The Economics Of The Blockchain

Economics has often been touted as the dismal science and has always been seen as a rather abstract matter or discipline. However, economics is a social science that studies human interaction in a broad sense and can offer some unique insights which, many times are often overlooked.

Blockchain is a case in point. Primarily discussed from a technical and legal standpoint, the economics of blockchain, and the economics that explains why the technology is so important and revolutionary are many a times overlooked.

So, What Does Economics Have To Tell Us About Blockchain?

The starting point is actually the study of economics itself. Although there is no one accepted or plain definition, one can safely say that economics is a science that studies human behaviour and interaction as a relationship between ends and scarce means which have alternative uses. In other words, it explores the concepts of choice and decision-making, the coordination process and the allocation of resources. Possibly, a simplistic view of economics is that it studies markets.

Blockchain and Economy
Source: Oil painting: Market Scene c. 1550 By Aertsen, Pieter

A market is not only a place where buyers and sellers meet to transact.

The image of market encapsulates many economic elements including the allocation of resources; the mechanisms of individual choice, the actual transactions; the payment and settlement of a transaction; the exchange between the buyers and sellers and so much more. The market embodies the spirit of transactions and includes the element of transfer, settlement and even more so of trust.

Trust is a cornerstone of economics and political economy. Economics studies mechanisms on how trust is built through repeated interactions apart from the rules or institutions that should support this function.

Blockchain is in itself described as “the trust machine.” To truly discuss the economics of the blockchain, our starting point has to be an analysis of the core of the technology itself; the ledger.

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JP Fabri is an economist and Managing Director of ARQ Economic & Business Intelligence, a specialised unit that handles blockchain and cryptocurrencies forming part of ARQ Group. He is also a visiting assistant lecturer at the University of Malta.