I took a break from the grandiose pronouncements at the Bitcoin 2022 conference to get a more scholarly perspective on the blockchain boom from a Miami-based economist who studies it for a living: Cathy Barrera. While earning a PhD in business economics from Harvard and teaching at Cornell, Barrera became convinced her discipline needed to catch up to the realities of a society being transformed by what has been termed a “Fourth Industrial Revolution,” driven by technologies like artificial intelligence and robotics. After watching the rise of crypto, she co-founded Prysm Group, a consulting firm that helps blockchain businesses design their economic incentive schemes and counts Nobel laureate Oliver Hart as a senior adviser. Over coffee in the lobby of the Betsy Hotel, she held forth on the future of economics, blockchain’s trust-busting potential and what Bitcoin’s inventor got wrong. Our conversation below has been condensed and edited for clarity. Why do we need a new economics for the ‘fourth industrial revolution’? Even when these metrics like gross domestic product were created, folks knew at that time this is not a perfect metric and it doesn’t capture everything that we care about. GDP is very good at capturing trades, but not other production, like household production. The way that digital technologies evolved over the last two decades has made a bigger gap between GDP and actual economic value produced in the economy. For example? If you think about things like the music industry, we listen to even more music than when everything was on CDs, but most people are listening to a free streaming service. The portion captured by GDP has been declining even though the amount of music we listen to has been increasing. [Eds note: It's true, our Spotify playlists lists have been getting a lot of use. ] Could blockchain activity change our understanding of economics and the way we measure economic activity? I wouldn’t rule it out. A lot of experiments in the blockchain space are trying to replicate things that were happening within a firm — organizing activities and resources — that are maybe using markets, using governance, using voting instead. Perhaps having these things happen in a database where we observe it could lead us to aggregate that information into new metrics. The issue is that these activities are quite marginal compared to the overall economy. There would have to be a tremendous change in the adoption of these platforms in order for blockchain data to be used in general policy-making. What about the ability of blockchain to upend industry? Is it going to be harder than blockchain creators think to outcompete existing firms that have monopolies? In order to replace the monopoly with something better, you have to make sure you are ticking the boxes on the things that the monopoly is doing. Maybe the monopoly is charging too much for its service, but if the monopoly is providing 99 percent ‘uptime’ you need to provide 99 percent uptime. The mechanisms to do that in a decentralized way can be much more complex than you initially think. How do projects adapt to that challenge? Designs have multiple layers. You’ll see [Decentralized Autonomous Organizations] that have voting by token-holders, but they also have committees. They’re decentralized but they also have elements of centralization. That’s a response to the reality that there are some activities or services provided by these centralized groups that are important to their value. Do blockchains eliminate the need for the government’s antitrust power? The two things are complementary. If we have the hypothesis that more and more activities are going to have the blockchain as a base layer, we aren’t there yet. In the meantime, we need to be using all the tools at our disposal. How would you rate Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, as a designer of economic incentives? The Bitcoin white paper describes bitcoin as a peer-to-peer cash system, and that is not what Bitcoin is. It was envisioned as a system where all the participants in the system would participate in securing the system and validating the system. Instead, there are a small number of miners relative to the Bitcoin holders, so I don’t think it can be described as peer-to-peer, at least in practice. From an economic perspective, it’s clear why the design of the system would lead to consolidation.There’s set compensation for a block, and only one of the miners can get that compensation, so there’s an incentive to invest in capacity to be able to win that contest. So, if you were trying to sleuth out Satoshi’s real identity, you wouldn’t go looking in an economics department? No.
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