#bitcoinconfmelb

1. Melbourne
Nicholas Gruen E ngruen@gmail.com
T @ngruen1
9th
July 2014
Bitcoin:
a public good privately provided

2. Outline
3
Emergent public goods
What is money?
• Hint: an emergent public good
Perfect and monopolistic networks
• Phase transitions and transactions costs
Banks: what are they good for?
• Hint: ripping us off
Bitcoin: what is it good for?
Public private partnerships

3. Public goods –
goods that no-one
will supply if the
government
doesn’t
Public goods
Public goods . . . present serious
problems in human organisation.
Vincent and Elenor Ostrom - 1977
(as a problem)

4. Public goods
(as an opportunity)
He who receives an idea from me, receives
instruction himself without lessening mine; as he
who lights his taper at mine, receives light without
darkening me.
Thomas Jefferson to Isaac McPherson, August, 1813

5. Web 2.0 platforms are public goods:
Google (1998)
Wikipedia (2001)
Blogs (early 2000s)
Facebook (2004)
Twitter (2006)

6. The Wealth
of Nations (1776)
•Private Goods
The Theory of
Moral Sentiments (1759)
•Social rules (like road rules)
Order the social world and
Transform potential
conflict into
harmony and
cooperation
Language
Adam Smith

7. The ecology of private and public goods: Markets
Private Goods
• Traders address
their mutual
self-interest
Public Goods
• Marketplace for
meeting
• Price discovery
• Liquidity

8. Public Goods
Private Goods
[The public good of]
Justice . . . is the main
pillar that upholds the
whole edifice. If it is
removed, the great, the
immense fabric of
human society . . . must
in a moment crumble
into atoms.
Adam Smith
The ecology of public and private goods

9. 10
The fractal ecology of public and private goods

10. The old and the new

11. The old and the new

12. The old and the new

13. The old and the new

14. The economics of abundance: a new birth of freedom
Public goods . . . present
serious problems in human
organisation.
Vincent and Elenor Ostrom - 1977
He who receives an idea from me, receives instruction
himself without lessening mine; as he who lights his taper
at mine, receives light without darkening me.
Thomas Jefferson
Public goods as a problemPublic goods as an opportunity

15. When the economics of abundance runs out
W
hat could
be built in
this
space?
W
hat could
be built in
this
space?

16. Is money a thing? A commodity that
becomes a medium of exchange?
20
Or something else?

17. 21

18. 22

19. Modern practice in regard to gold reserves
has a good deal to learn from the more
logical practices of the island of Yap.
John Maynard Keynes
23

20. 24
16 October 1834

21. 25

22. 26

23. 27
Money is information
(including incentives to maintain its integrity)
+
Social convention as to value
(AKA collective hallucination)

24. The significance of transactions costs
28

25. 29
Two Networks
Phone Network Internet

26. Two Networks
• Monopolistically competitive
• Large transactions costs to
establishing interfirm trade
• Concentration is high
• SMS, International Roaming
• Obstacles to innovation
• Perfectly competitive
• Negligible transactions costs
- 99.5% informal agmts
• Low concentration
• Where marginal cost is zero,
so is marginal price
• Innovation is exploding
30
Phone Network Internet
Both built from interconnect agreements

27. Economic growth is held back by industries where
established interests are so powerful that
disruptive innovation can be staved off forever.
Financial services is probably one.
UK Econ Prof and FT Journalist John Kay, 2012.
31

28. The significance of transactions costs
32
• Home lending at <60% loan to valuation
• Foreign Exchange
• Credit cards
• Wealth Management
Margins from 500% to 2,000% above costs

29. The significance of transactions costs
33
Reasonable
Margin
Actual
Margin
(Smarts)
Ratio
(Smarts)
Actual
Margin
(Mugs)
Ratio
(Mugs)
<60% LVR
Loan 0.50% 2.50% 500% 3.50% 700%
FX 0.20% 2% 1,000% 9% 4,500%
Retail
Payments 0.20% 2.50% 1,250% 5% 2,500%
Wealth
management 0.25% 1.75% 700% 2.50% 1,000%

30. 34
Two Foreign Exchange Markets

31. 10%10%
14%14%
13%13%
14%14%
21%21%
23%23%

32. 36
Implicit Too-Big-To-Fail Subsidy For The 29
Biggest Banks
Source: Bank of England calculations. (Haldane, 2012)

33. Bitcoin: what is it good for?
37

34. 1. Medium of exchange:
2. Unit of account:
3. Store of value:
38

36. When the economics of abundance runs out
W
hat could
be built in
this
space?
W
hat could
be built in
this
space?

37. 42

38. 43

39. 44
10,000%
Productivity
Improvement

40. PPPs 2.0
45
Private sector builds service
Public sector contributes its resources
– Networks
– Nudges
– Non-obstruction
– Financial internalisation
Subject to openness and privacy undertakings
Much more for each in partnership than alone
Australia acquires new research assets
Not ‘picking winners’ but mediated through usual
processes such as open tenders, etc.

41. When the economics of abundance runs out
W
hat could
be built in
this
space?
W
hat could
be built in
this
space?

42. It’s the protocol stupid
47

43. 48
The End