Two Nobel Prize-winning economists just moved to cryptocurrency
What academic could resist the chance to work on programmable economies?
Dr Eric Maskin won the Nobel Prize in economics in 2007 for his work on mechanism design, while Sir Christopher Pissarides won it in 2010 for his work on search frictions in marketplaces.
Both Maskin and Pissarides now share something else in common after being hired on by Cryptic Labs, a blockchain commercial lab and startup accelerator, to provide its clients with research-based insights to help guide their cryptocurrency projects. They join Cryptic Labs' chief scientist, the 2015 Turing Award-winning cryptographer Dr Whitfield Diffie.
Both new additions will be working in their areas of specialty. Maskin will be exploring game theory and mechanism design in blockchain systems, while Pissarides will provide his expertise on macroeconomic trends.
It might be a natural step. Far from the commonly held perception that cryptocurrency is at odds with established economic theory, it might be thought of as a unique technology that allows for the creation of programmable economies. It's understandably a fairly exciting development in the field.
"I think that blockchain technology is potentially important for a modern economy," Maskin said. "Most discussions of blockchain technology focus on technical issues. I am more interested in the economic value such technology can bring. I believe that my background in economics and mechanism design should be useful for that purpose. Cryptic Labs is examining blockchain in interesting ways, and so I was glad to join the team."
"Blockchain is the most exciting development in financial markets in recent years, but we still don't know enough about it to recommend a wholesale transition of all our transaction records to blockchain," Pissarides said. "I look forward to working with the team at Cryptic Labs to leverage my expertise in macroeconomics to help companies improve the use of blockchain, make it more secure and widely accessible, and examine the implications that it has for trade, financial markets and economic performance."
Mechanism design... on the blockchain
Maskin and his co-laureates are sometimes regarded as the father of mechanism design, among many predecessors, for their work laying out a coherent mechanism design theory.
The basic idea is to have a goal in mind, and then work backwards from that goal to build a system that can accomplish that goal, by motivating the people in that system to do certain things.
This is an integral element of any cryptocurrency. Because cryptocurrencies are decentralised systems, their functionality depends on a lot of different people anonymously doing the right thing to keep it ticking.
Bitcoin, for example, depends on miners spending a lot of money and energy securing the network because they're incentivised to do so through bitcoin payments. The bulk of this incentive is currently in the form of mining rewards, but over time those mining rewards inevitably need to drop off to make sure bitcoin remains finite and doesn't exceed its 21-million limit.
The goal of the bitcoin system is to remain secure and to successfully keep processing transactions. The purpose of bitcoin's mechanism design is to make it happen even as block rewards drop off and incentives change.
Experts in the field are needed, not just for design inspiration, but also because this kind of thing can be exceptionally complicated and good mechanism design isn't always cut and dried.
For example, no one's entirely sure what will happen when all 21 million BTC are mined but the academic research around mechanism design, much of which was carried out by researchers like Maskin even before the creation of bitcoin, is one of the cornerstones of the cutting edge of today's research in the field.
Incidentally, the principles of mechanism design theory say bitcoin probably won't survive hitting the 21-million limit even if transaction fees can keep up because the new most-powerful incentive will be for miners to attack the network rather than process transactions.
Mechanism design is a key element of anything related to blockchain or cryptocurrency (and everything else economic of course), so Maskin's mechanism design expertise is extremely valuable.
Pissarides's role at Cryptic Labs will be focused on advising its clients on macroeconomic trends – the large scale factors that impact entire economies - as well as giving its clients a better understanding of the all-important behavioural economics elements.
"I am honored to welcome two of the world’s highly regarded experts in economics to our Economics Advisory Board," said Cryptic Labs co-founder and managing director Humphrey Polanen. "For the first time in the industry, Drs. Maskin and Pissarides will offer unparalleled expertise and insight to the blockchain industry, providing nuanced understandings of behavioral economics to our clients.
"The new members of our Economics Advisory Board provide the expertise for us to live up to our mission to fill critical and essential gaps in the industry. These experts and other economics advisors will help our client companies navigate complex problems, advising them on blockchain economics and helping them craft the incentive systems they need to ensure adoption and growth."
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.