What we think we know about defi

Originally a post at Cryptoeconomics with the RMIT Blockchain Innovation Hub team.

The financial sector exists solely to smooth economic activity and trade. It is the network of organisations, markets, rules, and services that move capital around the global economy so it can be deployed to the most profitable use.

It has evolved as modern capitalism has evolved, spreading with the development of property rights and open markets. It has grown as firms and trade networks became globalised, and supercharged as the global economy became digitised.

Decentralised finance (defi) is trying to do all that. But just since 2019, and entirely on the internet.

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How to Unfreeze the Post-Pandemic Economy

Originally published at the Foundation for Economic Education (FEE) with Aaron M. Lane.

Right now, economies around the world are frozen in an attempt to deal with the COVID-19 pandemic. Governments have pulled every policy lever to keep it that way, for the time being, to limit the spread of the virus. Many people think that the economy will be unfrozen just like we would turn a machine off and on again. But unfortunately economies don’t work like that—unfreezing won’t be nearly as easy as many assume.

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Unfreeze: How to Create a High Growth Economy After the Pandemic

Book published with the American Institute for Economic Research (with Chris Berg, Sinclair Davidson, Aaron M Lane and Jason Potts)

We spell out the policy settings necessary for the rapid adaptation and market re-coordination that is required to resuscitate the economy. We explain why a return to business as usual is simply not enough to get everyone working again. A period of high growth prosperity will be imperative to deal with the costs of the freeze. This book tackles the tough questions and fills some of the current void of ideas and thinking about economic recovery. We develop a framework and principles for an institutional re-build, presenting a path to recovery based on the ideas of private governance, permissionless innovation, and entrepreneurial dynamism.

Book Contents

  1. Introduction
  2. The Public Health Crisis
  3. The Economic Crisis
  4. The Need for a Square Root Recovery
  5. Thawing a Frozen Economy
  6. How to Achieve High Economic Growth
  7. The Way Forward

Reviews

“Economies are not like video games that can be paused and then unpaused with no effect. Freezing an economy causes systematic problems, and unfreezing it requires systematic solutions. This book is a much needed well-researched study on what it will take to get the world up and running again.” ~ Jason Brennan, Georgetown University

Blockchain Governance: What We Can Learn from the Economics of Corporate Governance

Published in the Journal of the British Blockchain Association (with Chris Berg).

Abstract: Understanding the complexities of blockchain governance is urgent. The aim of this paper is to draw on other theories of governance to provide insight into the design of blockchain governance mechanisms. We define blockchain governance as the processes by which stakeholders (those who are affected by and can affect the network) exercise bargaining power over the network. Major considerations include the definition of stakeholders, how the consensus mechanism distributes endogenous bargaining power between those stakeholders, the interaction of exogenous governance mechanisms and institutional frameworks, and the needs for bootstrapping networks. We propose that on-chain governance models can only be partial because of the existence of implicit contracts that embed expectations of return among diverse stakeholders.

Blockchain and Investment: An Austrian Approach

Published in the Review of Austrian Economics (with Chris Berg, Sinclair Davidson and Jason Potts).

Abstract: Investment is a function of expected profit, which involves calculation of the cost of trust. Blockchain technology is a new institutional technology (Davidson et al 2018) that industrialises trust (Berg et al 2018). We therefore expect that the adoption of blockchain technology into the economy will affect investment and capital structure. Using a broad Austrian economic approach, we examine how blockchain technology will affect the cost of trust, patterns of investment, and economic institutions.