Financial Resilience and Sustainability. Crypto tokens imply optionality and the ability to better manage risk. The thesis of this talk is that smart contracts are options, and as such, can be used to control risk (unwanted future uncertainty) in a wider range of areas than has been possible previously, in finance, and in other areas too such as medicine. Options as a financial market instrument have long been used to control the amount and timing of risk in specific ways and tailor exposure with granularity. Smart contracts are an even more flexible species of options because they are programmable contracts that can be used to confer the right to buy or sell any blockchain-based asset or liability at a future moment in time (blocktime or “fiat” (regular) time) per certain terms and consideration. Therefore, smart contracts allow a greater variety in the degree and type of risks that might be brought under management. The impact of having greater control over risk is that intangible social goods are produced such as surety, confidence, and reliability, which help to engender a more trustful society.

1. Inaugural Blockchain Symposium
Blacksburg VA, April 20, 2018
Slides: http://slideshare.net/LaBlogga
Blockchain Economics
Industry and Institutional Disruption
Melanie Swan
Philosophy, Purdue University
melanie@BlockchainStudies.org

2. 20 Apr 2018
Blockchain 1
Melanie Swan, Technology Theorist
 Philosophy and Economic Theory, Purdue
University, Indiana, USA
 Founder, Institute for Blockchain Studies
 Singularity University Instructor; Institute for Ethics and
Emerging Technology Affiliate Scholar; EDGE
Essayist; FQXi Advisor
Traditional Markets Background
Economics and Financial
Theory Leadership
New Economies research group
Source: http://www.melanieswan.com, http://blockchainstudies.org/NSNE.pdf, http://blockchainstudies.org/Metaphilosophy_CFP.pdf
https://www.facebook.com/groups/NewEconomies

3. 20 Apr 2018
Blockchain
Blockchain Economics
 Economics
 Study of resource discovery and propagation to
fulfill needs (supply and demand)
 Wants are always bigger than available
resources (cost of decision-making, opportunity
cost, scarcity (material or intangible))
 Eras of Economic Study
1. Classical Economics (material goods)
2. Network Economics (digital goods)
3. Blockchain Economics (cryptographic assets,
smart contracts, and DApps/DACs)
2
DApp: decentralized application; DAC: decentralized autonomous corporation

4. 20 Apr 2018
Blockchain
Blockchain Economics
 New economic model’s distinguishing aspects
1. Open network business model
 Two-way network effects (Metcalfe’s Law (n2))
 MV=PQ money supply valuation
 Vs. proprietary platform (GOOG, FB, NFLX, IG)
2. Token system for asset and monetary transfer:
users expect to participate in the community
economy
 Earn, vote, trade, access resources
3. Initial Coin Offerings as a novel and official
financing method
 Pre-sell token access to the network
4. Large-scale global participative communities
3
Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan.

5. 20 Apr 2018
Blockchain
Blockchain Economics
4
2015 2016
2017

6. 20 Apr 2018
Blockchain 5
economic
challenges.

7. 20 Apr 2018
Blockchain
Economic Challenges
6
Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan.
Debt
Systemic Risk
Entitlements
Overhang
Healthcare
(Cost-Outcome)

8. 20 Apr 2018
Blockchain
Challenges and Potential Solutions
7
Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan.
Debt
Systemic Risk
Entitlements
Overhang
Healthcare
(Cost-Outcome)
Net Settlement
a) Payment Channels
b) Payments/Securities as a Service
Programmable Risk
a) Black Swan Smart Contracts
b) Real-time Balance Sheets
c) Apply Deep Learning (RNN) to HFT
Automation Economy
a) Future of Work/Technological Unemployment
b) Human-Machine Collaboration
Blockchain Health Economics
a) Global Healthcare Equivalency Units
b) Digital ID, consent, interoperable data

9. 20 Apr 2018
Blockchain 8
Source: http://www.europeanfinancialreview.com/?p=21755
debt.

10. 20 Apr 2018
Blockchain 9
net settlement.
payment channels.
digital credit systems.
Source: http://timreview.ca/article/1109
rethink debt.

11. 20 Apr 2018
Blockchain
Payment Channels: the concept
10
 Ability to “have an account” relationship with any party
 3-step financial contract executed over time
1. Party A opens a payment channel with Party B and posts a
pre-paid escrow balance
2. Party A consumes against the escrow credit over the given
time period (activity is tracked)
3. At the end of the period, cumulative activity is booked in one
net transaction to close the contract
Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels

12. 20 Apr 2018
Blockchain
Payment Channel motivation and projects
 Motivation
 Micropayments for video bandwidth
consumption where piecemeal
transactions do not make sense
 Blockchain scalability (offload tx)
 Send payments across p2p network
 Projects
 Bitcoin: Lightning Network
 Time/signature lock parameters:
CheckLockTimeVerify,
CheckSequenceVerify
 Current ~$350 max (4% Btc) for
Lightning Payment channels
 Ethereum: Raiden, Plasma
11
Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels

13. 20 Apr 2018
Blockchain
1. Unilateral Payment Channel
12
Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling
Opening Transaction:
Broadcast to Network
Interim Transactions: Signed
between Wallets (both parties
agree and are obligated; not
Broadcast to Network)
USD $50
Alice opens $50 “Monthly Payment
Channel” with Starbucks
Closing Transaction:
Broadcast to Network
Alice consumes coffee and
Starbucks adjusts the refund
balance from the initial deposit
USD $5
4/1/18
4/30/18
1
2
Close “Monthly Payment Channel”:
Starbucks broadcasts last refund
amount to network
Starbucks
Coffee
USD $50
USD $45
Starbucks acknowledges with
unbroadcast refund of $50
4/2/18
USD $5
3
4/3/18
USD $5
4
4/4/18
USD $40
USD $35
USD $35
30

14. 20 Apr 2018
Blockchain
1. Unilateral Payment Channels
 Starbucks Example
1. Customer opens $50 monthly payment
channel with Starbucks
2. Daily coffee consumed is tracked and
booked against the $50 credit
3. Activity is netted at the end of the month.
Contracts close and roll over at regular
intervals. Either party may close the
channel early, trigger net settlement
 SBUX: payment channel prototype
 Loyalty program (cards & apps): 41%
purchases, $1.2 bn obligations
13
SBUX Balance Sheet
Assets
Cash $1.2bn
Liabilities
Stored Value
Cards $1.2bn
Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels

15. 20 Apr 2018
Blockchain
2. Bilateral Payment Channel
14
Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling
SBUX Balance Sheet
Assets
Cash $1.2bn
Liabilities
Stored Value
Cards $1.2bn
Opening Transaction:
Broadcast to Network
Interim Transactions:
Signed between Wallets
(not Broadcast to Network)
1 BTC
Open “Monthly Expense”
payment channel: create a new
address, each fund with 1 BTC
Closing Transaction:
Broadcast to Network
1 BTC
Each pays for expenses
from the shared address
during the month
1.2 BTC 0.8 BTC
4/1/18
4/30/18
1
2
3
Close “Monthly Expense” payment
channel: net settle the balance
returned to each
Roommate
Expense Sharing

16. 20 Apr 2018
Blockchain
3. Community Payment Channel
15
Source: https://solarpowerrocks.com/solar-basics/how-much-electricity-does-a-solar-panel-produce
Opening Transaction:
Broadcast to Network
Interim Transactions: Daily
production and consumption
measured as signed
transactions between Wallets
A, B, C, D ante up monthly dues to
the address to open this month’s
“Community Payment Channel”
Closing Transaction:
Broadcast to Network
Energy Produced
4/1/18
4/30/18
2
Close this month’s “Community
Payment Channel” with net
amount returned to A, B, C, D
0.8 kWh
CSC: Community Solar Coin
Token: ante-up expenses, vote,
governance re: how price per kWh,
smart contract lookups to pricing
oracle; additional capital calls
during the month if necessary
4/2/18
4/3/183 Etc.
30
Local Solar
Energy Production
1 CSC 1 CSCA B
C D
1 CSC 1 CSC
Energy Consumed
1.2 kWhA A
Energy Produced
1.1 kWh
Energy Consumed
0.6 kWhB B
Energy Produced
1.3 kWh
Energy Consumed
0.7 kWhC C
Energy Produced
1.0 kWh
Energy Consumed
1.1 kWhD D
1
A
B
C D
1 CSC 0.8 CSC
1.2 CSC1.1 CSC

17. 20 Apr 2018
Blockchain
Transactive Grid, President St, Brooklyn NY
 Decentralized DIY energy markets
 Blockchain-based microgrid
 Community:
 Five net-producing homes generating
energy through solar power
 Five net-consuming homes interested
in buying excess energy from
neighbors
 Benefits: no billing components, no
infrastructure losses, no
accounting losses in the system
 Ability for producers to sell or
donate excess
16
Source: https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york

18. 20 Apr 2018
Blockchain
4. Multi-resource Community
Payment Channel
17
Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains
Opening Transaction:
Broadcast to Network
Interim Transactions: Daily
production and consumption
measured as signed
transactions between Wallets
A, B, C ante up monthly dues to the
address to open this month’s
“Community Payment Channel”
Closing Transaction:
Broadcast to Network
Energy Produced
4/1/18
4/30/18
2
Close this month’s “Community
Payment Channel” with net
amount returned to A, B, C
0.8 kWh
CSC: Community Coin
Token: ante-up expenses, voting,
governance, decision-making re:
resource pricing; additional capital
calls; dispute resolution mechanism
4/2/18
4/3/183 Etc.
30
Sustainable
Community
1 CSC 1 CSCA B
C
1 CSC
Energy Consumed
1.2 kWhA
Greens Produced
3 units
Greens Consumed
1 unit
B
Bandwidth
Produced
10 units
Bandwidth
Consumed
3 units
1
A B
C
1 CSC
0.8 CSC
1.1 CSC
B
C
1.2 kWh
A
C
C A
B
2 units
1 unit

19. 20 Apr 2018
Blockchain
Uber for Microgreens
Who’s harvesting today?
18
Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains;
Swan, M. 2017. Technological Unemployment, In Surviving the Machine Age. Springer.
LocalGreens
Kale – SuperGreens
Citizen’s sense of duty to
serve the republic
Civic Duty
Civic Collaboration
Greek Statesman
Self-directed Cryptocitizen
Optional peer infrastructure
provision: Cryptocitizen’s
sense of meaning and
purpose in participating in
community sustainability
Identity Crisis: who are we in the Automation Economy,
Technological Unemployment, and the Future of Work?

20. 20 Apr 2018
Blockchain
5. Small Group Payment Channel
 Local bar: Lynn, Chris, Bartender
 Lynn has $10 tab with bartender, has consumed $6
 Chris has $10 tab with bartender, has consumed $5
 Lynn and Chris play pool, Chris owes Lynn $5
 Current method (gross settlement): each party settles with
each other (3 tx, $16 gross flow)
 New method (net settlement): (2 tx, $11 gross flow)
 Already see implication if less money transfers, more is available
19
Source: Andreas Antonopoulos
Bartender
A/R
Lynn $6
Chris $5
Lynn
A/R
Chris $5 Bar $6
A/P
$1
Chris
Bar $5
A/P
$10
Lynn $5
$11
Current
Method
Tx1 $6-Lynn
Tx2 $5-Chris
Tx3 $5-Lynn
Payment
Channel
Tx1 $10 C-to-B
Tx2 $1 L-to-B

21. 20 Apr 2018
Blockchain
6. MyMonthlyExpense Payment Channel
 My monthly expenses example
 De facto payment channel
 Inflows into bank account:
 Paycheck direct deposit
 Outflows from bank account:
 Auto-pay bills (fixed and variable)
 Formalized into a multi-party payment
contract netting salary against
expenses, any remainder to Schwab
investment account
 Implication: settling net basis frees capital
 Consider business entities on a net basis
20
Source: https://www.psmarketresearch.com/market-analysis/personal-robot-market
My monthly expenses
Salary (direct deposit)
DR CR
$xx
Expenses (auto-pay)
Rent (fixed amount)
Car payment (fixed)
Utilities (variable)
Discretionary (variable)
$xx
$xx
$xx
$xx
Net savings (variable) $xx
$xx
My apartment building
Expected inflows
DR CR
$xx
Expected outflows
Fixed
Variable
Net
$xx
$xx
$xx
My small business
Expected inflows
DR CR
$xx
Expected outflows
Fixed
Variable
Net
$xx
$xx
$xx

22. 20 Apr 2018
Blockchain
7. MySupplyChain Payment Graph Economy
 Blockchains: only sub-registers of the cash
account (Alice, Bob, HSBC, etc.), not a full
suite of general ledger accounts
 Property registries use cash-acct ledger structure
 Property registries where UTXOs are assets
 Birth/death registry: one credit tx, one debit tx
 Supply chain finance: for supply chain net
settling, need integrated account ledgers
 Single set of books with multiple views: by supply
chain (new) + by entity (existing)
 Revenue (WMT); COGS (Deere, Adidas)
21
Source: https://www.psmarketresearch.com/market-analysis/personal-robot-market
My supply chain
Sales Inventory COGS Manufacturing Raw Materials
Cash
Alice
Bob
Carol
Ralph
HSBC
DR CR
$xx
$xx
$xx
$xx
$xx
Payments trajectory
Goods trajectory
Orthogonal trajectories,
different incentives, behavior

23. 20 Apr 2018
Blockchain
Payment Channel implications
 New forms of Digital Credit Systems
 Contractually-obligated payment relationships
 Booked as periodic net activity
 Net settlement
 Digitized payment system for resource consumption that
settles based on net payments instead of gross transfers
 Peer-provided banking services enabled
22

24. 20 Apr 2018
Blockchain
Securities as a Service
23
Source: Blockchain Fintech: Programmable Risk and Securities as a Service,
http://futurememes.blogspot.com/2016/10/blockchain-fintech-programmable-risk.html
CD, DVD
Streaming Music and
Video Services
Entertainment as
a Service
Asset
Service
Auto, Home
Uber, Lyft, Gett, Juno,
Via; Airbnb, VRBO
HomeAway
Transportation,
Domicile as a Service
Securities
Securities as
a Service
 Securities a Service
 Now have to own because uncertain future value of assets
 Access to the consumable benefits of the asset without owning
 Works if trust consumable assets will have future availability
 Need the cash flow the asset provides, not the asset itself
Consumable benefits of
securities: cash flow,
appreciation
Payments as
a Service

25. 20 Apr 2018
Blockchain 24
systemic risk.

26. 20 Apr 2018
Blockchain 25
Source: http://timreview.ca/article/1109
 Blockchain business networks
 Single shared business processes
 Multiple private views

27. 20 Apr 2018
Blockchain
business networks.
26
digitized assets.
instantaneous transactability.
shared business processes.
the world is your VPN
Source: http://timreview.ca/article/1109

28. 20 Apr 2018
Blockchain 27
real-time balance sheets.
off-balance sheet obligations
disappear.
diminished risk.
Source: http://www.europeanfinancialreview.com/?p=21755
rethink risk.

29. 20 Apr 2018
Blockchain 28
 HFT = program trading,
automated execution
1. Higher volume since 2008
 Institutional investor volume
fixed (3-4 bn shares/day)
 Total volume: 2x higher
 50-70% total volume = HFT
2. Higher volatility
3. Tighter bid-ask spreads
4. Greater price efficiency
(no price gaps)
HFT (high-frequency trading)
Sources: Chaparro, F. 2017. Credit Suisse: Here's how high-frequency trading has changed the stock market. Business
Insider. https://speedtrader.com/how-algorithms-and-high-frequency-trading-programs-affect-your-trading/
https://snipethetrade.com/us/high-frequency-trading
US Equity markets

30. 20 Apr 2018
Blockchain
Programmable Risk
Black Swan Smart Contracts
 Financial options (put/call) used to
control/manufacture exposure
 Convexity (Fig. 1): control down-side
risk, upside gain, anti-fragile (robust)
 Concavity: undesirable risk profile
 Taleb: map event probabilities as
s-curve (Fig. 2) in medicine, etc.
 Convex-linear-concave profile
 Use programmable risk dropdown
feature of smart contracts to
manage risk in more domains
29
Sources: Swan, M. Submitted. Programmable Risk: Black Swan Smart Contracts, IEEE;
Taleb, Medicine: https://arxiv.org/ftp/arxiv/papers/1208/1208.1189.pdf
Figure 1
Figure 2

31. 20 Apr 2018
Blockchain
future.
30

32. 20 Apr 2018
Blockchain
store money.
31
old model.
networks.
banks.
new model.

33. 20 Apr 2018
Blockchain
change.
32
https://www.coindesk.com/jpmorgan-says-it-may-have-to-adapt-to-counter-crypto-adoption
“…financial institutions…face the risk that
payment processing and other services could
be disrupted by technologies such as
cryptocurrencies that require no intermediation”
Annual 10K, Mar 2018

34. 20 Apr 2018
Blockchain
power of the press.
33
old model.
networks.
newspapers.
new model.

35. 20 Apr 2018
Blockchain
power of the wallet.
34
old model.
peer networks.
banks.
new model.
1. Token Name
2. Ticker
3. Denominations
4. Total Money Supply

36. 20 Apr 2018
Blockchain
government as service
provider.
35
old model.
eResidency.
Exclusivity: One default
economic and political
sovereign birth regime.
new model.
Source: http://blockchainstudies.org/Blockchain_Economics_CFP.pdf
Plurality: Plug and play
economic and political
services regimes.

37. 20 Apr 2018
Blockchain
inclusion.
36
banking & credit.
land registry.
identity.
electricity.
vaccines & medicine.
Source: https://www.unicef.org.au/blog/unicef-in-action/april-2017/photos-vaccines-reach-most-remote-places-earth
Digital health wallet

38. 20 Apr 2018
Blockchain
Blockchain Economics
Challenges and Disruptive Solutions
37
Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan.
Debt
Systemic Risk
Entitlements
Overhang
Healthcare
(Cost-Outcome)
Net Settlement
a) Payment Channels
b) Payments/Securities as a Service
Programmable Risk
a) Black Swan Smart Contracts
b) Real-time Balance Sheets
c) Apply Deep Learning (RNN) to HFT
Automation Economy
a) Future of Work/Technological Unemployment
b) Human-Machine Collaboration
Blockchain Health Economics
a) Global Healthcare Equivalency Units
b) Digital ID, consent, interoperable data

39. Inaugural Blockchain Symposium
Blacksburg VA, April 20, 2018
Slides: http://slideshare.net/LaBlogga
Blockchain Economics
Industry and Institutional Disruption
Melanie Swan
Philosophy, Purdue University
melanie@BlockchainStudies.org