Submitted to the to the Senate Standing Committee on Economics. With Aaron Lane, Darcy WE Allen, Elizabeth Morton, Max Parasol, and Jason Potts. Available here.
With Jason Potts, Darcy W E Allen, and Nataliya Ilyushina. Available on SSRN.
Large Language Models (LLMs) or generative AI have emerged as a new general-purpose technology in applied machine learning. These models are increasingly employed within firms to support a range of economic tasks. This paper investigates the economic value generated by the adoption and use of LLMs, which often occurs on an experimental basis, through two main channels. The first channel, already explored in the literature (e.g. Eloundou et al. 2023, Noy and Wang 2023), involves LLMs providing productive support akin to other capital investments or tools. The second, less examined channel concerns the reduction or elimination of agency costs in economic organisation due to the enhanced ability of economic actors to insource more tasks. This is particularly relevant for tasks that previously required contracting within or outside a firm. With LLMs enabling workers to perform tasks in which they had less specialisation, the costs associated with managing relationships and contracts decrease. This paper focuses on this second path of value creation through adoption of this innovative new general purpose technology. Furthermore, we examine the wider implications of the lower agency costs pathway on innovation, entrepreneurship and competition.
Abstract: A cryptocurrency token airdrop is a novel means of distributing rights over a blockchain project to a community of users and owners for free. The market value of these airdrop giveaways is often upwards of hundreds of millions of dollars. This paper considers why projects might choose this unusual and costly means of token distribution. It considers a selection of high-profile airdrops as case studies between 2014 and 2022. This is the first comprehensive analysis of the rationales and mechanisms of Web3 token airdrops. We find that two primary rationales for airdrops are marketing (to attract new users and to maintain a community) and decentralisation of ownership and control of a project (building community, providing regulatory protection, and enhancing security). The paper contributes to an understanding of business practice and strategy in the emerging cryptocurrency and blockchain industry.
Abstract: Repugnant innovation is a form of evasive entrepreneurship that occurs in repugnant markets. Repugnance is an informal institution – controlled by long-lived norms, attitudes, customs and traditions – and repugnant innovation acts to shift institutions at the lowest level of the institutional stack. The paper considers three examples of repugnant innovation: e-cigarettes, online gambling, and webcam modelling. Each repugnant innovation challenges the complex mixture of material and moral concerns that contributes to repugnance in their respective markets. The paper adds to and expands on a body of evidence about innovation in apparently unsupportive institutional environments.
With Darcy WE Allen and Sinclair Davidson. Available at SSRN
Abstract: A core finding in traditional corporate finance is that manipulating funding instruments does not increase the value of a firm. Several Web3 projects have mechanisms to buy their tokens on the market and burn those tokens. If the finding from corporate finance holds in the Web3 environment then this manipulation of the value of tokens should not increase the value of those projects. This paper asks if these mechanisms serve more of a purpose than price manipulation. We provide an efficiency explanation for buyback and burn mechanisms: value signalling. A buyback and burn enables projects to signal that their business model has genuine network effects, and that it is not a Ponzi scheme. This finding has implications for the motivation, justification and design of buyback and burn mechanisms across Web3.
Working paper with Jason Potts, Darcy W E Allen, Aaron M. Lane and Trent MacDonald. Available on SSRN
Abstract: Blockchains have enabled innovation in distributed economic institutions, such as money (e.g. cryptocurrencies) and markets (e.g. DEXs), but also innovations in distributed governance, such as DAOs, and new forms of collective choice. Yet we still lack a general theory of blockchain governance. James Buchanan once described public choice theory as ‘politics without romance’ and argued instead for an exchange theory of politics. Following Buchanan, we argue here for an exchange view of blockchain governance. The ‘romantic’ view of blockchain governance is collective choice and consensus through community voting. The exchange view, instead, is focused on entrepreneurial discovery of opportunities for value creation in governance space through innovation in protocols (e.g. Curve, Convex, Lido, Metagov, etc) that facilitate exchange of coordination and voting rights, that are newly made possible through tools that enable pseudonymous, composable and permissionless governance actions. The exchange lens on web3 governance also helps illuminate how this emergent polycentric process can generate robustness in decentralised systems.
With Darcy WE Allen, Sinclair Davidson and Jason Potts. European Journal of Law and Economics volume 54, page 107–125 (2022)
Abstract: From the epidemiological perspective, the COVID-19 pandemic is a public health crisis. From the economic perspective, it is an externality and a social cost. Strikingly, almost all economic policy to address the infection externality has been formulated within a Pigovian analysis of implicit taxes and subsidies directed by a social planner drawing on social cost-benefit analysis. In this paper, we draw on Coase (1960) to examine an alternative economic methodology of the externality, seeking to understand how an exchange-focused analysis might give us a better understanding of how to minimise social cost. Our Coasean framework allows us to then further develop a comparative institutional analysis as well as a public choice theory analysis of the pandemic response.
With Darcy WE Allen and Aaron M Lane. Available at SSRN
Abstract: Blockchain treasuries are pools of digital assets earmarked for funding goods and services within a blockchain ecosystem that have some public purpose, such as protocol upgrades. Ecosystem participants face a trust problem in ensuring that the treasury is robust to opportunism, such as theft or misappropriation. Treasury governance tools, such as expert committees or stakeholder voting, can bolster trust in treasury functions. In this paper we use new comparative economics to examine how treasury governance mechanisms minimise different types of costs, thereby bolstering trust. We interpret case studies of innovative treasury governance within this framework, finding that the costs shift throughout the lifecycle of an ecosystem, and those subjective costs are revealed through crisis. These changes lead ecosystem participants to choose and innovate on treasury governance.
With Darcy WE Allen
The blockchain and defi sector should understand more about how real world grant giving bodies function. Nowhere is this clearer than in the recent debate about UniSwap and its new $20 million Defi Education Fund.
In the real world, grant giving is a lot like venture finance. It is an entrepreneurial activity involving the discovery of new information, new opportunities, and new ideas. It helps realise those opportunities and ideas and is rewarded for doing so.
The fact that grants are done with a for-purpose goal while venture finance is done with a for-profit goal only makes a difference at the margin. The best grant giving bodies in the world work very hard to ensure that the custodians of funds have incentives tightly aligned to the overall objectives of the body. Some even use external independent auditors to see whether grants align to objectives, and penalise the program’s management if they do not. These rules bind the grant makers, allowing the grant seekers to innovate and discover how best to achieve the programs objectives.
Admittedly, it can be sometimes hard to see the entrepreneurial and discovery nature of grant programs. Academic research grants tend to be highly bureaucratic processes with layers of committees and appointed experts collating and judging grant proposals at arms-length from the funders.
But ultimately this bureaucracy has a purpose. Those systems of rules might seem inefficient, but they have been designed to align the dispersal of funds with the objectives of the fund. In the case of the Australian Research Council, all those committees are intended to fulfil the objectives of the Department of Education’s scientific mandate through discovery and investment. (Let’s not get hung up about how effective these government programs are.)
At the other end of the spectrum is Tyler Cowen’s Emergent Ventures grant program, where almost all decision-making is Cowen’s judgement. But this too is a structure designed to align objectives with fund dispersal. The objectives of the fund are to allow Cowen to use his knowledge to support “high-risk, high-reward ideas that advance prosperity, opportunity, and wellbeing” — and by all accounts the program is an incredible success.
Two approaches to defi grants
Right now we broadly have two models of grant giving in the defi space. The first is small centralised grant committees. These tend to be small groups of authoritative community leaders with near absolute control of large treasuries assessing and granting funds to desirable projects. These leaders may be elected or appointed, but either way they are using their authority in the community to legitimate their decisions. They may have a deep understanding of their ecosystem and its funding needs. An obvious problem with this is the risk that committee leaders opportunistically fund projects based on personal relationships, rather than ecosystem value.
The alternative model — and the most common one — is putting all grant proposals up to a vote of all relevant stakeholders, that is, holders of a governance token. Designing structures for effective collective decision-making is one of the hardest problems in political science. It is no surprise that some decision-making in the nascent blockchain governance world have been controversial.
But there’s a fundamental problem with this democratic model to grant making: it makes very little sense to believe that a full distributed democratic community can make the sort of entrepreneurial decisions that we expect from both venture finance and grant giving bodies themselves. Why would we expect a diverse, pseudonymous community of governance token holders to coordinate around extremely uncertain entrepreneurial decisions?
Throwing every proposal to a mass vote is the worst of all worlds. First, every proposal ultimately becomes a public vote about the objectives of the program itself. Should the treasury’s funds be used for marketing, or research, or to build new infrastructure? Grant recipients, and the ecosystem that relies on them, are left with inconsistency and unpredictability.
Second, there is little reason to believe that a mass vote will reveal the best investments. Highly decentralised voting may protect against opportunism, but it isn’t likely to surface information about entrepreneurial investment opportunities — exactly what is needed for successful grant-giving. This precise information-revelation problem is the motivation and intuition between mechanisms such as quadratic funding, futarchy, and commitment voting.
A better grant program design
This is a solvable problem. Treasuries should give budgets to individual ‘philanthropists’. Those philanthropists then make entrepreneurial investments to align the compensation of those entrepreneurs with the success of their invested projects.
The full set of tokenholders sets the objective of the grant program, or an individual round. These objectives would shift as a given ecosystem and the broader industry develops — for instance from funding oracle feeds, to bridging infrastructure, to policy change. Grants are broken into funding rounds. The length of those rounds, say a year or two, must be long enough that there are observable outcomes from grant projects. Rounds could be sequential or overlap.
Each round, a set of philanthropists (say, five) are chosen (elected or appointed) and given discrete budgets. The number of philanthropists for a given round could also be decided by all tokenholders.
Once the funds are dispersed to each philanthropist, they run separate and independent grant programs. They must have credible autonomy: with their own rules, their own application processes, and their own interpretation of the objectives of the overall grant program.
At the end of the round, the full set of tokenholders rank each of the five philanthropists according to how successful (how much value was added, how closely they aligned to objectives) their grants were. The philanthropists are compensated for their work based on that ranking, with the top-ranked getting the most reward.
In this way the grants program is designed to both fund projects, and to incentivise decision-making philanthropists to do a good job.
Our proposal drives the same sort of competitive, entrepreneurial energy that we see in venture finance into defi grant distribution.
Through grant program design we can encourage effective decision-making through feedback loops, while maintaining decentralisation (the risk that philanthropists will behave badly is limited to the length of a grant round) and giving philanthropists a personal stake in the success of the grants that they have distributed (encouraging them to support and shepherd them to fruition).
Grant program design matters a lot
It might be easy to dismiss grant program design as a sideshow in the blockchain industry, marginally interesting but ultimately not a central part of the success of any particular protocol. It would be wrong to do so.
Analogies in blockchain are difficult. But if DAOs are like corporations, then grant programs are how they do internal capital allocation — and as Alfred D. Chandler Jr. has shown, internal capital allocation has determined the shape of global capitalism. Alternatively, if blockchain ecosystems are like countries with governments, then when we talk about grant programs we’re talking about public finance — they are how we pay for public goods and deploy scarce resources in a democratic context.
Ultimately, the sustainability and robustness blockchain ecosystems require effective use of resources. The success of grant programs will form a critical part of the success of blockchain and dapp protocols. They should seek to harness the same entrepreneurial energy and effort that has driven the rest of the blockchain industry.
With Darcy Allen and Jason Potts
The COVID-19 pandemic is both a public health crisis, and a digital technology accelerant. Pre-pandemic, our economic and social activities were done predominantly in cities. We connected and we innovated in these centralised locations.
But then a global pandemic struck. We were forced to shop, study and socialise in a distributed way online. This shock had an immediate impact on our cities, with visceral images of closed businesses and silent streets.
Even after COVID-19 dissipates, the widespread digital adoption that the pandemic brought about means that we are not snapping back to pre-pandemic life.
The world we are entering is hybrid. It is both analogue and digital, existing in both regions and cities. Understanding the transition is critical because cities are one of our truly great inventions. They enable us to trade, to collaborate, and to innovate. In other words, cities aggregate economic activity.
The Digital CBD project is a large-scale research project that asks: what happens when that activity suddenly disaggregates? What happens to the city and its suburbs? What happens to the businesses that have clustered around the CBD? What infrastructure do we need for a hybrid digital city? What policy changes will be needed to enable firms and citizens to adapt?
Forced digital adoption
This global pandemic happened at a critical time. Many economies were already transitioning from an industrial to a digital economy. Communications technologies had touched almost every business. Digital platforms were commonly used to engage socially and commercially. But the use of these technologies was not yet at the core of our businesses, it sat on the sidelines. We were only on the cusp of a digital economy.
Then COVID-19 forced deep, coordinated, multi-sector and rapid adoption of digital technologies. The coordination failures and regulatory barriers that had previously held us back were wiped away. We swapped meeting rooms for conference calls, cash for credit cards, pens-and-paper for digital signatures. There had been a desire for these changes for a long time.
These changes make even more frontier technologies suddenly come into view. Blockchains, artificial intelligence, smart contracts, the internet of things and cybersecurity technologies are now more viable because of this base-level digital adoption.
Importantly, this suite of new technologies doesn’t just augment and improve the productivity of existing organisations, they make new organisational forms possible. It changes the structure of the economy itself.
Discovering our digital CBD
Post-pandemic, parts of our life and work will return to past practices. Some offices will reopen, requiring staff to return to rebuild morale and culture. And those people will also flood back into CBD shops, bars and restaurants. They will, as all flourishing cities encourage, meet and innovate.
But of course some businesses will relish their new-found productivity benefits – and some workers will guard the lifestyle benefits of working from home. Many firms will never fully reopen their offices and will brag about their remote-work dynamic culture.
The potential implications for cities, however, are more complex. Cities will fundamentally have different patterns of specialisation and trade than a pre-pandemic economy. Those new patterns are enabled by a suite of decentralised technologies, including blockchains and smart contracts, that were already disrupting how we organise our society.
We can now organise economic activity in new ways. CBDs have historically housed large, hierarchical industrial-era companies. As we have written elsewhere, decentralised infrastructure enables new types of organisational forms to emerge. Blockchains industrialise trust and shift economic activities towards decentralised networks.
How do these new types of industrial organisation change the way that we work, and the location of physical infrastructure? What are the policy changes necessary to enable these new organisations to flourish in particular jurisdictions?
Economies and cities are fundamentally networks of supply chains, and that infrastructure is turning digital too. The pandemic has accelerated the transition to digital trade infrastructure that provides more trusted and granulated information about goods as they move. How can we ensure that these digital supply chains are resilient to future shocks? What opportunity is there for regions to become a digital trade hub?
Another impact of digital technology is that labour markets just became more global. The acquisition of talented labour is no longer bounded by physical distance. Our collaborations are structured around timezones, rather than geography.
Labour market dynamism presents unique opportunities, but will also require secure infrastructure both to validate credentials and to facilitate ongoing productivity. How can Melbourne, a world-class cluster of universities, place itself for this new environment?
A research and a policy problem
Building a digital CBD is fundamentally an entrepreneurial problem—a problem of discovering what these new digital ways of coordinating and collaborating look like. Our Digital CBD research program contributes to this challenge with insights from economics, law, political science, finance, accounting and more. We aim to use this interdisciplinary research base to make policy recommendations that help our digital CBD to flourish.