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Author Topic: Blockchain Incarnation of the Coase Paradigm  (Read 14 times)
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May 04, 2018, 08:43:55 AM

“It is futile to approach social facts with the attitude of a censor who approves or disapproves from the point of view of quite arbitrary standards and subjective judgments of value.” (Ludwig von Mises)

It is quite common for the people stumbling upon complicated issues to set hopes on a central authority to resolve them rather than proposing an algorithm for the individuals to preserve their fundamental right to economic choice.

The complicated problem of social costs, of negative externalities, collateral damages, especially related to environmental issues, remains in the focus of economic science for over 100 years and has become critically important in relation to climate change in particular. While Piguvian approach remains dominant, advance of economic thought and technologies allow for implementation of the model based on values and choices of free individuals.

The problem of social costs, of negative externalities, collateral damage, especially related to environmental issues, remains in the focus of economic science for over 100 years and has become critically important in relation to climate change in particular.

Ronald Coase, 1910–2013, a British economist, Nobel Prize Winner in Economic Sciences in 1991, proposed a general market-approach to the problem of social cost and a solution based on clearly defined property rights. The approach introduced the concept of clear delimitation of rights to perform activities harmful to a third party and provided the basis for the market-based distribution of limited resources as a production factor and for a peer-to-peer settlement of reciprocal damage “to avoid the more serious harm”[1].

The manufacturers argue that they supply goods and services in demand, which at least means that the buyer of the goods and services (the second Party) is equally liable. From the economic point of view, it is actually the transaction, the deal between the two, which causes the damage.

Furthermore, the manufacturer can reimburse negative externality (collateral damage) against the claim of the third party in monetary form, or either of the parties or professional supplier of offsets (the forth Party) can provide for offsetting or mitigation ‘in-kind’.

Traditionally, such complicated interactions of the four parties are regulated by the governments, which take possession of the arbitration, assign taxes and fees, quantitative limits and commitments.

The advance of public and programmable blockchain technology, Turing complete systems, and triple-entry accounting allows for decentralized arbitration and truly peer-to-peer solutions, and thus allows for further development of the Coase paradigm.

Blockchain technology can be applied to mitigate the collateral socioeconomic damage caused by economic activities; it requires market-based infrastructure that supports decentralized peer-to-peer interactions, the public network evaluation of negative impacts, the distribution of liability, and settlement by means of mitigation outcomes.

DAO Integral Program for Climate Initiatives IPCI) Minimum Viable Product is open-sourced and provides for mitigation of collateral damage by means of offsetting by mitigation instruments and transparent accounting of mitigation activities.

The first version of DAO IPCI allows participants in greenhouse gas (GHG) credit-based or quota-based emissions trading schemes to account for claims made towards these targets.

The DAO IPCI design objective is to provide any person, program, corporation, association or jurisdiction, with common space, common space fabric, common tools and ecosystem that is universal, reliable, transparent and that allows diverse stakeholders, including businesses and even individuals to: register their quantified impacts and emissions reductions pledges; invest in mitigation projects; offset carbon footprints; acquire and trade mitigation instruments; and join existing programs or launch new programs.

As a blockchain ecosystem focused on mitigating negative societal externalities, DAO IPCI is a digital environment built on smart contracts designed to minimize transaction costs and to make the issuance and transfer of mitigation instruments — including internationally transferred mitigation outcomes — highly reliable, transparent and protected from interventions and manipulation by any centralized power.

There are no technical restrictions as to who may launch an autonomous mitigation program in DAO IPCI. Existing mandatory or voluntary, large and small programs of diverse scopes of activities and jurisdictions, as well as businesses, NGOs and individuals may create independent decentralized autonomous organizations (DAO) to implement specific programs and projects and perform transactions in DAO IPCI. Independent mitigation programs within DAO IPCI may interlace and form a web of DAOs that share selected modules and protocols with their peers.

Diverse mitigation instruments (environmental units) are represented by specific tokens issued via coordinated actions of the Operator, the Issuer and the Independent Entity. Only if these actions are in coordination and in compliance with the logic of the open-source smart contracts may the tokens be issued to the possession of the Issuer.

Independent Entities play a crucial arbitration role in the procedure. To reduce transaction costs and convert arbitration to truly decentralized smart contracts based model, IoT smart devices and Network verification has to be introduced and developed to substitute gradually “manual verification”.

Regular demand for tokens representing mitigation instruments is on the side of the participants of commercial deals that cause collateral damage, manufacturers, suppliers and consumers, sellers and buyers of goods and services. However, monetary claims for damages of ‘the third Party’ is also a potential source of demand, which can be satisfied either in monetary form or by ’in-kind’ offsetting. Existing smart contracts in principal allow for initiating claim for damages, supporting it by secondary claimants, for and either reimbursement or offsetting the damage.

Other than tokens representing mitigation instruments type of token represents an internal currency for internal markets of independent programs, essentially a payment token. Operators of independent programs, DAOs, may issue this type of tokens arbitrarily.

The Genesis Operator, the Operator of the Russian Carbon Fund Integrated Program for Climate Initiatives (RCF IPCI Operator) has issued Mitigation Token (MITO) in total amount of 9,068,185.45, including 109,987.25 tokens, which have been actually sold or distributed, and are in the possession of private holders. No further emission of this token is technically possible. MITO is the payment token for RCF IPCI Program MITO Market.

Market is the core element of DAO IPCI structure and of any independent program, DAO, within the ecosystem. Other elements like issuance or retirement of mitigation instruments provide for the quality of market goods and traceability of transactions, compliance with the program requirements. The goods traded at these markets are not for direct consumption but are goods of a higher order, factors of further production; essentially, they represent rights for further economic activity harmful to a third party.

It is in the best interests of all DAO IPCI stakeholders to link, integrate and merge markets, and therefore to have a unified payment token.

Payment token functional role is to provide for seamless market operations, fungibility of mitigation instruments, and its’ value is determined by the value of the market. To provide for market operations with minimum transaction costs and for growth of value of the market further emission of payment token would seem necessary. However, payment token emission algorithm has to be compliant with inherent properties of public blockchain.

“The state of the market at any instant is the price structure, i.e., the totality of the exchange ratios as established by the interaction of those eager to buy and those eager to sell.”[3] Evaluation of the state of the market should be performed by verification nodes of the programmable blockchain Network. Based on this evaluation, emission of payment token algorithm should be introduced to support ‘proof-of-stake’ protocol.

Most of the elements to implement the model in principle are in place in DAO IPCI. Yet, some of them are still under development, and the concept in general still needs comprehension by the communities.

[1] Ronald H. Coase, “The Problem of Social Cost”, The Journal of Law & Economics, Vol. III, 1960, p. 2

[2] “It is necessary to know whether the damaging business is liable or not for damage caused since without the establishment of this initial delimitation of rights there can be no market transactions to transfer and recombine them. But the ultimate result (which maximises the value of production) is independent of the legal position if the pricing system is assumed to work without cost.” (R. Coase, p. Cool

[3] Human action: a treatise on economics / by Ludwig von Mises, 4th rev. ed., San-Francisco, 1996, p. 258
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