Jason Potts – Page 5

Blockchain and the manufacturing industry

With Darcy Allen and Jason Potts

Bitcoin was invented in 2008 by Satoshi Nakamoto as a censorship-resistant cryptocurrency built for the internet. With regular fiat money centralised bodies such as banks and governments control the records of who owns what. For bitcoin those records are held in a decentralised blockchain. Blockchains are updated and maintained by a decentralised network. To ensure the transactions and records are correct, economic incentives to continually drive the blockchain network towards consensus.

Applications of blockchain extends beyond records of money. We rely on trusted third parties to maintain our registries, enforce our contracts, and maintain our records. Entrepreneurs are now discovering which roles carried out by third parties such as governments and firms will be shifted towards blockchain-based decentralised networks.

Blockchain is now being applied to trace goods along supply chains, to give control of medical records to patients, and to create decentralized identities that help people move across borders.

What does blockchain mean for Australia’s manufacturing industry?

At first glance manufacturers produce physical products and then transport those goods to consumers. More deeply, the manufacturing process is heavily reliant on databases of information in multiple directions along their supply chains. This is especially true for advanced manufacturing. When goods and inputs move, information about them must move too. This includes information about the provenance of sub-components and intermediate parts, information about the integrity of rare products prone to counterfeit, and information about ethical standards in production.

It’s harder to produce this supply chain information than you think. The information must be coordinated between hundreds of parties in the supply chain. Most of those parties don’t know or trust each other. And this information is still often paper-based or siloed within organisational hierarchies. The result is a trail of information about manufactured goods that is prone to error, fraud and loss. And these problems only get worse as supply chains get longer in a globalised world, and manufactured goods become more complex.

Blockchain technology presents a different way to govern supply chain data that centres on the movement of the good itself. Rather than passing pieces of paper between supply chain participants to track goods, information can be recorded in a decentralised blockchain. In practice goods are given a digital representation. Then as the goods move, information about them is timestamped in an immutable blockchain. Importantly this information is stored outside of organisational boundaries, making blockchain an alternative mechanism to solving the age-old problems of provenance and quality. What information is stored in a blockchain could be the historical location of a good, who produced it, how it has been stored, and who has finance on the goods.

Supply chain information extends beyond a single supply chain. To produce a complex product involves first mining raw materials, transforming those into intermediate parts, before manufacturing of the final good. Blockchains are critical here because they can track goods and components across multiple supply chains, giving more visibility and traceability deeper into complex manufactured goods.

Blockchain supply chains will leverage other frontier technologies such as the Internet of Things (IoT). Containers and products will contain sensors to record information such as GPS location and temperature. This information won’t be sent to a centralised party, but recorded cryptographically into a blockchain. This information can help consumers in verifying genuine products, assist producers in creating analytics of consumer demand and ensuring their inputs are legitimate, and governments in ensuring compliance with domestic rules and regulations.

The first and most obvious application of blockchain in supply chains has been in agricultural products such as wine, meat and seafood. The common characteristic of these goods is that they are information-rich. Information about their provenance and stewardship is often hard to verify by observing the final goods, but radically affects the price that consumers will pay.

This means the next wave of applications is likely to be other high-value information-high goods. Goods that are highly-customised, such as 3D printed medical devices, aeroplane parts and pharmaceuticals, are perfectly poised to apply blockchain technology.

Blockchain in advanced manufacturing is more than just tracking goods once they’ve been produced. We can use blockchains to coordinate the highly valuable digital files that sit behind many of these products. How can you ensure that the CAD file being 3D printed was the one originally intended? Similarly, blockchains are being used for intellectual property rights, helping to ensure compliance in an increasingly digital world.

In the physical manufacturing process itself blockchain can be used to record information about the lifecycle of manufacturing equipment. We can now have more cost-efficient and credible auditable ledgers that extend beyond organisational hierarchies.

What we have proposed here is a general movement away from intermediaries being trusted to maintain information about goods and their production, towards information governance through decentralised blockchain platforms. To be sure, many of these applications are in the trial and experimental phase. But they represent an early fundamental shift in how we organise information across the entire manufacturing supply chain.

Blockchain and the New Economics of Healthcare

With Darcy W E Allen, Anastasia Pochesneva and Jason Potts

Abstract: In this paper we outline the economics of healthcare as a problem of coordinating data and examine how blockchain technology might be applied as new economic infrastructure to govern those data rights. We argue that blockchain as a technology of trust pushes the economic organisation of healthcare data away from large, centralised hierarchical organisation towards decentralised, emergent platform organisation. The fundamental problem in healthcare is the coordination and governance of information around decision making (e.g. patient records, licensing of professionals, medical trial data, supply chains). The new economics of healthcare emphasises how this information is governed (e.g. through firms, governments, markets, blockchains) and how the most effective governance changes through time as new technologies of trust are developed. We examine the potential of blockchain as new healthcare data infrastructure (including ensuring the integrity of pharmaceuticals and devices, medical records and data markets). Our view is that blockchain fundamentally shifts healthcare data property rights away from centralised third parties (e.g. hospitals, companies, governments) towards decentralised data property rights held by individual patients. The future platform-based healthcare ecosystem will act as the foundational institutional infrastructure for new competitive solutions to healthcare problems (powered up through other technologies such as the Internet of Things and Artificial Intelligence), helping to solve a growing healthcare productivity crisis.

Available at SSRN

International policy coordination for blockchain supply chains

Abstract: From the adoption of the shipping container to coordinated trade liberalization, reductions in trade costs have propelled modern globalization. In this paper, we analyse the application of blockchain to reduce the trade costs of producing and coordinating trusted information along supply chains. Consumers, producers, and governments increasingly demand information about the quality, characteristics, and provenance of traded goods. Partially due to the risks of error and fraud, this information is costly to produce and to maintain between dispersed parties. Recent efforts have sought to overcome these costs—such as paperless trade agendas—through the application of new technologies. Our focus is on how blockchain technology can form a new decentralized economic infrastructure for supply chains by governing decentralized dynamic ledgers of information about goods as they move. We outline the potential economic consequences of blockchain supply chains before examining policy. Effective adoption faces a range of policy challenges including regulatory recognition and interoperability across jurisdictions. We propose a high‐level policy forum in the Asia‐Pacific region to coordinate issues such as open standards and regulatory compatibility.

Author(s): Darcy W. E. Allen, Chris Berg, Sinclair Davidson, Mikayla Novak, Jason Potts

Journal: Asia & the Pacific Policy Studies

Vol: 6 Year: 2019 Pages: 367–380

DOI: 10.1002/app5.281

Cite: Allen, Darcy W. E., Chris Berg, Sinclair Davidson, Mikayla Novak, and Jason Potts. “International Policy Coordination for Blockchain Supply Chains.” Asia & the Pacific Policy Studies, vol. 6, 2019, pp. 367–380.

Some Economic Consequences of the GDPR

Abstract: The EU General Data Protection Regulation (GDPR) is a wide ranging personal data protection regime of greater magnitude than any similar regulation previously in the EU, or elsewhere. In this paper, we outline how the GDPR impacts the value of data held by data collectors before proposing some potential unintended consequences. Given the distortions of the GDPR on data value, we propose that new complex financial products—essentially new data insurance markets—will emerge, potentially leading to further systematic risks. Finally we examine how market-driven solutions to the data property rights problems the GDPR seeks to solve—particularly using blockchain technology as economic infrastructure for data rights—might be less distortionary.

Author(s): Darcy W. E. Allen, Alastair Berg, Chris Berg, Brendan Markey-Towler, Jason Potts

Journal: Economics Bulletin

Vol: 39 Issue: 2 Year: 2019 Pages: 785–797

DOI: 10.22004/ag.econ.287380

Cite: Allen, Darcy W. E., Alastair Berg, Chris Berg, Brendan Markey-Towler, and Jason Potts. “Some Economic Consequences of the GDPR.” Economics Bulletin, vol. 39, no. 2, 2019, pp. 785–797.

Byzantine political economy

With Sinclair Davidson and Jason Potts.

Abstract: For decades, computer science and economics have been working on the same questions in parallel. But each field has offered strikingly different answers. This paper examines the close relationship between what the study of distributed systems describes as Byzantine consensus and what the study of institutional economics describes as robust political economy. These parallels have become evident after the invention of distributed ledger technology (blockchain) via the Bitcoin cryptocurrency which provides a new technology for managing and coordinating knowledge about property rights. Blockchain is the instantiation of a new form of social infrastructure that securely decentralises property ledgers. As such it represents a shift in the role of government as a centralised property ledger.

Available at SSRN.

Towards Crypto-friendly Public Policy

With Sinclair Davidson and Jason Potts. Published in Melanie Swan, Jason Potts, Soichiro Takagi, Frank Witte and Paolo Tasca, 2019. Blockchain Economics: Implications of Distributed Ledgers, World Scientific Publishing, Singapore, pp. 215-232.

Abstract: Distributed ledgers are institutional technologies that pose complex challenges regarding regulation and inter-jurisdictional competition. This chapter introduces ‘crypto-friendly’ public policy as a way to understand these challenges. Blockchains are relevant to public policy in at least three ways. First, they can be adopted by governments for the provision of public services. Second, many blockchain applications interact with existing regulatory frameworks and may provide new regulatory challenges. Third, they present the possibility of ‘crypto-secession’ as a form of privately provided public goods provision. The chapter applies an institutional theory of regulation to assess how blockchains effect relative institutional costs and guide public policy choices. Blockchain applications such as property rights and identity management are also considered. Finally the chapter considers the possibility of crypto-friendliness as a dimension for international regulatory competition.

Available at World Scientific.

The use of knowledge in computers: introducing nanoeconomics

With Sinclair Davidson, Jason Potts and Bill Tulloh. Originally a Medium post.

In his 1945 essay “The Use of Knowledge in Society”, Friedrich Hayek first drew attention the knowledge problem. Information is distributed throughout an economy. No central planner can effectively bring it together.

Hayek, obviously, was talking about a human economy, where people exchange with people. But machines suffer from knowledge problems too. This is the domain of nanoeconomics — which we suggest is the study and evaluation of the economics of machine systems.

Hayek in the machine

Nanoeconomics is about human-machine exchange, and machine-machine exchange. It is the economics of distributed ledgers and artificial intelligence, of object-capability programming and cybersecurity, of ‘central planning’ in the machine, and of ‘markets’ in the machine.

As we’ve come to understand blockchains and other distributed ledger technologies as an institutional technology, we’ve also learned that not only can blockchains coordinate and govern decentralised human economies (as governments, firms and markets do) but they can coordinate and govern decentralised machine economies (or human-machine economies).

This extends what Hayek called catallaxy — the spontaneous order of the market — from the market coordination of human action to the coordination of human-to-machine and machine-to-machine economies.

Nanoeconomics is not a new idea. In their Agoric papers published in 1988, Mark Miller and K. Eric Drexler developed the idea of a computational system as a space for economic exchange. The development of object-oriented programming has created software agents, which vie for scarce resources in the machine. But right now, these agents are governed through planning, not markets. Miller and Drexler suggested an alternative: a market-based computation system. In this system:

machine resources — storage space, processor time, and so forth — have owners, and the owners charge other objects for use of these resources. Objects, in turn, pass these costs on to the objects they serve, or to an object representing the external user; they may add royalty charges, and thus earn a profit.

With global computers like the smart-contract platform Ethereum we now have the bones of such a market-based computational architecture.

Nor is the idea of an analytical layer below microeconomics a new idea. Kenneth Arrow used the word nanoeconomics for the study of single buying and selling decisions. But that line of research has been subsumed into behavioural and now neuroeconomics. Alternatively it is used to describe the economics of nanotechnology.

But in an age where we deploy digital, quasi-autonomous agents to act on our behalf, and where the traditional economic problems of opportunism, asset specificity and bounded rationality are intimately tied into cybersecurity and digital services, we have to drive our economic analysis — and our institutional choices — into the machine.

Nanoeconomics is the study of an economy of software agents, using market institutions and property rights to order computation and bid for computational resources. It is the study of choices and market exchange that occur between computational objects in object-oriented software architectures, and which are economically coordinated through blockchain infrastructure.

As Miller and his colleagues have pointed out, a key problem with ‘centrally-planned’ computation are the implications for computer security. A decentralised software economy would instead seek to operationalise tradable property rights for access to objects through the principle of least authority.

Contract theory, not choice theory

Nanoeconomics is not simply a new field of economics — it is a significant extension. Where the choice-theoretic branch of economics has managed to drive its analysis down into the brain, the contract-theoretic branch has stopped at the level of human-to-human exchange.

What do we mean by choice-theoretic and contract-theoretic? Choice theory studies why people make the choices they do. This branch has traditionally been split into macroeconomics (the study of the aggregate economy) and microeconomics (the study of individual market choices).

In recent decades many economists have sought to drive their analysis deeper into the brain. Why do they have different preferences? Behavioural economics applies psychology to economics, and even more recently neuroeconomics applies biology. The choice-theoretic branch of economics goes: macro, micro, behavioural, neuro.

The contract-theoretic branch is the economics of Ronald Coase, James Buchanan, Oliver Williamson, Friedrich Hayek, and Elinor Ostrom. This branch looks at exchanges (that is, contracts) and the human institutions we have devised to constrain or facilitate those exchanges. Firms, markets, governments, clubs and commons (and now blockchains) are institutional environments to make exchanges, sign contracts, and otherwise pursue economic goals.

Contract-theoretic economics starts with constitutional economics — the macro level structuring of political and economic choices. It applies a transaction cost approach to microeconomic analysis. And with nanoeconomics we can start look at machine agents as economic actors, making exchanges — and acting opportunistically.

As more and more of the economy becomes machine-mediated, we need to worry about the security and efficiency implications of centrally-planned machine economies. But the underlying knowledge problems are general.

We’ve previously argued that blockchains are constitutional protocols for catallactic ordering. Nanoeconomics is about how they can not only facilitate improved decentralised economic coordination for humans, but also for machines.

From Industry Associations to Ecosystem Associations: Blockchain, Interest Groups and Public Choice

With Mikayla Novak, Jason Potts and Stuart J Thomas

Abstract: Conventional public choice literature suggests that interest groups have a largely malign effect upon the economy. Suggesting that interest groups are primarily established to lobby governments for rents, the public choice approach essentially rests upon normative presumptions concerning the appropriateness of relationships between interest groups and the state. This analysis tends to overlook constructive roles undertaken by interest groups to facilitate economic coordination, including the facilitation of technology adoption, and to collaborate with political and other actors to overcome obstacles to innovation and industry dynamics. The development of blockchain technology in recent years serves as a useful case study illustrating the role of interest groups in contributing toward the development of a blockchain-enabled economy. We provide support for our general hypothesis of a beneficial economic contribution by interest groups by profiling the activities of blockchain industry associations. This paper also considers to what extent interest group involvement in blockchain coordination and governance is designed to pre-emptively avoid more stringent governmental action, or respond to perceived inadequacies in public policy settings. This study contributes to a revision of public choice scholarship regarding the appropriateness of interest group activity.

Available at SSRN.

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

With Sinclair Davidson and Jason Potts

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

Available at SSRN

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.