Crypto-tokens and blockchain are associated with a reduction in two key costs: the cost of verifying the transaction attributes that can be recorded on a blockchain, and the cost of networking (Catalini and Gans, 2016). For a market to function, key attributes of the individuals, firms, goods and services involved need to be verified and audited before and after transactions take place.
Whereas this process is often labor-intensive or requires a third-party to ensure market safety, it can be cheaply implemented on a distributed ledger. But the time-stamping ability and immutable nature of a blockchain are not what make the technology a radical innovation. In fact, these two features fit well into incumbents’ value chains as they allow for reductions in costs through cheaper forms of settlement and reconciliation.
The architectural change brought by cryptocurrencies is tied instead to their use of a native token to incentivize the growth, operations, and securing of a platform.
Like in Bitcoin, the token can bootstrap the development of an entire innovation ecosystem where anyone can build novel applications on top of the underlying protocol without requiring permission from a network operator or intermediary. Combined with the right incentives, participants can use a cryptocurrency to reach consensus – on a global scale – about the allocation of scarce resources. This drastically changes the scale and scope of what an online community or platform can achieve.
In their seminal work, Jensen and Meckling (1976) defined the firm as a `nexus of contracts’: crypto-tokens are the natural next step in our search for an organizational form that can transcend geographical boundaries and allocate resources more efficiently. This new form will combine the efficiency of a spot market with the more complex forms of governance and incentives used within today’s organizations.
By automating the aggregation of information and preferences, and overcoming the limits of our cognitive ability, the ecosystems built on top of blockchain technology will be able to source and remunerate talent, ideas and capital at a scale previously unimaginable.
As described by Hayek in his seminal work on the price system:
‘[i]f we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic’.