March, 2018

The Blockchain and Increasing Cooperative Efficacy

  • Daniel Sutter

    Senior Affiliated Scholar
  • Malavika Nair

    Assistant Professor of Economics, Manuel H. Johnson Center for Political Economy, Troy University
Read more

Find the whole article throught the Independent Revew website.

Bitcoin is a cryptocurrency based on open-source software created by the pseudonymous Satoshi Nakamoto in 2009. The Bitcoin currency has attracted considerable attention, first among computer scientists and later among businesspeople and the general public. It is being accepted by an increasing number of merchants worldwide; the current market price of Bitcoins is now widely available; and thousands of people worldwide used more than 1.46 terawatt hours of electricity in Bitcoin mining in 2015. Economists have noted the potential for Bitcoin or perhaps a rival cryptocurrency to supplement or even displace fiat currencies. Regulators and policy makers have taken note as well, sometimes responding with regulations not well informed by the realities of Bitcoin (Brito and Castillo 2016).

The Bitcoin payment system is based on the blockchain, a permanent record of all transactions maintained on users’ computers. The blockchain is a distributed ledger that not only allows the Bitcoin payment system to operate but also opens possibilities for new forms of contracting and cooperation. Tech writers, bloggers, private corporations, government organizations, and economists have begun to notice the economic implications of the blockchain, recognizing that it may far exceed that of Bitcoin itself. As Melanie Swan points out,

"More important, blockchain technology could become the seamless embedded economic layer the Web has never had, serving as the technological underlay for payments, decentralized exchange, token earning and spending, digital asset invocation and transfer, and smart contract issuance and execution. Bitcoin and blockchain technology, as a mode of decentralization, could be the next major disruptive technology and worldwide computing paradigm (following the mainframe, PC, Internet, and social networking/ mobile phones), with the potential for reconfiguring all human activity as pervasively as did the Web." (2015, vii)

In this paper, we offer a framework for evaluating and integrating the various different consequences and impacts of the blockchain for the economy. We apply the public-goods argument for government and a comparative institutional approach to assess the government’s and the voluntary sector’s ability to produce different individual public goods. The public-goods argument holds that government provision (via taxes and regulation) will be frequently chosen given the limitations of voluntary provision— namely, the free-rider problem. In a comparative institutional framework, however, the imperfections of government must be compared against the effectiveness of voluntary mechanisms. People’s willingness to contribute voluntarily to public goods and various mechanisms’ ability to convert willingness into effective provision have been labeled “cooperative efficacy” (Cowen and Sutter 1999).