jason potts

Blockchains are the distributed, decentralised ledger technology underlying Bitcoin and other cryptocurrencies. We apply the transactions cost analysis of Oliver Williamson to the blockchain consensus mechanism. Blockchains reduce the costs of opportunism but are not 'trustless'. We show that blockchains are trust machines. Blockchains are platforms for three-sided bargaining that convert energy-intensive computation into economically-valuable trust.

Trust is a fundamental precondition underpinning exchange and economic coordination between heterogeneous agents, but is costly to maintain. Given the potential for agents to enjoy zero-sum gains by opportunistically betraying the trust of exchanging counterparties, an edifice of occupational roles, organisational forms and institutional practices have emerged in an effort to uphold trustworthy behaviour and conduct. In simple terms, there exists a " cost of trust " and this cost is non-trivial for a highly specialised economy operating at an increasingly global scale. This paper provides numerical estimates of the cost of trust for the United States economy, based on an attribution of labour force occupational data with varying degrees of trust-maintenance. Occupations which are represented in high cost-of-trust activities include managers, lawyers and judges, tax professionals, accountants and auditors. Overall, it is estimated that the cost of trust accounts for 35 per cent of U.S. employment in 2010. The cost of trust has significant implications for the economic applicability of distributed ledger technologies, such as blockchain, compared with conventional forms of ledger technology largely maintained by centralised third-party organisations.

As blockchain technology is adopted into modern economies, the underlying institutional protocols will evolve (Davidson et al 2018, Berg et al 2017, 2018). In this paper we set out the reasoning behind how this will likely take us to an economy beyond both money and money prices. Money facilitates human-human exchange in the presence of cognitive limitations. However in the near future personal artificially intelligent machine agents will be able to conduct exchanges with a matrix of liquid digital assets (such as cryptocurrencies). We call this process high frequency bartering. The existence of markets without money present complex public policy challenges around privacy and taxation.

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 are constrained by the technologies and institutions available. Blockchains are a gov-ernance technology that reduces the costs of consensus, coordinating information , and monitoring and enforcing contracts. Blockchain could be applied to the voting and electoral process to form a crypto-democracy. Analysed through the Institutional Possibility Frontier framework, we propose that blockchain lowers disorder and dictatorship costs of the voting and electoral process. In addition to efficiency gains, this technological progress has implications for decentralised institutions of voting. One application of crypto-democracy, quadratic voting, is discussed.