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Making Sense of ‘Cryptoeconomics’(Joshua Stark)
“Crytoeconomicsis the practical science of using economic mechanisms
to build distributed systems,
where important properties of that system are guaranteed by financial incentives,
and where the economic mechanisms are guaranteed by cryptography.”
What is ‘Economic Design’?
ü Game theory provides a structured language that helps in analyzing interactive
situations; when several individuals have to make decisions, and the outcome depends
on each person’s choice.
ü The generalpurpose of mechanismdesign is to design games in order to achieve
ü Market Design :Auctions and matching or assignment problemsare in fact special
cases of mechanism design.
<Source:GuillaumeHaeringer, <Market Design :Auction andMatching>TheMITPress,2018>
Game theory,behavioral economics,and market design all allow us to look at rules, and
howpeople interact with them, understand them, circumventthem, and change them.
Game Theory – Mechanism Design –Market Design
The study ofmathematical
models ofstrategic interaction
How to design
the ‘ruleofthe game’?
A kind ofeconomicengineering,
simulations, and more
’94 : JohnHarsanyi,JohnF. Nash,Reinhard Selten
’05 :ThomasC. Schelling,Robert J.Aumann
’96 : William Vickrey,JamesMirrlees
’07 : LeonidHurwicz,Eric S.Maskin,RogerB. Myerson
’14 : JeanTirole
’12 : LloydS.Shapley,Alvin E. Roth
Definition of Public Choice Theory
In political science,it is the subset ofpositive political theory that studies self-interested
agents (voters,politicians, bureaucrats) and their interactions, which can be represented
in a number of ways – using (forexample) standard constrained utility maximization,
game theory,or decision theory.
Public choicetheory is also closely related to social-choice theory,a mathematical
approach to aggregation of individual interests, welfares, or votes.
Public choice or public choice theory is
"the use ofeconomictools to deal with traditional problems ofpolitical science".
Economics of Collective Decision-Making
• Collective action is composed of individual actions and on the rejection
of any organic interpretation of the state.
• A purely individualistic conceptionof collectivity is maintained.
• The sum of external costs and decision-making costs are the cost of
• The rational individual should try to reduce these interdependence
costs to the lowest possible figure.
• Homoeconomicus stands for a portrayal of humans as agents who are
consistently rational and narrowly self-interested.
• It attempts to maximize utility as aconsumer and profit as a producer.
Choice of optimal time interval between elections
<Source:George Tridimas,‘Constitutional choicein ancient Athens’,2017>
Two Levels of Choices
üHowto govern the actions of individuals within the network and
prevent or mitigate opportunistic behavior
üThe consensus over any transaction, corresponding to ‘choice
within rules’(based on proof-of-workbyminers)
üHowto navigate afast-changing world that requires rules and
constraints to evolve
üThe consensusrequired at the level ofthe codeor protocol:that
concerningchoice of rules
Constitutionalpolitics(concerningchoice within rules) placesboundaries
aroundthe realmof ordinary politics.
Loi vs Droit
•The generalidea of law (lot, legge, ley, Gesetz) includes the rules
over which people have no influence.
•Lex always expressesan imperative, but it can be a physical or a
metaphysical power as well as a human power.
•Thinking in terms of law, in all its forms, is certainly not self-evident
and by no means universal.
•‘It derives fromius, a word which in Roman law referred to the
formulas in which the judicialprocess was expressed.
•It is based on the idea of direction (directum)and associates the idea
of justice with that ofline ofconduct, an association already present
in the Latin regula (ruler)or norma (set square).
Crypto Public Choice
<Source:Alastair Berg,ChrisBergandMikayla Novak,‘CryptoPublicChoice’,2018>
The applicationof public choice to blockchaintechnology
Concernedwith the mechanisms and incentivesfor collective choice
in two blockchain contexts
a) Regarding the economicsof collective choices around the consensus mechanisms
for updating the contents ofa shared ledger
b) Communities making collective decisions around the design ofblockchain
protocols,the upgrade of those protocols,forking those protocols, and making
decisions as to whether to ‘cryptosecede’
Blockchain and the Supply of Public Goods
ü Blockchains are institutional environments (protocols)which provide public goods
in order that their ‘citizens’(users) can pursue diverse ends (simple exchange,
contracting, wealth creation and so forth).
ü There are at least two public goodsin the blockchain institutional environment.
• Blockchain consensus mechanisms are economicdevices to compensate
users (ora class ofusers) to performthe economically valuable task of
updating the shared ledger.
• Blockchains natively enforceproperty rights throughtheir combination
of (asymmetric, or public key) cryptography and economicincentives.
• Cryptography provides the base layer of security.
<Source:Alastair Berg,ChrisBergandMikayla Novak,‘CryptoPublicChoice’,2018>
The Meaning of 憲法
憲 = 害 + 目+ 心
What is Constitution?
a set offundamental principles or established precedents according to which a state or
other organization is governed.
üThe term constitution comesthrough French from the Latin word constitutio,used for
regulations and orders, such as the imperialenactments (constitutionesprincipis: edicta,
mandata, decreta, rescripta).
üPolitical economy theoryregards constitutions as coordinationdevices that help citizens
to prevent rulers fromabusing power.
üAn alternative view considers that constitutions are not enforcedby the citizens at-
large, but rather by the administrative powers ofthe state.
Definition of ‘Constitutionalism’
"a complex ofideas, attitudes, and patterns of behavior elaborating the principle that
the authority ofgovernment derives from and is limited by abody of fundamental law".
üPolitical organizations are constitutionalto the extent that they
"contain institutionalized mechanisms of power control forthe protectionof the
interests and liberties ofthe citizenry,including those that may be in the minority".
üUsed descriptively, it refers chiefly to the historical struggle for constitutional
recognition ofthe people's right to 'consent' and certain other rights, freedoms,and
privileges. Used prescriptively, its meaning incorporates those features of government
seen as the essential elements ofthe...Constitution.
a field of economicsand constitutionalism and analyzes the specific interrelationships
between constitutional issues and the structure and functioning ofthe economy.
ü Constitutional economicsdraws substantial inspiration from the reformist attitude which
is characteristic ofAdam Smith's vision, and that Buchanan’s conceptcan be considered
the modern-day counterpart to what Smith called "the science of legislation".
ü Constitutional economicshas been characterized as a practical approach to apply the
tools of economicsto constitutionalmatters.
Characteristics of ‘Constitutionalism’
<Source:Dieter Grimm,‘Constituionalism :Past,Present andFuture’,2016>
1. The constitution in the modern sense isa set oflegal norms,not a philosophical
2. The purpose ofthese normsis to regulate the establishment and exercise of public
power as opposed to a mere modification of a pre- existing public power.
3. The regulation is comprehensive in the sense that no extraconstitutional bearers of
public power and noextraconstitutional ways and means to exercise this power are
4. Constitutional law finds its origin with the people as the only legitimate source of
5. Constitutional law is higher law. It enjoysprimacy over all other laws and legal acts
emanating from government.
Constitutionalism vs. Constitutionalisation
<Source:Edoardo Celeste, ‘Digital Constitutionalism’, 2018>
Ideology that aims to establish and gurantee the existence of
a normative framework forthe protectionof fundamental
rights and the balancing of powersin the digital environment
Processof productionof normative counteractionsvis-à-vis
the alteration ofthe relative equilibrium of the constitutional
ecosystem produced by digital technology
of the digital
Information and Incentives
üEconomicsystem structured to deal with the twin problems ofinformation and incentives
üHowcan we coordinate action — make exchanges, build relationships and communities — in
a world ofincomplete information and potential rentseeking?
üWhere cryptographers have found their solutions in public key cryptography and PoW
mechanisms, economists have found solutions in markets, regulation, and institutions.
Code as Constitutional Rules and Constraints
“The Bitcoin protocolin particular is essentially a set ofrules written in computer code
governing what is, and what is not, allowed by the participants in the Bitcoin network.
No single participant can change the rules, but newrules (in the form ofupgrades to the
open-sourcesoftware) can be advanced by different participants.
The key to understanding Bitcoin’srulesis to understand consensus.”
Constraints governingBlockchain Technology
From Authority to Governance
üDecentralized platforms, like those that utilize blockchain technology are complex economic
system that require rigorous design because they lack authority.
üOn decentralized platforms, authority has to be replaced by incentives and other mechanisms.
Rule of Office
Rule of Code
Code as Law
<Source:Primavera DeFilippi,‘BlockchainandtheLaw’, 2018>
“By relying on blockchain technology,
governmentscould regulate society more efficiently
by reducing the costs of regulatory compliance and law enforcement,automating laws,
while simultaneously reducing the degree of uncertainty that is inherent in the legal prose.”
<Source:JohnKeane, ‘TheLifeandDeath ofDemocracy’,2009>
In the age of monitory democracy,in
contrast to the earlier eras of assembly
democracy and representative democracy
in territorial state form,many new
mechanisms are mixed and combined with
new ways of publicly monitoring and
controlling the exercise ofpower.
What is meant by ‘Monitory Democracy'?
The emerging historical form of'monitory' democracy isa 'post-Westminster' formof
democracy in which power-monitoringand power-controllingdevices have begun to
extend sideways and downwards through the whole political order.
The chasteningofpower:LemuelGulliver trapped
bytheLilliputians, fromC.E. Brock’s drawing,1894.
Rule-Systems in which
individuals(or firms, or algorithms) can make economicand political exchanges.
üBlockchains have systems of governance.
üBlockchains look a lot like countries.
üThey have currencies(tokens),property(digitalassets), laws(protocols),
corporations(DAOs),and security systems(proof-of-work,orproofof stake, or
delegated byzantine fault tolerance, etc.).
Blockchains are ConstitutionalCatallaxy!
Open source constitutionalordersin which participants are continually
developingtherulesof thegame evenafter thegame has started.
“Man’s reason is the slave to his passions,
and recognizing this about himself,
man can organize his own association with his fellows
in such a manner that the mutual benefits
from social interdependence can be effectively maximized.”
- James M. Buchanan and GordonTullock,<TheCalculusof Consent>