The Changing Nature of Market Awareness

tl;dr: Bitcoin changes money. Blockchain changes industries. The emergence of crypto-economics changes markets.

The primary way that most people “look” at the actual Ethereum blockchain is through a site called Etherscan.

Transparency by Default

Seeing every transaction is both a blessing and a curse.

On the one hand, you can easily confirm a transaction and trace the origin of the funds all the way back to when they were created through the mining process.

On the other hand, if I send you some digital assets, you can easily see everything else in that wallet as well…and you know I own it.

It’s like me handing you a $20 bill and you also having knowledge of all of the credit cards, forms of ID, and cash that I have in my wallet.

So, now, not only will Capital One know “What’s in your wallet?” so will everyone else.

Don’t worry, however, you’re not the only one who doesn’t want the world to know what’s in your wallet. However, the premise that every transaction can be verified is essential.

This type of transparency sits at the heart of public blockchains. Without full blockchain auditablity, it’s not possible to verify any and all transactions.

Same Goal, Different Means

Once you have that as the baseline assumption, THEN you can add on layers of privacy like zero-knowledge proofs.

Zero-knowledge proofs are mathematically rigorous. Once, I sat in a room with the Zcash team that invented them. After about 3.5 hours, I had to tap out, but I tried to follow.

Basically, it’s a mathematically sound way for you to verify a claim that I am making without knowing the details of that claim.

The simplest, though maybe not the best, explanation is this:

Imagine you get a bill for a meal at a restaurant after a party of 10 has finished eating.

All you get is the final amount, not the list of every single item that was ordered by every person.

However, you have 100% confidence that the total amount of the bill is accurate.

So, you can see the output (the final bill) without seeing all the inputs (each ordered item) and still have confidence that the transaction is legit.

That’s zero-knowledge proofs, commonly referred to as zk-snarks, in a nutshell.

Both blockchain and non-blockchain systems seek to deliver trust as their output. Centralized systems begin with the premise of “trust us” (bank, accounting firm) and seek to add layers of assurance.

Decentralized systems, on the other hand, begin with the premise of “trust no one” and then add layers of assurance of their own.

Smart Contracts and Behavior of Markets

I actually began this post thinking I would write about the beauty that is “smart contracts”.

I was motivated to do that because I had read a report by the Etherscan team called, “Ethereum in 2019 — Through the Lens of a Block Explorer”. I guess I figured I needed to explain Etherscan. Sorry if that was boring for you.

The Etherscan team has as good an insight into the behavior of people in the entire global eco-system as anyone (though anyone else can do it, too.)

And that is one of the best thing about open, public blockchains.

Instead of spending countless hours and a ton of money trying to figure out how the market is “behaving,” all you have to do is look to see what’s “on chain.”

In other words, what kinds of transactions are happening? What kinds of wallets (big or small) are doing what kinds of activities?

You can see what types of smart contracts are used. In other words, what “deals” are people making, how are those deals turning out, and where value is flowing in the network.

Those are immensely valuable insights about how markets, which Hayek would remind us is a collection of individuals taking actions in their own perceived best interests, are moving at any given time.

Instead of trying to “steer” a market through guesswork, like our current model, anyone can have near real-time data about what is happening in the market.

It’s not perfect, by any means, but it is a very different way of organizing a market or an economy.

When any of us can look at how much money is going into a BlockFi or CryptoKitties contract, that changes markets. Information asymmetry, though not entirely removed, is reduced.

Seeing contracts, wallets, and transactions gives us a new way of having market-wide view points.

The Changes Wrought by Crypto

For me, it’s notoriously challenging to explain why I am so intrigued and excited about the potential of crypto-economies running on public blockchain.

It’s a paradigmatic shift in the way that markets can operate.

Bitcoin changed the paradigm of “who can issue a globally recognized store of value.”

Public blockchains will impact all types of sectors as diverse as gaming and Virtual Private Networks.

To cite one just example, there’s now a servicewhere someone can take an “in-game asset,” such as a special wand or tool that they earned in a game and then, thanks to a smart contract, loan it out to someone else for use. Thanks to the service, cleverly called Loan Shark, a user knows full well that they will get it back. That’s nothing short of revolutionary.

But it is at the market-wide level where the arrival of crypto economics, I believe, will have the most impact.

The idea that “we’re not really sure what is going on out there” was once a standard part of economics could one day be quaint.