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Introduction
Tokenomics has focused on the interactions between different agents such as liquidity providers, traders, and users from a systematic token engineering perspective. However, decentralised platforms—particularly in the scope of on-chain ecosystems like Base networks—have seldom been examined as distinct economic entities like a society, or a nation from a macroeconomic perspective. As I raised the new concept of on-chain economics, aka. ‘onchainomics’ (LeapOnchain, 2024), I realised this is an interesting field to dive in.
Recently, it has come to my attention that a newly announced protocol has asserted its mission to increase the GDP of Farcaster. While this is undoubtedly a commendable objective, it raises important questions. As an economist and senior investment research analyst, a persistent question continuously arose in my mind for many years: What is consumption within an on-chain scenario in terms of the Gross Domestic Production formula? For instance, can it be said that individuals genuinely 'consume' services or goods on-chain? Do decentralised finance (DeFi) services qualify as services in the traditional economic sense? Should the consumption of transaction gas be classified as expenditure? This is what we need to find out in the article below.
The Classical GDP Formula
To address these issues comprehensively, it is essential to first elucidate the concept of 'GDP' within this specific context and analyze how this economic measure influences and potentially shapes the structure of a decentralized social system. An examination of this concept from an economist's perspective, particularly through the lens of the Gross Domestic Product formula (Mankiw, 2020), provides valuable insights. This formula can be represented by the following equation:
Consumption(C): Consumption refers to the total value of all goods and services consumed by households within an economy over a specific time period.
Investment(I): Investment refers to the expenditure on capital goods that will be used for future production.
Government Spending(G): Government Spending = gov. consumption expenditure + gov. investment.
Exports(X): Exports are goods and services produced within one economy and sold to other economies.
Imports(M): Imports are goods and services produced by other economies and purchased by the domestic economy.
This equation serves as a straightforward method to explore the basic growth models in macroeconomics. GDP assesses the output of a society, typically calculated within the scope of a nation or economic entity. The aforementioned notions are presented to clarify the components of this equation.
By mechanically applying this macroeconomic formula and broadening it to encompass the broader scope of the cryptocurrency world, including platforms like Farcaster and Base, some inspiring insights emerge. For the sake of exploration, let's designate GDPd as the 'decentralised' version of GDP to investigate what is needed to establish a sustainable productive society within this context. It is important to note that this method is intended to stimulate thought, serving as a conceptual framework rather than a rigorous economic model.
Dive into On-chain Consumption
What is On-chain Domestic?
First and foremost, one must define what constitutes 'domestic' within the context of the crypto ecosystem. It is easier to assess the isolated ecosystem assuming that cross-chain bridges, Layer 2 solutions, staked coins, modular technological architectures, and Wrapped coins etc. aside - just for a clearer discussion for now.
This classification arises from the inherent difficulty in transferring data and values seamlessly across these different blockchain ecosystems. It is reasonable to propose that individual blockchain networks—namely those of Bitcoin, Ethereum, Solana etc. — could be considered distinct 'domestic states.' Therefore, the GDP in a decentralised ecosystem would be assessed as the criteria below:
GDEP (Gross Decentralised Ecosystem Production) only assess one chain of decentralised ecosystems, relatively maintaining the data, user, and values in the system.
What is On-chain Consumption?
What is on-chain consumption? This is a broad question, encompassing a multitude of topics that warrant exploration. Below are some examples of activities that could be categorised as on-chain consumption:
- Gas fees, smart contract interaction fees, and transaction fees. In traditional economic frameworks, transaction fees in financial systems (like brokerage fees or banking fees) are also considered part of consumption because they are costs associated with accessing services rather than investments in productive assets. In the on-chain scenario, protocol nodes, validators miners etc. provided the transaction services decentralised, thus gas fees may counted as operational costs for users, aligning them with consumption in economic classifications.
- De-Fi protocols services fee. De-Fi protocols provide decentralised financial services as paying for asset management fees, and banking services are categorised as consumption in the traditional financial system, engaging with DeFi protocols follows the same economic principles. These are expenses incurred to facilitate financial operations rather than to create future productive capacity.
- On-chain native content consumption. On-chain content consumption includes paying for access to digital content such as articles, videos, music, and other media through blockchain-based platforms. This can involve micropayments using cryptocurrencies or access tokens, ensuring that creators are compensated directly and transparently. Examples include subscribing to decentralised streaming services and accessing exclusive content through token-gated platforms.
- Token economy and utility payments. Usage of utility tokens for accessing services within a blockchain ecosystem, such as paying for cloud storage, domain names such as ENS, or other decentralised services.
While assessing these typical cases of on-chain consumptions, interesting characteristics of web3 consumption emerge: speculative investments such as gambling and lottery are generally categorised as consumption rather than investment in traditional macroeconomics, as it is expenditures on entertainment and leisure activities. So the activities generated by meme coins may also considered as part of on-chain consumptions.
Therefore, consumers shall have a strong preference for NFT PFPs, and NFT JPEGs, value the sense of identity, cherish the community, and appreciate the gaming experience. Even if the value of the currency present value for these goods and services drops to zero, these activities should still be considered consumption based on the initial purchase price paid by the consumer, examples include, but are not restricted to:
- NFT purchases and marketplace transactions. NFTs(non-fungible tokens) related economic activities counted as on-chain consumption, as users buy and sell the ownership of digital assets for some prime functions. Noted that NFTs purchases have Investment characteristics, similar to the characteristics of the housing market.
- Gaming and metaverse expenditures. Expenditures in on-chain gaming (including game-fi) and metaverse (e.g., purchasing in-game items, land, or other digital assets) that are recorded on the blockchain networks.
The Inelasticity Challenge in On-Chain Consumption
The concept of on-chain consumption, while innovative, reveals significant limitations when compared with IRL economies. In traditional IRL economies, inelastic goods and services—such as food, water, healthcare, basic utilities, education, and transportation—are fundamental to human survival and societal functioning. These goods and services exhibit inelastic demand, meaning that their consumption remains relatively constant regardless of price fluctuations due to their essential nature.
Conversely, the current landscape of on-chain consumption is predominantly characterised by elastic demands. These include digital assets (e.g., NFTs, tokens), virtual experiences (e.g., gaming, metaverse), decentralised financial services (DeFi), and on-chain native content. These categories are largely discretionary and can be reduced or eliminated without significantly impacting an individual's basic needs or quality of life.
The absence of inelastic goods and services in on-chain economies raises questions about their long-term viability. Without integrating essential services, on-chain economies may struggle to sustain themselves independently. To address these limitations, there is a need for greater integration between on-chain systems and traditional economic structures. This hybrid approach could leverage the benefits of blockchain technology while ensuring the provision of essential inelastic goods and services. The future development of blockchain technology and Web3 should prioritize addressing fundamental human needs.
In conclusion, while on-chain consumption offers exciting possibilities, its current scope is limited by the absence of inelastic goods and services that are crucial for sustaining a complete societal structure. Addressing this gap is essential for the future development and integration of blockchain-based economic systems.
So what are the fundamental human needs that could be done again on-chain?
Education, Decentralisation, and Employed Re-globalisation
The Simultaneity of De-globalization and Re-globalization in Production
The nature of on-chain societies presents a paradigm shift in the globalisation of education and employment, offering unprecedented opportunities for what can be termed ‘re-globalisation’. The decentralised and borderless characteristics inherent to blockchain technology facilitate the implementation of transparent and efficient reward and compensation mechanisms for both on-chain education and employment.
As experts reported (Bown and Kolb, 2022), the U.S.-China trade dispute, which intensified markedly post-2018, exemplifies this phenomenon, with its ramifications reverberating throughout global commerce. Furthermore, regional conflicts and diplomatic impasses across various global sectors have contributed to a discernible trend towards deglobalisation. While many more examples and insights analysis could be cited in geography-politics and international economics academic fields, it is assumed that readers with expertise in this field already fully understand this de-globalisation circumstance.
As the production function brought by Cobb and Douglas (1928) shows the key factors for an economic production process, as Y = A * L^β * K^α (Where Y is total production, L is labour input, K is capital input, A is total factor productivity, and α and β are the output elasticities of capital and labour).
Figure 2: The production function (Cobb and Douglas 1928)
The emergence of Cryptocurrencies and the web3 education+job market represent a huge potential for international labour and capital. Factors be more freely moved/allocated on-chain following the production paradigm shift engendering a more dynamic interplay between these factors of production, as they become increasingly fluid and globally distributed.
The Future of Decentralised Education
In the realm of education, blockchain-based platforms have the potential to democratise access to learning resources on a global scale, effectively dismantling geographical barriers that have historically limited educational opportunities. On-chain education could also enable the establishment of clear and transparent incentive structures for both educators and learners, ensuring prompt and traceable payments, while simultaneously providing comprehensive and transparent information for future employment activities.
Moreover, the immutable nature of blockchain technology ensures the authenticity and verifiability of educational credentials, significantly streamlining the process of qualification verification for employers and institutions. This could lead us to another topic of licensing and asymmetric information. Future research could address the classical economic challenges posed by asymmetric information, blockchain technology offers a promising solution.
The Future of Decentralised Labour
While the current iteration of on-chain employment may not precisely mirror traditional employer-employee relationships, there is considerable potential for the development of more sustainable organizational structures. These may include next-generation Decentralized Autonomous Organizations (DAOs) or smart contract-based arrangements, which warrant further investigation. These novel frameworks have the potential to incorporate long-term stabilizing benefits, such as healthcare provisions and other welfare mechanisms. However, it is important to note that the full realization and implementation of such systems remain subjects for future research endeavours.
In the context of employment, on-chain platforms can facilitate the creation of a truly borderless workforce, enabling individuals to engage with organizations worldwide unfettered by the constraints of traditional employment contracts. Blockchain technology underpins transparent and secure compensation mechanisms, ensuring equitable rewards for workers' contributions.
Skill-Based Matching re-globalisation Society
Perhaps the most significant synergy lies in the potential development of a fully detailed on-chain "Skill-Based Matching re-globalisation society." This concept envisions a system where decentralised job markets can efficiently match workers with employers based on verified skills and qualifications, as evidenced by the blockchain-based education system described earlier. Such a system could dramatically improve labour market efficiency on a global scale.
In conclusion, while current on-chain consumption models may lack provisions for inelastic goods and services, the re-globalization of education and employment through blockchain technology presents significant opportunities for economic transformation. By addressing fundamental human needs and leveraging the benefits of decentralized systems, on-chain economies have the potential to evolve into more sustainable and inclusive economic models.
While contemporary Decentralized Identity (DID) platforms, such as Project Galaxy(Galxe, 2024) and its counterparts have made significant strides in articulating the potential of blockchain-based identity systems, there remains a notable gap in the discourse surrounding their real-world application and adoption. This lacuna is particularly evident in the realm of "In Real Life" (IRL) marketing strategies, which are crucial for bridging the divide between theoretical potential and practical implementation.
This transformation, however, necessitates further research to fully understand and navigate the complex interplay between the Web3, economics, and social structures evolve in this emerging paradigm.
Future Research Recommendations
ThirdInternet(2024) project has successfully delivered Web3 educational sessions to high school graduates, engaging approximately 300 students as documented in their YouTube video. This initiative represents a significant move towards integrating the younger generation into the on-chain economy and serves as a valuable case study for the potential of blockchain-based education.
To fully understand the impact of this initiative, a comprehensive, multi-year longitudinal study is recommended. This research should analyse the long-term effects of Web3 education on participants, measuring changes in their understanding of blockchain technology, tracking engagement with on-chain platforms, and assessing subsequent career development. The study should evaluate how acquired skills translate into tangible economic benefits, such as job placements in blockchain-related fields or the founding of on-chain businesses. Additionally, a comparative analysis between students who received Web3 education and those who did not would provide valuable insights into the effectiveness of the program.
Conclusion
In conclusion, this article explores the potential of intersecting traditional economics with the emerging topic of decentralised society. Specifically, by comparing the concept of GDP in traditional economics and the on-chain scenario, this article proposes a framework for understanding on-chain consumption, and discovering the elasticity of different types of consumption in both contexts, highlighting the challenges of decentralised scenarios. Therefore, the study identified education and employment have the significant potential to bring the decentralised social platform/system to a more sustainable economy - a decentralised society. The concept of ‘employed re-globalisation’ has been facilitated by the reality of deglobalisation and the emergence of on-chain economic activities. The study argues a new paradigm of globalisation that only an on-chain economy would achieve. Overall, this study concludes with future case study research recommendations and the potential impact of this decentralised social system.
Reference
Bown, C.P. and Kolb, M., 2022. Trump's Trade War Timeline: An Up-to-Date Guide. Peterson Institute for International Economics. [online] Available at: https://www.piie.com/blogs/trade-and-investment-policy-watch/trump-trade-war-china-date-guide [Accessed 08 July 2024].
Cobb, C.W. and Douglas, P.H., 1928. A Theory of Production. The American Economic Review, 18(1), pp.139-165.
Galxe, - Web3 Credential Data Network. [online] Available at: https://app.galxe.com/ [Accessed 08 July 2024].
Kuznets, S., 1934. National Income, 1929-1932. 73rd US Congress, 2nd session, Senate document no. 124, page 7.
ThirdInternet, 2024. Empowering the next generation of African leaders through Web3 education. [video online] Available at: https://www.youtube.com/watch?v=wBwu8w7b--4 [Accessed 08 July 2024].
Mankiw, N.G., 2020. Macroeconomics. 10th ed. New York: Worth Publishers.
LeapOnchain, Zora, 2024. Introduction to Onchainomics: Shaping the Future of Borderless Economy. [online] Available at: https://zora.co/collect/base:0x36a16070fe69fe6a8257d9ce77b3ad04b36670a9/2 [Accessed 08 July 2024].
Author Bio
183Aaros.eth is a long-term contributor to BanklessCN, an economist and senior analyst focusing on onchain economic activities and the impact of blockchain on off-chain economics, DAOing, and onchain governance.
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Special Thanks
Thank you to @JessePollak @Lilping and @0xLuo for the inspiration of Onchainomics.
This post is taking part in the t2 x Kiwi Writing Contest
