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Blockchain Economics: Tackle Debt and Systemic Risk

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Financial Resilience and Sustainability. Crypto tokens imply optionality and the ability to better manage risk. The thesis of this talk is that smart contracts are options, and as such, can be used to control risk (unwanted future uncertainty) in a wider range of areas than has been possible previously, in finance, and in other areas too such as medicine. Options as a financial market instrument have long been used to control the amount and timing of risk in specific ways and tailor exposure with granularity. Smart contracts are an even more flexible species of options because they are programmable contracts that can be used to confer the right to buy or sell any blockchain-based asset or liability at a future moment in time (blocktime or “fiat” (regular) time) per certain terms and consideration. Therefore, smart contracts allow a greater variety in the degree and type of risks that might be brought under management. The impact of having greater control over risk is that intangible social goods are produced such as surety, confidence, and reliability, which help to engender a more trustful society.

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Blockchain Economics: Tackle Debt and Systemic Risk

  1. 1. Inaugural Blockchain Symposium Blacksburg VA, April 20, 2018 Slides: http://slideshare.net/LaBlogga Blockchain Economics Industry and Institutional Disruption Melanie Swan Philosophy, Purdue University melanie@BlockchainStudies.org
  2. 2. 20 Apr 2018 Blockchain 1 Melanie Swan, Technology Theorist  Philosophy and Economic Theory, Purdue University, Indiana, USA  Founder, Institute for Blockchain Studies  Singularity University Instructor; Institute for Ethics and Emerging Technology Affiliate Scholar; EDGE Essayist; FQXi Advisor Traditional Markets Background Economics and Financial Theory Leadership New Economies research group Source: http://www.melanieswan.com, http://blockchainstudies.org/NSNE.pdf, http://blockchainstudies.org/Metaphilosophy_CFP.pdf https://www.facebook.com/groups/NewEconomies
  3. 3. 20 Apr 2018 Blockchain Blockchain Economics  Economics  Study of resource discovery and propagation to fulfill needs (supply and demand)  Wants are always bigger than available resources (cost of decision-making, opportunity cost, scarcity (material or intangible))  Eras of Economic Study 1. Classical Economics (material goods) 2. Network Economics (digital goods) 3. Blockchain Economics (cryptographic assets, smart contracts, and DApps/DACs) 2 DApp: decentralized application; DAC: decentralized autonomous corporation
  4. 4. 20 Apr 2018 Blockchain Blockchain Economics  New economic model’s distinguishing aspects 1. Open network business model  Two-way network effects (Metcalfe’s Law (n2))  MV=PQ money supply valuation  Vs. proprietary platform (GOOG, FB, NFLX, IG) 2. Token system for asset and monetary transfer: users expect to participate in the community economy  Earn, vote, trade, access resources 3. Initial Coin Offerings as a novel and official financing method  Pre-sell token access to the network 4. Large-scale global participative communities 3 Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan.
  5. 5. 20 Apr 2018 Blockchain Blockchain Economics 4 2015 2016 2017
  6. 6. 20 Apr 2018 Blockchain 5 economic challenges.
  7. 7. 20 Apr 2018 Blockchain Economic Challenges 6 Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan. Debt Systemic Risk Entitlements Overhang Healthcare (Cost-Outcome)
  8. 8. 20 Apr 2018 Blockchain Challenges and Potential Solutions 7 Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan. Debt Systemic Risk Entitlements Overhang Healthcare (Cost-Outcome) Net Settlement a) Payment Channels b) Payments/Securities as a Service Programmable Risk a) Black Swan Smart Contracts b) Real-time Balance Sheets c) Apply Deep Learning (RNN) to HFT Automation Economy a) Future of Work/Technological Unemployment b) Human-Machine Collaboration Blockchain Health Economics a) Global Healthcare Equivalency Units b) Digital ID, consent, interoperable data
  9. 9. 20 Apr 2018 Blockchain 8 Source: http://www.europeanfinancialreview.com/?p=21755 debt.
  10. 10. 20 Apr 2018 Blockchain 9 net settlement. payment channels. digital credit systems. Source: http://timreview.ca/article/1109 rethink debt.
  11. 11. 20 Apr 2018 Blockchain Payment Channels: the concept 10  Ability to “have an account” relationship with any party  3-step financial contract executed over time 1. Party A opens a payment channel with Party B and posts a pre-paid escrow balance 2. Party A consumes against the escrow credit over the given time period (activity is tracked) 3. At the end of the period, cumulative activity is booked in one net transaction to close the contract Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels
  12. 12. 20 Apr 2018 Blockchain Payment Channel motivation and projects  Motivation  Micropayments for video bandwidth consumption where piecemeal transactions do not make sense  Blockchain scalability (offload tx)  Send payments across p2p network  Projects  Bitcoin: Lightning Network  Time/signature lock parameters: CheckLockTimeVerify, CheckSequenceVerify  Current ~$350 max (4% Btc) for Lightning Payment channels  Ethereum: Raiden, Plasma 11 Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels
  13. 13. 20 Apr 2018 Blockchain 1. Unilateral Payment Channel 12 Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling Opening Transaction: Broadcast to Network Interim Transactions: Signed between Wallets (both parties agree and are obligated; not Broadcast to Network) USD $50 Alice opens $50 “Monthly Payment Channel” with Starbucks Closing Transaction: Broadcast to Network Alice consumes coffee and Starbucks adjusts the refund balance from the initial deposit USD $5 4/1/18 4/30/18 1 2 Close “Monthly Payment Channel”: Starbucks broadcasts last refund amount to network Starbucks Coffee USD $50 USD $45 Starbucks acknowledges with unbroadcast refund of $50 4/2/18 USD $5 3 4/3/18 USD $5 4 4/4/18 USD $40 USD $35 USD $35 30
  14. 14. 20 Apr 2018 Blockchain 1. Unilateral Payment Channels  Starbucks Example 1. Customer opens $50 monthly payment channel with Starbucks 2. Daily coffee consumed is tracked and booked against the $50 credit 3. Activity is netted at the end of the month. Contracts close and roll over at regular intervals. Either party may close the channel early, trigger net settlement  SBUX: payment channel prototype  Loyalty program (cards & apps): 41% purchases, $1.2 bn obligations 13 SBUX Balance Sheet Assets Cash $1.2bn Liabilities Stored Value Cards $1.2bn Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels
  15. 15. 20 Apr 2018 Blockchain 2. Bilateral Payment Channel 14 Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling SBUX Balance Sheet Assets Cash $1.2bn Liabilities Stored Value Cards $1.2bn Opening Transaction: Broadcast to Network Interim Transactions: Signed between Wallets (not Broadcast to Network) 1 BTC Open “Monthly Expense” payment channel: create a new address, each fund with 1 BTC Closing Transaction: Broadcast to Network 1 BTC Each pays for expenses from the shared address during the month 1.2 BTC 0.8 BTC 4/1/18 4/30/18 1 2 3 Close “Monthly Expense” payment channel: net settle the balance returned to each Roommate Expense Sharing
  16. 16. 20 Apr 2018 Blockchain 3. Community Payment Channel 15 Source: https://solarpowerrocks.com/solar-basics/how-much-electricity-does-a-solar-panel-produce Opening Transaction: Broadcast to Network Interim Transactions: Daily production and consumption measured as signed transactions between Wallets A, B, C, D ante up monthly dues to the address to open this month’s “Community Payment Channel” Closing Transaction: Broadcast to Network Energy Produced 4/1/18 4/30/18 2 Close this month’s “Community Payment Channel” with net amount returned to A, B, C, D 0.8 kWh CSC: Community Solar Coin Token: ante-up expenses, vote, governance re: how price per kWh, smart contract lookups to pricing oracle; additional capital calls during the month if necessary 4/2/18 4/3/183 Etc. 30 Local Solar Energy Production 1 CSC 1 CSCA B C D 1 CSC 1 CSC Energy Consumed 1.2 kWhA A Energy Produced 1.1 kWh Energy Consumed 0.6 kWhB B Energy Produced 1.3 kWh Energy Consumed 0.7 kWhC C Energy Produced 1.0 kWh Energy Consumed 1.1 kWhD D 1 A B C D 1 CSC 0.8 CSC 1.2 CSC1.1 CSC
  17. 17. 20 Apr 2018 Blockchain Transactive Grid, President St, Brooklyn NY  Decentralized DIY energy markets  Blockchain-based microgrid  Community:  Five net-producing homes generating energy through solar power  Five net-consuming homes interested in buying excess energy from neighbors  Benefits: no billing components, no infrastructure losses, no accounting losses in the system  Ability for producers to sell or donate excess 16 Source: https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york
  18. 18. 20 Apr 2018 Blockchain 4. Multi-resource Community Payment Channel 17 Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains Opening Transaction: Broadcast to Network Interim Transactions: Daily production and consumption measured as signed transactions between Wallets A, B, C ante up monthly dues to the address to open this month’s “Community Payment Channel” Closing Transaction: Broadcast to Network Energy Produced 4/1/18 4/30/18 2 Close this month’s “Community Payment Channel” with net amount returned to A, B, C 0.8 kWh CSC: Community Coin Token: ante-up expenses, voting, governance, decision-making re: resource pricing; additional capital calls; dispute resolution mechanism 4/2/18 4/3/183 Etc. 30 Sustainable Community 1 CSC 1 CSCA B C 1 CSC Energy Consumed 1.2 kWhA Greens Produced 3 units Greens Consumed 1 unit B Bandwidth Produced 10 units Bandwidth Consumed 3 units 1 A B C 1 CSC 0.8 CSC 1.1 CSC B C 1.2 kWh A C C A B 2 units 1 unit
  19. 19. 20 Apr 2018 Blockchain Uber for Microgreens Who’s harvesting today? 18 Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains; Swan, M. 2017. Technological Unemployment, In Surviving the Machine Age. Springer. LocalGreens Kale – SuperGreens Citizen’s sense of duty to serve the republic Civic Duty Civic Collaboration Greek Statesman Self-directed Cryptocitizen Optional peer infrastructure provision: Cryptocitizen’s sense of meaning and purpose in participating in community sustainability Identity Crisis: who are we in the Automation Economy, Technological Unemployment, and the Future of Work?
  20. 20. 20 Apr 2018 Blockchain 5. Small Group Payment Channel  Local bar: Lynn, Chris, Bartender  Lynn has $10 tab with bartender, has consumed $6  Chris has $10 tab with bartender, has consumed $5  Lynn and Chris play pool, Chris owes Lynn $5  Current method (gross settlement): each party settles with each other (3 tx, $16 gross flow)  New method (net settlement): (2 tx, $11 gross flow)  Already see implication if less money transfers, more is available 19 Source: Andreas Antonopoulos Bartender A/R Lynn $6 Chris $5 Lynn A/R Chris $5 Bar $6 A/P $1 Chris Bar $5 A/P $10 Lynn $5 $11 Current Method Tx1 $6-Lynn Tx2 $5-Chris Tx3 $5-Lynn Payment Channel Tx1 $10 C-to-B Tx2 $1 L-to-B
  21. 21. 20 Apr 2018 Blockchain 6. MyMonthlyExpense Payment Channel  My monthly expenses example  De facto payment channel  Inflows into bank account:  Paycheck direct deposit  Outflows from bank account:  Auto-pay bills (fixed and variable)  Formalized into a multi-party payment contract netting salary against expenses, any remainder to Schwab investment account  Implication: settling net basis frees capital  Consider business entities on a net basis 20 Source: https://www.psmarketresearch.com/market-analysis/personal-robot-market My monthly expenses Salary (direct deposit) DR CR $xx Expenses (auto-pay) Rent (fixed amount) Car payment (fixed) Utilities (variable) Discretionary (variable) $xx $xx $xx $xx Net savings (variable) $xx $xx My apartment building Expected inflows DR CR $xx Expected outflows Fixed Variable Net $xx $xx $xx My small business Expected inflows DR CR $xx Expected outflows Fixed Variable Net $xx $xx $xx
  22. 22. 20 Apr 2018 Blockchain 7. MySupplyChain Payment Graph Economy  Blockchains: only sub-registers of the cash account (Alice, Bob, HSBC, etc.), not a full suite of general ledger accounts  Property registries use cash-acct ledger structure  Property registries where UTXOs are assets  Birth/death registry: one credit tx, one debit tx  Supply chain finance: for supply chain net settling, need integrated account ledgers  Single set of books with multiple views: by supply chain (new) + by entity (existing)  Revenue (WMT); COGS (Deere, Adidas) 21 Source: https://www.psmarketresearch.com/market-analysis/personal-robot-market My supply chain Sales Inventory COGS Manufacturing Raw Materials Cash Alice Bob Carol Ralph HSBC DR CR $xx $xx $xx $xx $xx Payments trajectory Goods trajectory Orthogonal trajectories, different incentives, behavior
  23. 23. 20 Apr 2018 Blockchain Payment Channel implications  New forms of Digital Credit Systems  Contractually-obligated payment relationships  Booked as periodic net activity  Net settlement  Digitized payment system for resource consumption that settles based on net payments instead of gross transfers  Peer-provided banking services enabled 22
  24. 24. 20 Apr 2018 Blockchain Securities as a Service 23 Source: Blockchain Fintech: Programmable Risk and Securities as a Service, http://futurememes.blogspot.com/2016/10/blockchain-fintech-programmable-risk.html CD, DVD Streaming Music and Video Services Entertainment as a Service Asset Service Auto, Home Uber, Lyft, Gett, Juno, Via; Airbnb, VRBO HomeAway Transportation, Domicile as a Service Securities Securities as a Service  Securities a Service  Now have to own because uncertain future value of assets  Access to the consumable benefits of the asset without owning  Works if trust consumable assets will have future availability  Need the cash flow the asset provides, not the asset itself Consumable benefits of securities: cash flow, appreciation Payments as a Service
  25. 25. 20 Apr 2018 Blockchain 24 systemic risk.
  26. 26. 20 Apr 2018 Blockchain 25 Source: http://timreview.ca/article/1109  Blockchain business networks  Single shared business processes  Multiple private views
  27. 27. 20 Apr 2018 Blockchain business networks. 26 digitized assets. instantaneous transactability. shared business processes. the world is your VPN Source: http://timreview.ca/article/1109
  28. 28. 20 Apr 2018 Blockchain 27 real-time balance sheets. off-balance sheet obligations disappear. diminished risk. Source: http://www.europeanfinancialreview.com/?p=21755 rethink risk.
  29. 29. 20 Apr 2018 Blockchain 28  HFT = program trading, automated execution 1. Higher volume since 2008  Institutional investor volume fixed (3-4 bn shares/day)  Total volume: 2x higher  50-70% total volume = HFT 2. Higher volatility 3. Tighter bid-ask spreads 4. Greater price efficiency (no price gaps) HFT (high-frequency trading) Sources: Chaparro, F. 2017. Credit Suisse: Here's how high-frequency trading has changed the stock market. Business Insider. https://speedtrader.com/how-algorithms-and-high-frequency-trading-programs-affect-your-trading/ https://snipethetrade.com/us/high-frequency-trading US Equity markets
  30. 30. 20 Apr 2018 Blockchain Programmable Risk Black Swan Smart Contracts  Financial options (put/call) used to control/manufacture exposure  Convexity (Fig. 1): control down-side risk, upside gain, anti-fragile (robust)  Concavity: undesirable risk profile  Taleb: map event probabilities as s-curve (Fig. 2) in medicine, etc.  Convex-linear-concave profile  Use programmable risk dropdown feature of smart contracts to manage risk in more domains 29 Sources: Swan, M. Submitted. Programmable Risk: Black Swan Smart Contracts, IEEE; Taleb, Medicine: https://arxiv.org/ftp/arxiv/papers/1208/1208.1189.pdf Figure 1 Figure 2
  31. 31. 20 Apr 2018 Blockchain future. 30
  32. 32. 20 Apr 2018 Blockchain store money. 31 old model. networks. banks. new model.
  33. 33. 20 Apr 2018 Blockchain change. 32 https://www.coindesk.com/jpmorgan-says-it-may-have-to-adapt-to-counter-crypto-adoption “…financial institutions…face the risk that payment processing and other services could be disrupted by technologies such as cryptocurrencies that require no intermediation” Annual 10K, Mar 2018
  34. 34. 20 Apr 2018 Blockchain power of the press. 33 old model. networks. newspapers. new model.
  35. 35. 20 Apr 2018 Blockchain power of the wallet. 34 old model. peer networks. banks. new model. 1. Token Name 2. Ticker 3. Denominations 4. Total Money Supply
  36. 36. 20 Apr 2018 Blockchain government as service provider. 35 old model. eResidency. Exclusivity: One default economic and political sovereign birth regime. new model. Source: http://blockchainstudies.org/Blockchain_Economics_CFP.pdf Plurality: Plug and play economic and political services regimes.
  37. 37. 20 Apr 2018 Blockchain inclusion. 36 banking & credit. land registry. identity. electricity. vaccines & medicine. Source: https://www.unicef.org.au/blog/unicef-in-action/april-2017/photos-vaccines-reach-most-remote-places-earth Digital health wallet
  38. 38. 20 Apr 2018 Blockchain Blockchain Economics Challenges and Disruptive Solutions 37 Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan. Debt Systemic Risk Entitlements Overhang Healthcare (Cost-Outcome) Net Settlement a) Payment Channels b) Payments/Securities as a Service Programmable Risk a) Black Swan Smart Contracts b) Real-time Balance Sheets c) Apply Deep Learning (RNN) to HFT Automation Economy a) Future of Work/Technological Unemployment b) Human-Machine Collaboration Blockchain Health Economics a) Global Healthcare Equivalency Units b) Digital ID, consent, interoperable data
  39. 39. Inaugural Blockchain Symposium Blacksburg VA, April 20, 2018 Slides: http://slideshare.net/LaBlogga Blockchain Economics Industry and Institutional Disruption Melanie Swan Philosophy, Purdue University melanie@BlockchainStudies.org

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