian tax system.

The current regime also risks cryptocurrency users accumulating an Australian dollar-denominated tax liability that might be tied up in illiquid tokens.

The committee should understand that compliance with this regime in the Australian public is likely to be very low and the risk of taxpayers making errors in attempting to comply with the current legislation is very high.

Recommendation:

We recommend that CGT events be limited to exchanges where it is reasonable to comply with the capital gains tax regime. These would be when:

  • Cryptocurrency is exchanged with fiat currency (most commonly the Australian dollar),
  • Cryptocurrency is used in the acquisition or disposal of a tangible good or service, or a non-fungible token (such as a piece of digital art). Depending on the CGT classification of the respective token (for example a personal use asset or collectable), these transactions may yield the normal concessional treatments.

The burden of demonstrating compliance with these rules would remain with the taxpayer. This approach would significantly simplify the capital gains tax regime while reducing regulatory burdens, encourage innovation and the expansion of blockchain and cryptocurrency jobs in Australia, and be revenue neutral to the Commonwealth government.

The managed investment scheme regime doesn’t suit autonomous (algorithmic) financial products

A managed investment scheme (MIS) is an investment structure where a “responsible entity” manages investments for unit holders. In summary, the Corporations Act 2001 (Cth) provides that a MIS will exist where (i) members contribute money or money’s worth as consideration to acquire rights to benefits produced by the scheme; (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the members; and (iii) the members do not have day-to-day control over the operation of the scheme. Generally, a MIS is required to be registered with ASIC if it has more than 20 members. A registered entity is required to be a public company and hold an Australian Financial Services License.

There is a significant risk facing blockchain companies in Australia that the MIS regime will be inappropriately applied, particularly as it pertains to decentralised finance (‘defi’) products. There is approximately US$41.5 billion worth of tokens in the defi ecosystem. Inappropriate and high cost regulation threatens the viability of the defi industry in Australia and will send entrepreneurs and job-makers overseas.

For example, popular defi applications include a class of automated market makers (AMMs) that allow users to make token-to-token exchanges outside ‘traditional’ centralised exchanges like Binance or Coinbase. Investors pool tokens in these automated exchanges, earning profit through fees. The pool automatically prices exchanges in a way that rebalances the pool, guaranteeingthat each asset is always available.

It is likely an AMM would be considered a MIS within the legal definition outlined above. However, there are several regulatory problems in applying the MIS regulatory framework to defi products like AMMs:

  • These schemes have no manager – that is, there is no responsible entity on whom the obligations of a financial services licence could be meaningfully imposed or exercised. The scheme – and thus the return on the investment – is determined entirely algorithmically.
  • Automated market makers like this have no responsible agent. Amendments to the protocol (for example, varying the fee for investors) are entirely controlled by the voting behavior of governance token holders (typically investors).

Applying the rules governing managed investment schemes to these autonomous and algorithmic financial products is a category error.

In any case, treating a defi product as an MIS would not achieve the government’s policy goals. Defi products are censorship resistant and fully digital. Australian investors are able to interact with defi products developed around the world at almost zero cost. Regulatory avoidance is trivially easy because these products can be freely “forked” (that is, their code copied, modified, and re-deployed permissionlessly). Applying the MIS framework to Australia-built defi products means that Australian companies are highly reluctant to innovate in this frontier fintech field.

The committee might consider amending the government’s enhanced fintech sandbox or develop a new blockchain technology specific sandbox to deal allow for defi products. However, we do not recommend this approach. One problem is that the current sandbox rules (such as limitations on the amount of money invested, or persons involved) would be inappropriate for defi because of the absence of centralised management, the ease of forking, and the quantum of funds. For example, automated exchanges have no mechanism to limit the size of the total pool (doing so would potentially reduce the stability of the pool) and even if limits were implemented they could be avoided through forking the pool and re-deploying it. Furthermore, if regulators were to determine that the defi product no longer compliant with the sandbox rules, given the uncensorable nature of blockchain, there would be no mechanism by which regulators could insist that the product could cease trading.

Recommendation:

We recommend that the Corporations Act be amended to exempt “autonomous financial products” from the existing definition of a MIS. To qualify as an autonomous financial product, the product needs to be:

  • Fully algorithmically deterministic (that is, all investment decisions are made by an algorithm rather than a responsible human entity);
  • Governance decisions are sufficiently decentralised and made solely by those who have invested; and
  • Fully open source, with its code published on a recognised platform (such as
    GitHub), allowing investors to scrutinise the code themselves.

This change would be straightforward and is consistent with the existing legislative approach of the Act. While legislative change is preferred to provide certainty, we note that this approach could also be achieved through regulation as section 9 of the Act provides a mechanism for the Regulations to declare that a scheme is not a MIS.

PDF version with references and footnotes available in here.

Tracer: Peer-to-Peer Finance

With Ryan Garner, Lachlan Webb, Jason Potts and Sinclair Davidson

Abstract: In this paper we introduce Tracer: peer-to-peer financial infrastructure for the decentralised economy. Tracer lowers the costs of participating in financial markets, using blockchain technology to enforce property rights and settle financial contracts without the need for a trusted
third party. Tracer’s Factory smart contract hosts an ecosystem of standardised financial contracts. The Tracer DAO can install proposed contract templates into the Factory, which can be accessed and deployed by anyone with a connection to the Internet. Once deployed, a contract is permissionless and not subject to DAO governance unless specified. A Reputation System allows users to identify financial risk and assess under-collateralised financial opportunities. Oracle financing is introduced as a novel model that incentivises the discovery and standardisation of new data for use in decentralised financial contracts. Tracer’s financial infrastructure stands to be the backbone of a secure, global financial network and provides strong foundations for future financial innovation.

Available at the Tracer website and in PDF here.

After GameStop, the rise of Dogecoin shows us how memes can move markets

Published in The Conversation with Jason Potts

One of the most difficult problems in finance right now is figuring out the fundamental economic value of cryptocurrencies. And the past week has complicated this further.

For many cryptocurrency investors, the value of Bitcoin is based on the fact it is artificially scarce. A hard cap on “minting” new coins means there will only ever be 21 million Bitcoin in existence. And unlike national currencies such as the Australian dollar, the rate of release for new Bitcoin is slowing down over time.

Dogecoin, a cryptocurrency that takes its name and logo from a Shiba Inu meme that was popular several years ago, have a cap. Launched in 2013, there are now 100 billion Dogecoin in existence, with as many as five billion new coins minted each year.

But how can a currency with a seemingly unlimited supply have any value at all? And why did Dogecoin’s price suddenly surge more than 800 per cent in 24 hours on January 29?

At the time of publication, the “memecoin” was worth about $5.6 billion on the stockmarket.

Dogecoin is one of the original “altcoins”: cryptocurrencies released in the few years after the pseudonymous Satoshi Nakamoto first released Bitcoin into the wild.

From a technical perspective, Dogecoin isn’t very innovative. Like many early altcoins, it’s based on the original source code of Bitcoin.

Or more technically, it’s based on Litecoin, which in turn was based on Bitcoin — but with some small modifications such as faster transactions and the removal of the supply cap. But Dogecoin is much more interesting when seen through a cultural lens.

The cryptocurrency was created by software engineers Billy Markus and Jackson Palmer — although Palmer, an Australian, has since walked away from the project. They branded it with the Doge meme partly to be funny, but also to distance it from Bitcoin’s then questionable reputation as a currency for illicit transactions.

Now, Dogecoin has outlasted almost all the early derivative altcoins and has a thriving community of investors. In 2014, Dogecoin holders sponsored the Jamaican bobsled team. Soon after, they sponsored a NASCAR driver.

Elon Musk, the world’s richest man, is among the cryptocurrency’s high-profile advocates. In December last year, a tweet from Musk sent Dogecoin’s price soaring.

Reddit threads proclaim Dogecoin’s value as a new global currency. Musk himself shared a similar sentiment a few days ago. Speaking on the app Clubhouse, he said:

Dogecoin was made as a joke to make fun of cryptocurrencies, but fate loves irony. The most ironic outcome would be that Dogecoin becomes the currency of Earth in the future.

But Dogecoin is best thought of as a cultural product, rather than a financial asset. The reality is few cryptocurrency users hold it as a serious investment or to use in regular transactions. Instead, to own Dogecoin is to participate in a culture.

People buy it because it’s fun to have, is inherently amusing and comes with a welcoming and enjoyable community experience.

If we start thinking of the cryptocurrency as a cultural product, last week’s sudden jump in Dogecoin’s price makes sense. The boost came just after a meme-centric community managed to drive the share price of videogame retailer GameStop from US$20 to US$350 in mere days.

This swarm behaviour was unlike anything seen before — and it frightened global financial markets.

One particularly interesting aspect of the Reddit forum r/WallStreetBets — which coordinated the attack on the hedge fund that had effectively bet on GameStop’s share price falling — was how many users were having fun.

It’s no surprise activity surrounding Dogecoin has a similar vibe; it was designed to be fun right from the start.

Some people participate in financial markets as a form of consumption — meaning for entertainment, leisure and to experience community — just as much as they do for investment.

Cultural assets such as Dogecoin are hard to systematically value when compared to financial assets, a bit like how we don’t have a fundamental theorem for pricing art.

Almost by definition, the demand for a memecoin will fluctuate as wildly as internet culture itself does, turning cultural bubbles into financial bubbles. RMIT professor and crypto-ethnographer Ellie Rennie calls these “playful infrastructures“.

By inspecting Dogecoin closely, we can learn a lot about the interplay of technology, culture and economics.

Moreover, cryptocurrencies are extraordinarily diverse. Some are built for small payments or to be resilient holders of value. Others protect financial privacy or act as an internal token to manage smart contracts, supply chains or electricity networks.

Under the hood, Bitcoin and Dogecoin look almost exactly the same. Their code differs in only a few parameters. But their economic functions are almost entirely opposite.

Bitcoin is a kind of “digital gold” adopted as a secure hedge against political and economic uncertainty. Dogecoin, on the other hand, is a meme people add to their digital wallet because they think it’s funny.

But in an open digital economy, memes move markets.

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