An economic theory of blockchain foundations

16 Pages Posted: 10 May 2021

See all articles by Jason Potts

Jason Potts

RMIT University

Darcy W E Allen

RMIT University

Chris Berg

RMIT University

Sinclair Davidson

RMIT University

Trent MacDonald

RMIT University; RMIT Blockchain Innovation Hub; ARC Centre of Excellence for Automated Decision-Making and Society

Date Written: May 8, 2021

Abstract

Abstract. Blockchain (or crypto) foundations are nonprofit organizations that supply public goods to a crypto-economy. The standard theory of crypto foundations is that they are like governments with respect to a national or regional economy, i.e. raising a public treasury and allocating resources to blockchain specific capital works, education, R&D, etc., to benefit the community and develop the ecosystem. We propose an alternative theory of what foundations do, namely that the treasury they manage is a moat to raise the cost of exit or forking because the benefit of the fund is only available to those who stay with the chain. Furthermore, building and maintaining a large treasury is a costly signal that only a high quality chain could afford to do (Spence 1973). We review these two models of the economic function of a blockchain foundation - (1) as a private government supplying local public goods, and (2) as a moat to raise the opportunity costs of exit. We outline the empirical predictions each theory makes, and examine the implications for optimal foundation design. We conclude that foundations should be funded by a pre-mine of tokens, and work best when large, visible, transparent, rigorously managed, and with a low burn rate.

Keywords: blockchain foundations, public goods, crypto economy, costly signalling

JEL Classification: D7, D8, H00, H4, P00

Suggested Citation

Potts, Jason and Allen, Darcy and Berg, Chris and Davidson, Sinclair and MacDonald, Trent, An economic theory of blockchain foundations (May 8, 2021). Available at SSRN: https://ssrn.com/abstract=3842281 or http://dx.doi.org/10.2139/ssrn.3842281

Jason Potts (Contact Author)

RMIT University ( email )

Darcy Allen

RMIT University ( email )

440 Elizabeth Street
Melbourne, 3000
Australia

Chris Berg

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Sinclair Davidson

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Trent MacDonald

RMIT University ( email )

124 La Trobe Street
Melbourne, VIC 3000
Australia

RMIT Blockchain Innovation Hub ( email )

106-108 Victoria Street
Carlton, VIC 3053
Australia

ARC Centre of Excellence for Automated Decision-Making and Society ( email )

106-108 Victoria Street
Carlton, VIC 3053
Australia

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