The Bitcoin ecosystem
If we look beyond the Bitcoin blockchain, how does the industrial organization of the Bitcoin ecosystem look like? Who profits, who controls, who checks? An unrolled tweetstorm of moderate technicality, originally published on @ecoinomia.
The Bitcoin ecosystem:
0. The Bitcoin blockchain and all participating nodes
1. Miners and mining pools
3. Institutional investors and hedge funds, hodlers
4. Commerce, retail, NFPs
5. Coders, core and otherwise
6. Regulators and legislators, courts
7. News & info
I’m sure there’s more, but I ran out of characters. Using Bitcoin as the best-established and observed ecosystem here. Notably, only 0, parts of 4 (NFPs) and 5 (OSS coders) and, well, 6 operate outside of a profit motive.
Exchanges and mining pools are functions that are at least in theory decentralizable, but afaict decentralized operations are at best fringe players as of now. Happy to get more input here.
The relationship the crypto community has towards the profit motive can best be described as “awkward”. Also, charitably expressed: “intuitive”, less charitably: “pushing for conflicting ideals without realizing they’re conflicting”. Iow: utopian.
One the one hand, “free markets” are the one thing that separates crypto ideals from post-War Soviet “cybernetic planning”. (That and faster computers.) Otherwise it’d just be a mix of “collective ownership of the means of production” plus “collective control of distribution”.
On the other hand, it reserves the brunt of its hostility towards private, for-profit actors: the evil banks that used their central role within the global ecosystem to extort Ricardian rents, and still managed to fail at it. Cue ominous music: the Middleman!
How do we find an operative middle ground between these two poles? Some sort of idealized near-perfect competition market with vertical integration of consumers into production (P2P) and room for (useful) entrepreneurial activity (Schumpeter rents).
The key bone of contention is whether this ideal state can be reached and sustained without interference. Iow, whether the centrifugal (decentralizing) forces are stronger than the centripetal (centralizing) forces.
If we treat the central element, the blockchain, as some kind of rent-dispersing Aumann Machine* we can have a closer look at the periphery to find out which hypothesis holds water.
1. Miners: initially P2P laptop ops, now for-profit enterprises that turn economies of scale, access to expensive technological and cheap natural resources into Ricardian rents. Mining pools: risk sharing ops, afaict mostly for profits, so basically insurances or lottery pools.
(If there’s someone in mining who reaps Schumpeter rents, it’s Nvidia. But they really backed into that…)
2. Exchanges: Afaict, always entrepreneurial outfits that eat exchange rate volatility for breakfast, with a sprinkling of fees on top, like those boxes at the airport. So mostly Ricardian. Also, in a perfect Bitcoin economy, they wouldn’t exist. Like tram accidents.
3. Traders and hodlers: run the gamut from grandma to institutional, purely for profit. There’s some social usefulness to arbitraging, but if it’s more than vacuuming up satoshis, this should be cause for concern. Hodling is essentially profiting from congestion.
4. Commerce and retail: the rainbow-farting unicorns of the white paper. In a perfect Bitcoin economy, the main beneficiaries from reduced transfer fees/transaction costs. Rumored to still be roaming the wild.
(Oh, of course I refer to both producer and consumer side of retail commerce. In an atomistic vertically integrated P2P economy they shouldn’t be too far apart anyway. Interested in data points how much of $BTC tx volume is non-virtual, non-conspicuous consumption P2P commerce.)
5. coders: come in all stripes and participate for all kinds of reasons. Also, speaking strictly de facto, they’re the ones with the hand on the switch.
So what are the takeaways? For starters, you don’t solve complex socio-economic interaction by spraying a bit of coordination glitter on top. It takes more than that.
There’s still a lot of counterproductive rents being reaped in the periphery, especially from (supply and demand) scale economies, private access to data, and congestion. Even useful rents (risk pooling) are subject to economies of scale and too-big-to-fail systemic risks.
Especially that “ten years in (sic), why aren’t there any blockchain use cases” pamphlet that’s been retweeted endlessly should really be called, “nine years in, why are mining and exchanges still centralized?”
Because putting the central component on some sort of rent-dispersing trust mechanism doesn’t help much if these rents get sucked up by players benefiting from location, private information, and scale economies. Ur doin it rong.
And finally, my beloved drunk unicyclist theory of governance: if you have to navigate a narrow path between two evils with an unstable contraption, you better not get drunk, or you might end up in a ditch. That’s it: FIN.
The original tweetstorm appeared on @ecoinomia. The text has been slightly edited and it might still evolve into a real essay. Oliver Beige is an industrial engineer turned economist (PhD Berkeley, MBA Illinois, MSIE Karlsruhe) who is focusing on how technologies like machine learning or blockchain might change the value creation between markets and enterprises.