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TLDR below. This is not financial advice.
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As much as we want to figure out logic and algorithms or understand how things work and understand correlation and causation to what is going on in the market, the truth is that a lot of things in the universe or in nature are always one step ahead of logic. You can’t exactly logic your way to figure out which plants will start growing or figure out which leaves will start propping up first in a plant. This is something that is a little bit out of the scope of what we can do as an economist or as an ecosystem creator.
These are the different kinds of risks that you don’t always capture in the ecosystems that you design. This can be good or bad. The good thing is that your ecosystem is dynamic enough to integrate new information and update its mechanisms or its market structure to allow the ecosystem to continue growing. For example, if you’re in DeFi, you have more information and more updates to make your ecosystem a bit more robust, or if you’re in a P2E space then you have different kinds of players and have a different kind of perspective to consider and to build as you are designing a very fun game.
The downside to it is this thing called black swan events or black swan effects where there are a lot of uncertain unknowns that you just don’t know are going to happen because there is no algorithm and there isn’t always a logical explanation to whatever that goes on in the space.
A quote from Luther Burbank reads
“The fact is that you cannot see all the facts about anything just by looking at the thing itself. For instance, to learn part of the essential truth about grasses, you have to study the cow. The effect is relative and if it is placed out of its relative position it apparently is not a fact often.”
Being Ecosystem Designers
As much as we are designing an ecosystem, we want to anticipate a little bit more about what the token price fluctuation is. It is really relative to the entire ecosystem. If your ecosystem’s business model doesn’t make sense or your ecosystem simply is quite flawed then your token relative to the ecosystem just doesn’t make sense. When we want to compare tokens, we have to compare not just across the various kinds of alternatives or across the entire crypto segment but also its relative position to the business model itself.
Change in Economics
The other thing in this relativity is that there is a big shift in economics when it comes to relativity. In the past, it was a little bit more one-sided as in Shell or BP or one of these oil and gas companies would find oil, dig it out, refine and sell it to manufacturers. There is some understanding of supply-demand but it’s supply creation. The finding of oil is not directly dependent on the demand of people wanting the oil because there are a lot of alternatives.
What we’re looking at today is a shift in that mindset. If you look at the top 20 companies by market cap in the last 15 years most of them are moving away from independent creation of supply and demand like oil and gas companies or mineral companies or car companies like GM and moving towards ecosystem and markets creation. The difference is that when it comes to markets the economics is very different. The economics is a relative consideration or a relative correlation between two ecosystems or two parties in your market. It changes a lot based on how we understand and analyse economics and how we design economics in these systems.
Firstly, there are a lot of things that we can design and there are a lot of things that we can try to limit the external risk or the black swan events of. But the truth is that life is always one step ahead of logic so we can’t always logic our way out to everything. However, given that, we can have some level of price flow or assumptions flow where given the assumptions that we have in place what are some less wrong guesses that we can make about this system and how can we create economic models and economic policies to constrain these less wrong decisions and less wrong outcomes.
Application in DeFi and P2E
The way we do that is through understanding the relative relationship between these different agents or assets or tokens in your game. This could be for P2E, DeFi, social tokens, or this could be for anything. This doesn’t even have to be blockchain. It can be how Airbnb or Amazon or Meta works. What we’re doing is creating a market and creating this ecosystem that allows people to come and trade together and transact together. It is true that we can have a lot more control of how we design these economic policies but also be mindful that there are a lot of things that are outside of our control or are outside of things that we can design as policies. We call them black swan events but they exist and this is something to be mindful of when you are looking at any ecosystem.
Token price fluctuation is really relative to the entire ecosystem. If your ecosystem’s business model doesn’t make sense or your ecosystem simply is quite flawed then your token relative to the ecosystem just doesn’t make sense. There is a big shift in economics when it comes to relativity. Most of the top 20 companies by market cap in the last 15 years are moving away from independent creation of supply and demand and moving towards ecosystem and markets creation.