> What I find so intriguing about crypto is that it offers commitment devices that are built from…
Vitalik Buterin

Vitalik Buterin: This seems interesting, but I’m not sure I understand what you mean too clearly. Can you give a specific example?

Not sure if I can come up with a specific example, because virtually every Proof-of-X is an attempt to build a commitment device from the viewpoint of the transaction rather than the actor, but let me elaborate a bit. After all, it’s Saturday…

Adam Smith’s key insight, and the spark that started modern economic thinking, is “mutual gains from trade”, the recognition that economic entities engage in a voluntary transaction if the assets they hold are worth more to the counterparty than to themselves, so it makes sense to swap, and an economic systems that allows these transactions to happen (mostly) unfettered is likely to create good economic outcomes. This might sound fairly obvious today, so it’s hard to realize just how radical this idea was in the late 18th century.

Almost immediately economics (or “economy” back in the day) moved back from focusing on the transaction on focusing on the actor. Macroeconomics, originally perceived as the study how the state actor can facilitate economic exchange, looked at generic actors: the government, industries, sectors, households, banks, import/export.

With more data and a better understanding of how the economy works, the focus shifted towards a more fine-grained view. But Microeconomics is still actor–centric. The two fundamental theories in Micro are choice theory (for consumers) and production theory (for companies). Both center on individual decision making in the face of an anonymized, aggregated market response.

TCE is often perceived as an even closer perspective, some kind of picoeconomics, but the key is that it moves back to looking at the economy from the vantage point of the action (the transaction) and not the actor.

If graph–theoretic terms, if the whole economy is a network of transactions, Microeconomics looks at the nodes and TCE looks at the edges.

Moving to databases. When relational databases came up in the 1960–70s, they didn’t try to revolutionize how accounting and financial reporting got done, they simply revolutionized the speed and scale at which it could be done. So they continued to do what had been done for 500 years — record transaction from the vantage point of the individual actor.

In an ideal world, all transactions in an economy equal out and you have a hermetic system of stocks and flows. In such a world, it would suffice to record either stocks or flows and impute the other. But we don’t live in an ideal world. The cost of not living in an ideal world is the trillion-dollar industry called professional services.

Due to simplicity and inertia, we’ve been recording transactions from the vantage point of the actor — typically firms or banks — a system that has served us well through the last couple of decades of rapid globalization and ever more complex supply chains. Until it didn’t serve us that well anymore, simply because we have reached a speed and scale where firm A recording their version of the transaction, firm B theirs, and hoping they equal out, does not work anymore.

Even in routine cases, this reconciliation is cumbersome and slow. In case of a discrepancy this can blow up very quickly and trigger the trillion-dollar professional services industry.

This is the point I was trying to make. The advantage of public, distributed ledgers is not that they “cut out the middleman”, or other popular slogans. The advantage is that they offer a complementary commitment device to the current one, where records are kept intra–firm, inter–firm reconciliation is done manually and only when needed, and conflict resolution is prohibitively expensive. This promises to reduce transaction costs — the costs of doing business in the market — drastically, so we should see a sizable chunk of economic activity move from intra–firm to the market…

Adam Smith was onto something… Photo by Chris Lawton on Unsplash.