Cryptoeconomic Microfoundations

 

Building microfoundations allows us to discuss and examine system level variables that we will be covering later in crypto macro view [crypto macroeconomics] in general. I decided to head straight micro foundational aspects as these factors can be used to model system-level / macro view models which would need to explain national/intra-governmental national attributes (size, wealth, population) and their relationship to blockchain in general. In the future, in the Macro Cryptoeconomics series, we will be covering macro persepectives such as Institutional Cryptoeconomics and organization.

Readers will notice that these explanations will draw on actor-specific models such as those of Putnam (1988) and zero-sum games from game theory. Notice that Buterin and many developers currently in the cryptocurrency scene heads directly into the microeconomic aspects of agent to agent interaction. As we explore more into crypto microeconomics that will too be covered, but for the moment we will stay away from that from now until we have foundational aspects laid and understand clearly.

Blockchain applications, however, will not be simply be limited to zero sum games as shown by Dr. Dimitri’s paper titled “Bitcoin as a mining cost” see a quick breakdown of his paper here. The act of processing and releasing transactions falls on the burden of the users. In the case of Bitcoin, unknown developer “Satoshi Nakamoto” utilised the blockchain framework to distribute processing needs and reward major processors (now known as miners) with the same cryptocurrency used to power the blockchain.

Given that there are various variants of games given that individuals/firms have different sets of information available to each other. In blockchain economics and application, it follows that the use of an open ledger allows for perfect information given that participants willing or coerced to reveal their wallets. Microfoundations of cryptoeconomics looks towards applying microeconomic principles that are in-line with the reduction of asymmetric information. This can be observed most blatantly through the changes that occur in Industrial Organization/Industrial economics. Which is centrally trying to solve the asymmetric information problem for which [assuming two actors] have two different sets of information. It doesn’t mean that one actor has a better set of information than the other. It normally is the case. However, the use of open ledgers in blockchain replaces the problem that asymmetric information poses with another issue.

It would be helpful for us to examine the use of Secondary Markets in terms of cryptocurrencies. Although the use of blockchain explorers allow for a possible evolution away from a normal exchange (NYSE, CME, NASDAQ) it did not happen (GEMINI, GDAX, HUOBI). It stands that in our current world, a stock or futures exchanges for which financial instruments and assets are traded it resembles an open ledger. When orders are viewed in the format of an order book, the market clearing price becomes extremely clear. This has been referred by most as close as we could get to “perfect information” in reality.

The term refers to the supposedly inherent dichotomies we draw between things such as art and kitsch, work and leisure, and other such dualities. How to Work Better, a retrospective of the Swiss duo’s thirty-three-year collaborative career currently on view at the Guggenheim. The visitor’s question prompted by Suddenly This Overview (1981–), a series of clay sculptures that form a tongue-in-cheek index of human history.

“Without the physical world, Ideas will not exist.”

– Joey Lawsin
 

Information Flow

This example serves to display a two-tier effect. We shall assume that a stock/cryptocurrency exchange allows for perfect information and that no private trading occurs.

In this scenario then a Chain of Information is formed. An agent who is privy to a wallet address can track where the amount went through unique transaction codes UNTIL the cryptocurrency is deposited into an exchange. It should be noted that the chain of information can continue as long as the exchanges  DO NOT TAKE ON DEPOSITED CURRENCIES ONTO THEIR OWN BOOKS. The Chain of Information might be clearer in the example below

Person A wishes to sell his Bitcoins in exchange for United States Dollars. It is known that 1BTC is worth $4,000 due to the publicly available information for which the market clearing price is at. Person A initiates a transaction which contains an unique transaction hash. He receives it in his own exchange wallet. After selling the crypto, the exchange deposits the amount into Person B’s exchange wallet. Assuming B withdraws, he or she receives it in his personal wallet.

Transactional Process

Person A’s personal wallet -> Person A’s exchange wallet -> Cryptocurrency Exchange’s wallet -> Person B’s exchange wallet -> Person B’s personal wallet

Depending on the Participant’s Willingness to reveal or deny information. The blockchain explorer can reduce informational asymmetric to as low as zero. It is not impossible to legislate that blockchain frameworks MUST remain public information as long as crypto currencies of value are exchanged.

Takeaway
  1. Microfoundations of cryptoeconomics examines the actors within the blockchain framework.
  2. Information asymmetry can be reduced halved or zero If And Only If Participant’s Willingness to REVEAL is high and punishment is extreme
  3. The Chain of Information is thus extremely important and a key to microfoundations of cryptoeconomics.

In the next post, I will be graphing the general equilibrium with effects of slight reduction of asymmetric information in comparison to the general equilibrium that we are currently using today. I believe it will help to put words into more defined perspectives.

Micro cryptoeconomics can be best explained using existing tools from IO as it has integrated game theoretic foundations and more importantly a certain level of uncertainty brought by information asymmetry.

Links to the Full Crypto Microeconomics Series

Introduction to Cryptoeconomics

Crypto Microeconomics (Intro)
Crypto Microeconomics – Basic Definitions in Cryptoeconomics Part 1 & Part 2
Crypto Microeconomics – Role of Economics (Irrationality)
Crypto Microeconomics – Extended role of economics

Crypto Microfoundations
[This Article] Crypto Microeconomics – Introduction to Cryptoeconomic Microfoundations 
Crypto Microeconomics – Basic Models and Agents
Crypto Microeconomics – IO Perspective
Crypto Microeconomics – The Real Economy

 

3 thoughts on “Cryptoeconomic Microfoundations”

  1. Robert Nordstrom

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  2. Robert Nordstrom

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