Tracer Drop Episode #15: Cryptocurrency Behavioural Economics

Cryptocurrency Behavioural Economics

Agenda

  • Books mentioned
  • Introduction
  • Chat questions
  • Cultural Science discussion
  • Cultural Science and DAOs
  • Management in distributed systems
  • POAP design winner

Call Recording: Here

Books mentioned

  • Cultural Science: A Natural History of Stories, Demes, Knowledge and Innovation by John Hartley and Jason Potts
  • The Invisible Hook: The Hidden Economics of Pirates by Peter Leeson

Introduction

  • This is a Holiday special.
  • Today we focus on bootstrapping crypto-economics with the attention economy, memes, prices, and valuations as well as crypto as a cultural product.
  • Economists love using price signals when thinking about markets because they are effective communication signals.
  • Price signals are also helpful for coordination. But there are other signals as well, we will explore these.

Chat questions

  1. Why is there a lack of rationality in price movement over the holiday period?
  • Common theory: People feel happier around the holiday, and so they bid up the markets (i.e. enforced niceness).
  • There is little evidence that one can profit from knowing holiday effects, although these price changes can be seen with basic technical analysis.
  • So, why doesn’t it work? Maybe because everyone else knows about the holiday price movements as well.
  • Other possible causes for lack of price rationality during this period: the American tax year is ending, and thus, people may be locking in profits or losses.
  1. Should one ignore holiday effects as a non-market maker and instead play a longer-term strategy like dollar-cost averaging?
  • If one enters the market, one should be comfortable holding for a longer period.
  • One should enter the market using dollar-cost averaging.
  • Day trading is typically the wrong strategy for most people. This is because one competes with others who are better informed.
  1. There’s a lot of froth in the markets right now. Is this temporary? Where are we in the cycle?
  • There are two schools of thought on bubbles and froth:
    • First, froth indicates high-risk taking and gambling-like behavior.
    • The second is that bubbles are fundamentally good. This is because it concentrates capital on ideas and allows people to invest without having all the information. Bubbles attract capital, allowing the acceleration of early-stage technology. New technology in all economic systems typically starts in a bubble.
  • What is rational behavior in a bubble? The first thing is to be involved in the bubble. Also, don’t try to pick winners, instead invest broadly.

Cultural Science discussion

  • Cultural Science by Hartley and Potts uses complexity and evolutionary theory to understand cultural studies.
  • What can be taken from the study of Cultural Science to help us understand crypto as a cultural product or as a meme?
  • Culture helps form groups with a storytelling mechanism.
  • What is the evolutionary value of this? A group that can come together and tell the same story can also create knowledge.
  • An innovation theory of culture is that culture makes groups, groups make knowledge, and new knowledge leads to economic growth.
  • Similar memetic patterns are found in the crypto space.
  • People develop an idea. Others then rally around that idea, which forms into a coherent story and meme. That meme becomes a community. When the economics “kick in,” that community starts to interact at low cost and under high trust.
  • When the cost of communication and coordination is low, it allows new types of memetic communication to form. This powers innovation and growth.
  • Shared values and principles are the foundation blocks of institutions. On top of that, one can build organizations, then markets.
  • In crypto, the institutions are often smart contracts and chains. The DAOs are the organizations, and the markets are Defi.
  • In the last 3-4 years, a bubble has allowed us to develop Defi, NFTs, and DAOs, and now we have all the pieces (infrastructure) to develop a crypto economy.

Cultural Science and DAOs

How do you create a DAO that functions as effectively as a hierarchical corporation using the Cultural Science model?

  • Work getting done in low trust situations is evidence of cultural infrastructure turning into economic infrastructure.
  • A big part of this is memes. They aren’t simply a marketing tool. Rather, they are a core instrument/tool used to lower transaction costs and sell the idea.
  • What we are seeing in the crypto spaces is an explosion of cooperation and functional community to do things. This is not common in human history.

Management in distributed systems

Considering management and scaling in technology ventures: How do you inculcate a community around shared values in a DAO structure?

  • Management is about trying to get a bunch of people to move in a common direction and coordinate their actions.
  • Early versions of a memetic approach to distributed management would be using a common flag or song.
  • We are now in a position to create similar cultural mythology as a way to tell the story of who we are and how we got here.
  • But in crypto, this is an emergent order, and similar to Leeson’s Invisible Hook idea, where he argues pirates had emergent leadership.
  • We may be able to use Leeson’s idea to understand how DAO leadership may emerge voluntarily as opposed to the involuntary industrial manner.

POAP design winner

  • Congratulations to Clinamenic for winning the POAP design contest.
  • The next Tracer Drop Call will be January 12th, 2022.

Summary Notes by tobias#0632 (Working Squadron: Communications)

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