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1/ Markets Are Eating the World Part Deux: Bitcoin and Public Blockchains. For part 1 see:
2/ To briefly recap, in part 1 we looked at the importance of transaction costs on how work is organized and whether consumers would prefer to rent or buy.
3/ Then we looked at how technology, like clocks, impact transaction costs and alter the structure of the economy:
4/ Clocks enabled greated coordination scalability, the defining trait of homo sapiens:
5/ In the Industrial Era, the most efficient way to increase efficiency was to organize work in large firms:
6/ Computers came along and reduced transaction costs more through smart phones and matchmaking:
7/ This lead to markets starting to slowly eat firms in industries touched by the internet from hotels to newspaper to taxis to retail:
8/ However, it only affected a small subset of all possible industries, particularly ignoring those which required high levels of trust:
9/ One area where trust matters a lot is money. Though Europe and the U.S. have had stable monetary systems in living memory, this is not the case either historically or in other parts of the world. 
10/ With the abandonment of the gold standard, the value of the U.S. dollar, the primary fiat in the world, is based on trust that the official in charge of U.S. monetary policy will manage it responsibly.
11/ The best way to understand this tension is the Selectorate spectrum. Large selectorates have many stakeholders which makes them less efficient but more robust (like a democracy)
12/ Dictatorships can be more "efficient" then democracies but that efficiency can go either way (and typically seems to go the wrong way)
13/ The long-term health of a government is based on picking the right point on the Selectorate spectrum, not so large that nothing gets done and you can't adapt nor too small that one group can hijack the government for personal gain.
14/ This tension between centralized efficiency and decentralized robustness exists in many other areas including firms (having a board/shareholders vs. all power with the CEO)
15/ We can view both the current monetary system and the internet aggregators through the lens of the selectorate. In both areas, the trend over the past few decades is that the robustness of a large selectorate has been traded away for the efficiency of a small one.
16/ Said another way, much of what appears efficient (a small selectorate) in the short term may not be efficient but hiding risk somewhere, creating the potential for a blow-up.
17/ Bitcoin was an effort to enlarge the selectorate of money. Instead of being reliant on a small group of individuals, Satoshi wanted to enlarge the selectorate for more individuals to participate.
18/ Why create a new form of money? Historically gold has been used as a hedge against inflation and unstable monetary policy.
19/ Viewed through the lens of Selectorate Theory, we can say that gold or other commodity forms of money have a larger selectorate and are more robust than government-issued fiat currency.
20/ The correct spot on the selectorate spectrum is still a matter of debate in economics. Keynesians believe we can afford to trade off some robustness for efficiency
21/ Austrians and Monetarists argue that any short-term efficiency gains actually create huge risks to the long-term health of the system.
22/ Viewed as a money, bitcoin has many gold-like properties, embodying something close to the Austrian/Monetarist view of ideal money but, unlike gold, is very easy to divide and transport
23/ Seen in this way, bitcoin offers a potentially better trade-off between robustness and efficiency, more efficient than gold but more robust than fiat.
24/ Said another way, bitcoin was the first example of money going from being controlled from a small group of firm-like entities (central banks) to being market-driven. What cryptocurrency represents is the possibility that anyone can make their own form of money.
25/ There is debate over whether and how this favorable tradeoff could be extended to other areas. One group believes that it can not be extended, and that public blockchains will only be used as money, where censorship resistance is most prized.
26/ The second school of thought is that bitcoin is the first example of a canonical, trustworthy ledger with a large selectorate and that there could be other types of ledgers which are able to emulate it.
27/ Nearly everything can be seen as a ledger. A government is just a collection of ledgers: citizenship, passports, tax obligations, social security entitlements and property ownership.
28/ Firms maintain ledgers of employment, assets, processes, customers and intellectual property. Economists sometimes refer to firms as “a nexus of contracts.” The value of the firm comes from those contracts and how they are structured within the “ledger of the firm.
29/ In the same way mechanical time opened up new categories of economic organization, so too may blockchains.
30/ For the first 10 years of Bitcoin's existence, this hasn't been possible, but many groups are working on ways to make blockchains more scalable without sacrificing too much trust (though there is huge disagreement over what "too much" means).
31/ Public blockchains may allow aggregation without the aggregators. For certain use cases, perhaps few, perhaps many, public blockchains will allow the organization and coordination benefits of firms and the motivation of markets while maintaining a large selectorate
32/ As @naval pointed out, what we call society is just a series of overlapping ledgers.
33/ In order for ledgers to function, they must be organized by rules which historically required rules. Public Blockchains allow people to agree on rules without a ruler.
34/ In doing so, blockchains may introduce markets into the far corners of society, replacing ledgers previously run by kings, corporations and aristocracies.
35/ Public blockchains allow for rules without a ruler. It began with money, but they may move on to corporate ledgers, social ledgers and perhaps eventually, the nation-state ledger.
36/ You can read the full essay at: ribbonfarm.com/2019/02/28/mar…
