The top of economists that heavily influenced blockchain technologies
What is the main force behind every blockchain network? Money. Money is the greatest incentive that keeps the participants of all blockchain networks motivated, starting from Bitcoin up to Doge. The economy is an integral part of all blockchains. No wonder that we can find the roots of the current blockchain implementations in the works of many significant economists.
In this article, we’re going to review the theories of such great minds as John Nash, Jan Tinbergen, and Alfred Marshall. You may probably say that their works are universal and can be applied to almost all areas of human economic activity- that’s true, but the blockchain is even more dependent on mathematics and economics than other areas. They must have rules to be able to run in a decentralized manner, and their participants behave according to these rules. But who sets these rules? Initially, developers, and after the launch, it’s up to users.
To make it simpler to read, we’ll use not an abstract blockchain, but an existing one, the Noah network, running on delegated Proof-of-Stake consensus. And we’ll start with John Nash.
All of us play games.
John Nash (1928–2015) can be recognized more as a mathematician than an economist. Nevertheless, he received a Nobel prize award in economics for its theory of non-cooperative games. A game in terms of this theory isn’t a joyful amusement, a game means any interaction between people, companies, organizations, entities, where they can win or lose something material or non-material.
A non-cooperative game is a type of interaction between various parties when they cannot cooperate. There’s no central authority to organize them. Sound familiar, right? That’s the premise of blockchain technology. Nash defined how blockchains must work, decades before their invention.
The Nash equilibrium is the situation when no player can gain any advantage by choosing alternative strategy considering other parties’ decisions. One of the most widely known examples is the prisoner’s dilemma: there are two prisoners, if one of them confesses, he will be freed and another prisoner will serve a longer jail time, if no one confesses, both will serve lesser time, but if both of them confess, both will also serve less jail time. They don’t know about the actions of each other, so the worst outcome for them is to not confess and have a risk of serving longer jail time. So the equilibrium in this situation for them- is to confess.
The new Noah blockchain is the perfect example of Nash equilibrium. Delegates, producing blocks, don’t know about the actions of each other. They can try to produce illegal blocks, trying to fork the network, but the dPoS system is designed in such a way, that it punishes such actions, if the majority of delegates don’t act in a malicious way. So the best strategy for all of them is to behave well. That ensures the security of the network, because it’s economically unprofitable for the Noah delegates to violate rules of the network, and the design of the system enforces the good behavior — thanks to John Nash.
Targets, inflation, and instruments.
The global monetary amount always has been inflated. Since the ancient times, kings knew that it’s a good method to make some additional profit for the crown by reducing just a bit the amount of gold in their gold coins. The father of economics Adam Smith wrote about it in his book “The Wealth of Nations”.
But the inflation in many cases was rather chaotic, governments subconsciously knew that they had to keep inflation at reasonable rates, not too high, not too low, but that was it. They didn’t have any certain approach. The man who formulated this approach was Jan Tinbergen (1903–1994). He classified some economic quantities as targets and others as instruments. Targets are those macroeconomic variables the policymaker wishes to influence, whereas instruments are the variables that the policymaker can control directly. Tinbergen emphasized that achieving the desired values of a certain number of targets requires the policymaker to control an equal number of instruments.
This classification remains viable today, and central banks still follow it. They use the interest rate as their instrument to reach the target inflation rate. The new Noah blockchain also implements this theory in practice. Delegates who produce blocks receive a reward for their duty with new-minted coins. That allows the network users to use Noah applications without paying any fee. In exchange, the NOAH token supply increases every year. But that’s what keeps the network running, thanks to delegates who confirm blocks, and to Jan Tinbergen, who laid the foundation to this system with his theory.
The equilibrium between supply and demand.
Alfred Marshall (1842–1924) is the oldest economist in our list, but he’s also one of the greatest. What did he do? Marshall performed various studies of supply and demand and defined how the changed balance between them can influence the price. He introduced the concept of three periods for any commodity.
- First is the period of the fixed supply — the price remains stable.
- Second is the short period of the increase in supply — the price declines without additional demand.
- Third, the long period of the capital influx in the commodity. Over time, the increased demand price also tends to grow.
Seems pretty logical, but Marshall was the first one to describe it. Up to this day, markets act according to his theory. In crypto, the price of tokens also depends on supply and demand. The minting of new NOAH tokens creates the surplus of supply, and the increased value of the network creates the demand, as more and more users want to participate by holding and staking coins. That’s the never-ending process.
Over the years, the blockchain industry has attracted the best minds in the world. But it’s not enough to use the experience of the modern researchers, it’s also crucial to use the experience of the best minds of the past to build the networks of the future. And The Noah ecosystem is one of such networks.
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