Blockchains and the Opportunity of the Commons

Tyler asks which goods and services are most likely to be bought and sold on a blockchain that is paid for with token issuance and appreciation?

  1. The services with high mark-ups? Low mark-ups?
  2. Big consumer bases?
  3. Well informed and well coordinated consumer bases?
  4. “Influencer” consumer bases, in the Gladwellian sense?
  5. “Trivial” consumer bases, that you don’t mind risking?
  6. Some other properties?

I will go with 6. Blockchains and tokenization are a way to incentivize the creation of a commons. A commons is an unowned place, platform, or protocol that helps people to meet, communicate and transact. Commons underlying modern life include TCP/IP, SMTP, HTTP, GPS and the English language. We don’t see these commons clearly because they are free, ubiquitous and, like air, taken for granted. What we do see are platforms like Airbnb, Uber and the NYSE and places to meet and communicate like OkCupid, Twitter, Facebook and YouTube. What blockchain and tokenization offer is the possibility of creating commons to replace all of these services and much more.

As the examples of AirBnb, Facebook and YouTube indicate, it’s possible for private firms to create platforms that serve the same purposes as a commons but these platforms are not a commons since they are privately owned. Private ownership is great but not without tradeoffs. Bill Gates hinted at one problem when he defined a platform:

A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it.

The platform dilemma is that a company that controls a platform wants to maximize the company’s value rather than the economic value of everybody that uses it. Company value and social value are correlated but they are not the same. There are three problems. First, the company will want to grab up as large a share of the social value as possible. That’s ok for efficiency but not ideal for platform users who, because of network effects and coordination issues, may find that they need to use the platform even though it leaves them with only a small surplus. Second, the company may take actions that increase its value but reduce social value. On some margins, for example, Facebook and YouTube profit from advertising that reduces social value. The third problem is that in creating a platform where many people meet and transact, a small number of companies come to control and access more data than may be ideal. Big centralized data is worrying for libertarian reasons but also because big, centralized data is a honeypot for bad actors and hence insecure.

The first set of internet commons like TCP/IP and HTTP were created by government and independent researchers. The unique use-case of blockchains is that blockchains can be used to incentivize the creation of unowned platforms, i.e. commons. The creator of a blockchain need not control the blockchain and indeed can credibly commit not to control it. Thus, the creator of a blockchain can commit to never taking actions to maximize profit at the expense of social value and it can commit to never taking actions to redistribute more of the social value to itself. The blockchain creator, however, can be rewarded through token issuance. Moreover, since the value of the token and the social value of the blockchain are positively correlated the blockchain creator has strong incentives to create a commons that maximizes social value.

To give an example, LBRY–one of the blockchain firms that I advise–is a kind of YouTube on the blockchain. The protocol that LBRY has created is unowned. LBRY’s incentives are to create something that will maximize the value of both content creators and content consumers. The social value created could well exceed that of any owned platform and if LBRY earns a small share of this social value they will be well compensated. Token issuance and appreciation is what incentivizes the creation of the commons.

Creating a commons on the blockchain isn’t easy, however. Decentralized institutions are much more difficult to design than centralized institutions. Decentralized databases are a big advance but making them work at scale-size and speed is a challenge. Precisely because the blockchain is unowned the designers have to get much more correct, right out of the gate. Changing a commons on the fly, forking, is costly, disruptive and not always possible. All of this explains why in the history of the world almost all decentralized institutions, such as markets and language, were not designed but arose through evolutionary forces. Hayek called decentralized institutions spontaneous orders because he implicitly assumed that all such decentralized institutions were spontaneous, i.e. unplanned. Only in very recent years have economists and computer scientists developed the understanding and tools that are necessary to design decentralized orders–orders that are planned but not controlled. Today smart contracts on blockchains like Ethereum have the potential to create a sophisticated set of global common resources that will form the foundation for much of the economic and social structure of this century–this is the opportunity of the blockchain commons.

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A centralized platform doesn't need to be controlled by a commercial company, though. It can be controlled by an organization with goals other than profit. This is often quite successful--for example, Wikipedia, or many open source software projects.

There are risks to this model (you have to trust the central organization), but it's not clear to me what real advantage blockchain has over more traditional models in almost all cases, given the complexity, inefficiencies, and risks of blockchain based systems.

"but it's not clear to me what real advantage blockchain has over more traditional models in almost all cases"

+1, I agree. What value does a blockchain add that is worth the additional complexity?

The one benefit is that you don't have to trust a central database as the source of the truth. But how often is that decisive? As you move away from currency, the incentives for exploiting a centralized record diminish rapidly.

Plus blockchain hasn't exactly removed trust requirements in practice. In order to use Bitcoin, I probably have to trust the creators of a Bitcoin client, as well as the operators of an exchange. Plus I'm exposed to anyone who has access to my wallet, or can gain access to it.

It's not clear that even using Bitcoin means having to trust less.

Indeed. A large number of crypto exchanges have been hacked. In no case have the hackers been able to take any actual money ("fiat currency", in their lingo). Instead, they have stolen the crypto currency every single time.

Remind me again, why is crypto "more secure" than actual money?

Real money stolen vs fake money stolen stat doesn't lie

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Wasn't the whole point of block chain that of *de*centralization?

I do agree that it's a bit more of a complicated approach to payments and think it's more suited to something like real estate transactions, or other settings where a contractual relationship/right is transferable, but then I suspect you do get into an issue of centralization (though that is already there). However here it might be more efficient and less complicated than what we have now.

My point is that the decentralization comes at a very high cost and rarely brings enough benefit to justify that cost. Also, decentralization may be illusory even with blockchain.

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'Commons underlying modern life include TCP/IP'

So, Prof. Tabarrok may actually be aware of what net neutrality is all about, but apparently, feels that the digital age requires corresponding Inclosure Acts.

'The platform dilemma is that a company that controls a platform wants to maximize the company’s value '

Still no mention of how the GPL prevented this in the case of Microsoft. Or why Android seems to do better than Windows Phone (or whatever it is called these days, assuming Microsoft still does anything with smart phones).

'The protocol that LBRY has created is unowned.'

Only if it is in the public domain - but it seems as if the MIT License (MIT) applies. Admittedly, the protocol as a stand alone object is not discussed, at least after a couple of minutes poking around at lbry and https://github.com/lbryio/lbry

'Changing a commons on the fly, forking, is costly, disruptive and not always possible.'

Forking is the sort of thing that lets the market decide which blockchain is superior - this is considered by many an advantage when enjoying the benefits of a global commons. Don't like OpenOffice anymore, just use Libre Office. Or if one finds the license terms onerous for a version control system, just create a new one.

'this is the opportunity of the blockchain commons'

Unless your ISP decides that the data packets connected to one blockchain protocol/framework deserve second class treatment compared to the blockchain that the ISP is involved in. Such is the fate of the commons when fences are allowed to be erected.

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"A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it." So either Microsoft was a platform or it offered no consumer surplus.

Microsoft Windows is a platform that exceeds the value of the company that created it.

So everything that has a consumer surplus is a platform? Sounds like Gates is saying everything will be in the commons. I may be reading too much into this.

Perhaps Gates means that the platform consists of consumer-created content, and the content is more valuable than the container? It's not really clear, though.

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It's not like that: The value of the windows-driven software business that ran on windows was vastly superior to Microsoft's value. You can remove consumer value, and look at the Autocads, SAPs and game developers of the world. Microsoft didn't capture most of the value strangling third parties. Other examples would be payment processors, like Paypal or Stripe.

There's companies that live and die by communicating to people on facebook, but do they combine to be bigger than facebook, or is facebook really capturing a lot of the value?

Right, Gates was probably trying to say something like that, but the quote fails to get the point across. What the quote says is what TMC notes: a good that produces consumer surplus (i.e. almost all of them) is likely to have "economic value [that] exceeds the value of the company that creates it."

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"[Spontaneous] orders that are planned but not controlled". That requires more faith than the combined faiths of Franklin Graham, T.D. Jakes, and Joel O'Steen, a motley crew of hucksters. If it's planned, it's exploited. "Tokens" are being used to exploit the faithful (investor): https://www.nytimes.com/2018/05/31/technology/envion-initial-coin-offering.html

But Tabarrok does provide a very useful summary of what is required for the creation of a "commons". He is just less skeptical (cynical?) than I.

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Here's an interesting article in Bloomberg about young traders who made fortunes in cryptocurrenices and are now making investments in "blockchain ventures with a positive social or environmental impact". https://www.bloomberg.com/news/articles/2018-05-30/traders-with-pockets-full-of-cryptocurrencies-quit-wall-street

I think you meant "young gamblers." Now, with the CME Bitcoin futures they can hedge their bets. N.B. One cannot hedge 100%.

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How about blockchain as consumer incentive?

"DOVU, a London, U.K.-based provider of a blockchain-based data marketplace for the transportation industry, recently completed a test with BMW to use ERC-20 tokens and blockchain technology track vehicle mileage."
https://finance.yahoo.com/news/bmw-blockchain-trial-uses-cryptocurrency-011028282.html

What the heck is the point of using blockchain for that?

BMW collects data on customer mileage and gives customers a small reward for participating. But it's a centralized program run by BMW, so why do they need a decentralized mechanism of storing the information?

According to the article:
BMW currently tracks vehicle mileage across fleets using fuel cards. This method is prone to typing errors and lack of management oversight, yielding inconsistent and often useless data.

Connected vehicles track such data, but the data tracked by connected vehicles is only used for diagnostic purposes if the car is brought in for service. Accessing this data also requires getting the driver’s permission. Hence, such data via connected vehicles is not readily available to the business. The existing system, meanwhile, requires “vast amounts” of clerical overhead.

An automated method to collect mileage was not available to DOVU for the pilot. Hence, DOVU agreed to allow BMW customers to use a manual approach to track this information in return for token-based rewards. Each week, users were prompted to use their phone cameras to take a picture of their dashboard at a specific time to provide mileage information.

So, it seems the answer is cutting overhead.

Yes, I did read the article. But the use of blockchain appears incidental to the benefits of what they did.

The system is wholly owned and operated by BMW, so what does the decentralized record keeping accomplish? BMW could have recorded the mileage in a traditional database and then issued a small reward to customers based on their participation. What does blockchain add?

Maybe it's just an unclear article, but I don't see the point.

It might have been that people weren't responding to a traditional incentive.

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What does blockchain add?

Trendiness?

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The only thing I could think of was providing an anonymous data feed to solve a number of things -- privacy concerns and laws create (the illusion of?) restrictions on when and how that diagnostic information could be used. If all identifying details were removed then it's easier to collect and use it -- and more people might be inclined to participate.

Reading some of the other comments not sure that is even the case though so wondering the same myself. Maybe move about marketing that anything else.

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"Blockchain companies" have enough money for 'advice', eh?

None of this will ever happen: its silly.

My invoice is in the mail.

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> To give an example, LBRY–one of the blockchain firms that I advise–is a kind of YouTube on the blockchain.

My gosh how can I get one of these high-paid consulting gigs? My guess is that I cannot because a) I actually understand blockchains and b) because I can't talk in a way that appeals to a CEO's FOMO.

Economists moonlighting as consultants to industry?

'No conflict, no interest'

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What widely used "commons"/platform simply facilitates transactions and adds very little value otherwise?

As far as I can tell, most people use organization run exchanges because those organizations provide value in addition to just recording the exchange. As examples, with Stubhub you are protected from buyer or seller fraud, YouTube filters out content that most people do not want to randomly see, Uber sets minimum standards for vehicles (presumably because most riders prefer them) and some driver vetting.

Youtube also provides a streaming interface that allows you to skip forward/backward/pause/change encoding. This systems sounds like BitTorrent i.e. you would receive media files and play them locally.

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The reasearch into finding usable real-life applications of blockchain technology (outside of cryptocurrency) has been going on for a decade now. Many billions have been spent, and many, many of the people who have spent time on this are definitely smart and successful in other areas.

Yet their combined success rate is 0 for umpteen.

Are there other examples of interesting technologies that after a decade and immense amounts of research had zero practical use, yet still made it big? If, not, why should one believe blockchain is the outlier here?

"An undertaking of great advantage, but nobody to know what it is"

UPSHOT: a technology in search of a use case

So, ARPANET?

(Which eventually became the internet.)

But wasn't ARPANET successful from the beginning at finding practical uses, e.g. email? And FTP?

Certainly not at scale...even when the web was widely deployed it was (by today's standards) underutilized.

Blockchains (some of them) currently do have utility among their (small) scale.

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For a technology that has been heavily used for 10 years, still being looking for a use case is very problematic.

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i don’t think i would have tried HTTP if it were marketed to me as primarily a way to get lambos.

Alex’s involvement gives it increased credibility (and advisors/consultants are paid for credibility not for witticisms).

but I haven’t seen anything yet to make me think the people pushing blockchain have the wisdom or concern for other people of Linus Torvalds or Richard Stallman.

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The guys who work at LBRY are probably very smart. The best advice you can give them is to pivot. It is much easier to develop a technology to solve a problem rather than trying to find a problem to solve with a specific technology.

Well, they have found both the problem and the solution.

The problem: "How can we get funding?"

The solution: Issue a press release saying "yada-yada-yada blockchain yada-yada-yada paradigm shift blockchain."

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What are the incentives for LBRY to maintain, improve and extend the system?

It seems like the moment the token launches, they become a marketing firm, not a technology firm, and as soon as they think their value is close to the right amount, they would want to start working on a 'new' system that is not connected to the first, so that they can give themselves new tokens on the new system.

Solve for that equilibrium.

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Like with most things in computer science, it boils down to picking the right data structure. For most applications a centralized relational database is the most efficient performant way to store data, and so most applications are built on top of them. About ten years ago, the rise of social media applications and specifically feeds posed a problem that relational databases struggled with and so there was an irrational excitedment for nosql document-based databases. Document stores with lots of denormalization of data was really hot for a while. But now engineers understand better the trade off between document stores and relational databases and can select the appropriate one for the appropriate problem.

A block chain is just a new type of database, and like document stores before it are having a moment of irrational exuberance. In my humble opinion, the types of problems best suited for the application of block chains are ones where ensuring conditions for trust involve large amounts of collateral and large reputable companies acting as chains of backstops. Basically is solving a problem requires you to hold a ton of capital unused as collateral, or line up a bunch of large insurance agencies to act as your back stop, the unwieldy performance trade offs of a block chain might prove worth trying anyway.

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The generic concept is a consensus algorithm. In finance, a private consensus algorithm is a dark pool.

Techies been working that problem in databases forever. Blockchain is a great consensus structure. If the traders register then the consensus algorithm is much simpler,the dark pool can police bad 'miners'.

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Until wages paid by government, and thus taxes collected, are based on blockchain, anything of this sort is merely like derivatives, like corn futures, or puts and shorts on Tesla.

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GPS is decentralized and unowned?

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"Thus, the creator of a blockchain can commit to never taking actions to maximize profit at the expense of social value and it can commit to never taking actions to redistribute more of the social value to itself. "

Is no more true than a company that forms as a not-for-profit or some mutual company and writes that type of statement into it's by laws. In both cases, on its own, they are both worth the paper written on.

they are both worth the paper written on

Enforceable by court of law, then a sheriff with a gun gets a cut of the recovery.

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RE: "advertising that reduces social value"

Advertising, as a rule, reduces informational value. It is always meant to obscure and obfuscate, rather than inform.

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The first set of internet commons like TCP/IP and HTTP were created by government and independent researchers. The unique use-case of blockchains is that blockchains can be used to incentivize the creation of unowned platforms, i.e. commons.

Good god no!

Tcp/IP is optimized to be efficient.

Blockchain was intentionally built to be slow to prevent brute force attacks.

Replacing tcp/IP with buzzword of the month is just as stupid as doing DNS over HTTPS: it's a solution in search of a problem.

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Alex, the crux of your entire argument is that you are assuming that this is something that can work like its boosters imagine. But, in practice, we've seen more progress in cold fusion that we've had in blockchains.

Would you have written an article about the promising uses of cold fusion as a way to power watches? Of course not, as expecting that cold fusion was not just functional, but miniaturized to run on a watch, was nonsense. In the end, we have yet to see cold fusion anyway.

Blockchains don't make sense. The kind of mathematical and purely technological advancements that would be required to make blockchains a great solution in all but the narrowest of use cases would also affect everything else. You might as well write an economics paper assuming someone can print and spend trillions without affecting the prices of anything.

I still stand by the opinion that Bitcoin, the very slow, very centralized, wildly fluctuating attempt at a cryptocurrency is having a larger effect on the world, today, than the rest of blockchain uses we'll find put together.

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