After the foundation is laid, the main components of the economic design can begin. These components — -contract design, market design, and information systems — -shape the behavior of platform participants so that the founders’ vision of the platform can be achieved.
- Contract and Transaction Design
In a typical transaction, one party pays another party to provide a good or service. There are a that can arise in the execution of contracts, such as the buyer not sending payment or the supplier not providing the service as described. Typical problems arise from moral hazard (the inability to properly share risk and monitor behavior) and adverse selection (asymmetric information regarding the quality of goods or services).
is often touted as a trustless system which helps to alleviate these sorts of issues; however, actually ensuring that a contract is executed as agreed upon, and that all parties receive the benefits they expected, requires careful design of the contract and related mechanisms. Economic levers that can be used in transaction design include:
- Contract terms
- Escrow services
- Dispute resolution services
Some of these elements may be more or less important depending on the specific context in which a transaction takes place. For example, decentralized -based peer-to-peer marketplaces have learned that are essential so that users trust the platform and want to engage in transactions.
Before transactions can be executed, buyers and sellers must be able to find each other and negotiate mutually beneficial transaction terms. Designing well-functioning marketplaces is a complex endeavor. Some of the many issues that can arise include congestion (buyers and sellers not being able to find each other), unraveling (users choosing to opt out of the market), inefficient matching (users would be better off transacting with alternate partners), suboptimal pricing mechanisms (one or both parties does not receive the appropriate surplus), and inefficient or ineffective procedures for negotiating terms.
Market design has numerous components, including:
- Matching of buyers and sellers
- Pricing mechanisms
- Negotiation of terms
Again, the relative importance of each of these elements depends on the specific setting at hand. An online e-commerce platform such as eBay, which sells many highly differentiated goods and has thousands of users, relies heavily on effective matching of transaction partners and well-designed reputation systems. In contrast, a procurement auction may depend less on matching and focus more on the design of the pricing mechanism.
Information, whether it is used by market participants or by the algorithms of the platforms, is critical to supporting the goals of contract and market design. Information mechanisms feed into other economic structures; for example, depend on , which are selected and their by the designers of the platform. Similarly, if a marketplace is intended to allow buyers to select among sellers of various abilities, then those abilities need to be communicated to buyers in a way that minimizes risk of manipulation and cheating. Information systems can include structures such as:
- Performance metrics
- Quality standards
- Reputation systems
The information systems of a particular platform are designed to support the function of its main economic mechanisms. Their design must take into account the way users are likely to interact with these informational tools based on their own motivations and goals.
- Token Economics and Design
Only after the economic design of the platform is complete should design take place. — there should be a compelling business reason to introduce a -based , and the economics of the needs to fit with the rest of the design of the platform.
A well-designed is more than a means of exchange or a of value. It must be designed so that it supports the incentive, market, and transaction design of the platform, as well as fulfilling the needs of those who use it for traditional currency purposes. Designing appropriate economics involves creating a that fulfils the fundamentals required by the platform, and then verifying that equilibrium values will sufficiently compensate any platform participants who receive their compensation in .
For a utility , the design elements will include:
- Fundamental value drivers
- Monetary policy
- Token distribution mechanisms
What is important is that the is designed with its specific use case or cases in mind. The same , for example, .
The design of security is more complex and varied, because they can be used to represent items of value both on and off-chain. Carefully thinking through the that a security bestows is essential for the to behave the way the platform founders desire.
Finally, platforms — and especially decentralized ones — need governance.
is the set of decision processes or systems that allow for a platform to adapt over time to changing conditions or new information. The design of a governance system must be flexible enough to allow for adaptation under unforeseen circumstances, which is when it will be most needed. However rules, mechanisms, and processes are typically put into place in order to ensure that the needs of particular stakeholders, such as platform users, are served by the decisions that result from a governance system. The economic fields of social choice (the study of decision making by groups) and contract theory (which covers decisions made by representatives) both provide frameworks that can inform the design of a governance system.
How to design governance depends on the specific decision to be made and can include:
- Proposal processes
- Delegation/representative decision-making systems
A critical lesson from social choice theory, a field which dates back to Kenneth Arrow’s work in the 1940s, is that a . The design of a governance process should be custom-fit to the purpose.
Published at Wed, 20 Feb 2019 21:14:47 +0000
