Tracer Drop Episode #14: Transaction costs, Decision making, and Markets as Information Processing Mechanisms

Transaction costs, Decision making, and Markets as Information Processing Mechanisms

Agenda

  • Introduction
  • Key Definitions
  • Structuring blockchain transaction costs
  • Question: Achieving positive cashflow in a non-existent transaction cost system
  • Perfect information
  • The Socialist Calculation Debate
  • Structuring transaction costs in DAOs
  • Computational Mechanism
  • Australian government
  • Problems and opportunities of transaction costs in Crypto

Call Recording: Here

Introduction

  • Tracer Updates: Funding Rari Fuse pools for Tracer.
  • Now there’s the ability to borrow and lend Tracer tokens.
  • Additionally, other types of TCR tokens are also accepted to increase engagement, participation, and governance.
  • Propose and vote with TCR staked in Tokemak as well with Arbitrum TCR and unstaked TCR.
  • New markets voted on for LINK and TOKE perpetual pools.
  • Tokemak liquidity was voted to direct to Tracer to create greater market efficiency.

Key Definitions

  • Transaction Costs: These are costs of getting things done. It will cost you something, to do something.
  • Information costs: Knowing the costs and location of something before you buy it. In terms of trading, you need to gather information on who what where when you will and are going to trade with. Information is essentially not free.
  • There are so many different types of costs that can be quite high and that they accumulate into larger costs.
  • When building or designing a crypto-economic system you need to think about all the types of costs. Think about how to deal with them.

Structuring blockchain transaction costs

  • Ronald Coase “Nature of the Firm”.
  • Why do firms exist? - Firms exists because the economies on transaction costs by deploying knowledge, transaction costs and routines.
  • We economies on the use of resources that we have when blockchain came along.
  • Many people did not realise how important trust is, as an economic asset.
  • Some time it costs money to build up trust. A big literature that we tend to trust taller, good looking people etc.
  • Blockchain economises on the use of trust.
  • Opportunism - one of the costs of operating an economy that people behave badly with self interest and taking advantage of one another.
  • Blockchain and in particular smart contracts - allow us to economies on the use of trust in our transactions.
  • Banks, churches, charities and governments have created environment whereby we can trade with one another.
  • Blockchain comes and says “we can do all of that, cheaper”.
  • When something becomes cheap - we will get more wealth, more social interaction, more economic activity and greater levels of human flourishing.
  • Blockchain goes beyond payments but it disrupts the trust mechanisms in our economy.

Question: Achieving positive cashflow in a non-existent transaction cost system

  • Transaction costs will not likely be non-existent because we still require information.
  • Information is never going to be free. It is valuable, so you are always going to have to discover new possibilities as a consumer and learn new things.

Perfect information

  • Mainstream economics has this ‘perfect mainstream’ assumption. This means that we know everything that there is to know and that everything that will be known, we kind of know.
  • Coming back to Ronald Coase - Why do we have firms if we think we have perfect information. We do not need those firms to exist to economies on transaction costs.
  • If we have perfect information, we don’t need to worry about transaction costs.
  • Ronald Coase “The Problem with Social Cost”. Why do we have law. Law actually creates a common framework of understanding and cooperation with each other.

The Socialist Calculation Debate

  • Friedrich Hayek - The Socialist Calculation debate.
  • Do you need to have free market prices in order to allocate resources?
  • Socialists say you can plan an economy however Hayek says you have to have prices to allocate resources.
  • Importance about prices is that they reveal information to the market.
  • To gain a deep understanding in crypto, you need to think of Coase’s transactions costs and Hayek’s proper pricing.
  • The more things that are priced, the better you can trade them, the more you can trade them and better manage risk in your life.
  • A lot of things that need to be priced, have not been able to be priced due to transaction and information costs being high.
  • Information is local and need trustlessly communicated local information to a broader scale.
  • This establishes a market to get the pricing going. This is what blockchain does.

Structuring transaction costs in DAOs

  • DAOs are the latest organisational structure that people use in order to achieve a common goal emerged over entire devotion of our species.
  • DAOs allow people to come together and form human relationships to achieve a common goal.
  • This is a communication of local information.
  • Legal personality would be a nice-have for DAOs.
  • The 19th century enabled legislation allowing corporations to emerge with legal personality.
  • Legal personality can be part of limited liability.
  • This facilitates greater cooperation at lower levels of risk.
  • A risk sharing mechanism.

Computational Mechanism

  • The most legible assets have been capital assets.
  • Human capital has been difficult to contract for obvious reasons. It’s big, important and unpredictable.
  • Economic institutions able to increase scope of what is capital in an economy.
  • Bringing it into information processing and market mechanisms and other forms of economic coordination changes the locus of power is not an economy.
  • The massive source of capital in an economy is human skills and capabilities.
  • Reduction in transaction costs of contracting and thinking of human capital legibility to an economic system opens up economic activity.

Australian government

  • Agrees with the Bragg committee inquiry proposal to establish new DAOs company structure in Australian law.

Problems and opportunities of transaction costs in Crypto

  • Transaction costs in crypto are utility costs for using the infrastructure.
  • It is also a price and higher prices introduces market competition, new layer ones, market innovation etc.
  • The power of lowering transaction costs is more towards counter-party identification
  • The more demand there is the higher the utility costs go up.
  • This shows that more resources and investments need to go into building out capacity of the network or building alternative networks on top of it.
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