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The Nature of the Firm

Tl;dr, I have a new company called Coase and we’re releasing a game into alpha. You can sign up here to learn more.

For those who studied economics, Ronald Coase needs no introduction. The 1991 Nobel laureate is most famous for his contributions to our understanding of the frictions and incentives associated with production in the modern world.

In “The Nature of the Firm,” Coase observes that, because markets are costly to use, the most efficient production process often takes place within a firm. As Kevin Werbach notes in his latest book, this can be understood as a response to the limitations of trust. Blockchain technology allows us to reimagine some of the ways of doing business that were built on these limitations and their costs.

Blockchains have the potential to lower transaction costs by shifting the levers that people have traditionally relied upon to audited, automated processes. Ultimately, they can serve as a piece of coordination technology among potentially conflicting parties to reconcile on a single-source. People trust the outcomes of blockchains because they trust the process that they use. Any impact of this recalibration will probably be best understood through a Coasian lens.

After co-founding a smart contract platform, Tezos, and watching an ecosystem bloom around it, I wanted my next company to help realize the potential for uniting markets using smart contracts. Now that I believe I’ve found the right first use case, a great co-founding team, and we are well on our way to releasing a first product, I’m ready to introduce my new company more thoroughly.

The price mechanism as a coordinating instrument

I named my new company Coase in the summer of 2018 as I began to reflect on the potential for shifts in transaction costs online. When considering these types of inefficiencies, it’s hard to ignore online video games. In-game assets, whether a form of currency or some artifact, are exclusively subject to the decisions of gaming company executives. For many players, this means that the fruits of their commitments — temporal or otherwise — risk some form of manipulation. What’s more, capturing and trading assets is usually mediated with a high premium. This has rendered systemic issues with liquidity, transparency, and trust in gaming economies. My intuition was that a smart contract-based solution could help provide a better alternative for players by facilitating more efficient marketplaces.

When I surveyed the different types of games that exist, I found the greatest opportunity for introducing more efficient economic models in digital collectible card games (CCGs). Their precursor, physical CCGs, were introduced by Richard Garfield in 1993 through Magic: The Gathering. Magic derivatives, such as Pokémon and Yu-Gi-Oh!, saw popularity throughout the 1990s and 2000s. Typically, these games have two components: 1. battle, where cards constitute different powers and spells in a game, and 2. economic, where players buy and trade cards to create collections based on battle strategies and card rarities.

Today, digitized versions of Magic and its derivatives are enormously popular, comprising a market with nearly $2B in revenues. However, digital CCGs have largely eschewed the economic component of the game introduced in physical CCGs. Instead, a free-to-play model, wherein players are given daily quests that pay gold, earn gold for winning games, and use that gold to enter events or buy packs, has been popularized (and parodied). Players don’t own their cards in any meaningful way and secondaries markets for cards, if they are allowed to exist, are marred by egregious transaction fees.

Free-to-play economies utilize the psychological tricks and mechanisms of daily quests and rewards, combined with random output of randomized card packs, allowing whales to spend hundreds or thousands of dollars on cards that cannot then be sold. The daily rewards come for free, which means those rewards would crash the market for similar cards or other assets if they were allowed to be sold. Previous attempts at introducing marketplaces have been crippled because they are incompatible with the daily rewards and randomized packs that form free-to-play best practices. The free-to-play model allows bots to grind and then flood the market, reducing the price that anything grinding can acquire down to zero.

We believe digital CCGs would have a better user experience if cards were wholly owned by players and exchanged in a liquid market. In the current environment, players are largely rewarded for not taking risks, creating the same cards and playing the same proven strategies. This pattern is a consequence of poor incentives and restrictive economic environments. Online websites and forums tell players the best builds and best cards to create, and players mostly create those cards and play those decks.

This is the opposite of how game with a market would work. In a market, if everyone wanted the same card, its price would go up and the price of unwanted cards would go down, encouraging creativity. Instead, most systems encourage conformity. Traditional CCGs have long benefited from players seeking to play ‘budget’ decks in this fashion, as which cards are ‘budget’ cards is self-balancing.

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Coase will tie the assets of its CCGs to a public blockchain in order to create an efficient secondary market and, thus, experiment with a new form of game play.

The traditional randomized pack-based card distribution in CCGs are a vestige of their analog counterparts. The restrictive and illiquid secondaries markets in digital games are a consequence of poor incentive alignment between publishers and players. We hope to remedy these two issues by leveraging a unique auction model and token bonding curves, all enforced using smart contracts, to create an extremely liquid and efficient market for cards.

Players won’t have to be experts in financial economics or blockchains to appreciate the convenience of programmatic liquidity and open markets. We don’t think players care about owning their own cards as much as we think they care about optionality and exploration.

In relinquishing control of card trade and issuance to contracts on a public ledger, our economy will offer new assurances to customers and players while opening up new venues for exchange. Ironically, this mechanism will replicate the economic component of physical CCGs while increasing coordination and lowering transaction costs. We like to think that Professor Coase would have been proud of our solution.

The coordinating function of the “entrepreneur”

With all of this said, the introduction of new dynamics in CCGs are only valuable insofar as the CCGs are played. While smart contracts are meant to facilitate the economic model we want to achieve, they serve as a means to an end. To prove my thesis at scale, I first needed to seed a company that would create compelling games.

In the fall of 2018, I quickly realized that it would be impossible to implement an original CCG without a seasoned gaming hand by my side. Cue my co-founder: Zvi Mowshowitz.

In addition to being a brilliant strategist and a Hall of Fame Magic: The Gathering player, Zvi brings experience in gaming R&D and, go figure, financial economics to the table. When introducing markets into an open environment, adversarial thinking is a requisite for success. Zvi stood out to me because his experience as a professional gamer and market maker honed these instincts in two extraordinarily competitive arenas.

Shortly after forming Coase, another talented executive, Brian David-Marshall, agreed to join us as our Chief Creative Officer. Brian comes with two decades of experience in collectible card games and comic books. A few weeks later, Alan Comer, a Wizards of the Coast alum who worked most recently at Valve Games, graciously accepted our offer to come on as CTO. Alan is one of the few people on Earth who can boast an extensive resume in building gaming engines and AIs for popular franchises like Pokémon. Finally, we capped our lineup with consulting services from Sam Black, a professional Magic: The Gathering player.

In most start ups of our size, founders would be lucky to have one other team member with decades of experience in their respective obscure and deeply competitive field. We have three. Though it’s only the beginning, I could not be happier with the combination of talents that we’ve been able to attract.

People have to forecast future wants

For the past year, the team has been working on an original implementation of a collectible card game titled ‘Emergents.’ In 2020, we will have an open alpha and, in its commercial release, we will support a marketplace powered by smart contracts on a public blockchain.

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If you’re interested in joining the open alpha for Emergents, or want to keep track of our progress, sign up for our mailing list. If you think you’d be a valuable addition to our team, email careers@coa.se with your CV. If you think you’d be a good beta tester for our other games, email beta@coa.se with a short description of yourself and the region where you live.

Working on decentralized governance and video games. Wife of @arthurb. Francophile by marriage.

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