Smart Network Economics: Debt, Risk, and Payment Channels Smart networks are intelligent autonomous networks, a new form of global computational infrastructure in which intelligence is built directly into the software such that an increasing degree of autonomous operation is facilitated. More formally, smart networks are state machines that make probabilistic guesses about reality states of the world and act upon this basis, particularly in economic domains, hence, smart network economics.

1. Melanie Swan
Philosophy, Purdue University
melanie@BlockchainStudies.org29 Sep 2018
Slides: http://slideshare.net/LaBlogga
Smart Network Economics:
Debt, Risk, and Payment Channels

2. 29 Sep 2018
Blockchain
blockchain
economics. 1

3. 29 Sep 2018
Blockchain
Context of Blockchain Economics
2
Source: Expanded from Mark Sigal, http://radar.oreilly.com/2011/10/post-pc-revolution.html
 Blockchain is fundamentally the next phase of the
Internet, not just a FinTech, could impact every industry
 Two fundamental eras of network computing

4. 29 Sep 2018
Blockchain 3
smart networks.
intelligent autonomously-operating networks:
a new form of global computational infrastructure

5. 29 Sep 2018
Blockchain
Debt
Systemic Risk
Net Settlement
a) Payment Channels
b) Securities as a Service
Automation Economy
Healthcare Outcomes
Financial Inclusion
Systemic Risk
Entitlements Overhang
Programmable Risk
a) Real-time Balance Sheets
b) Black Swan Smart Contracts
c) Apply Deep Learning (RNN) to HFT
Future of Work
a) Maslow self-development Smart Contracts
b) Outsourced ownership in new means of production
Smart Contract Futures
a) Contractual link: present earnings-future payout
b) Securities as a Service
Blockchain Health Economics
a) Global Healthcare Equivalency Units (quantified
smart contract outcome tracking)
b) Digital ID, consent, interoperable data
eWallet Banking Services
a) Official Digital Identity Credentials
b) Open Source Credit Bureaus
Economic Challenges and Potential Blockchain-based Solutions

6. 29 Sep 2018
Blockchain 5
causal model.
Blockchain Economic Theory of Digital Asset Contracting

7. 29 Sep 2018
Blockchain 6
Source: http://www.europeanfinancialreview.com/?p=21755
debt.

8. 29 Sep 2018
Blockchain 7
net settlement.
payment channels.
digital credit systems.
Source: http://timreview.ca/article/1109
rethink debt.

9. 29 Sep 2018
Blockchain
Payment Channels: the concept
8
 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

10. 29 Sep 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
9
Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels

11. 29 Sep 2018
Blockchain
1. Unilateral Payment Channel
10
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

12. 29 Sep 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
11
SBUX Balance Sheet
Assets
Cash $1.2bn
Liabilities
Stored Value
Cards $1.2bn
Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels

13. 29 Sep 2018
Blockchain
2. Bilateral Payment Channel
12
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

14. 29 Sep 2018
Blockchain
3. Community Payment Channel
13
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

15. 29 Sep 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
14
Source: https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york

16. 29 Sep 2018
Blockchain
4. Multi-resource Community
Payment Channel
15
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

17. 29 Sep 2018
Blockchain
Uber for Microgreens
Who’s harvesting today?
16
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?

18. 29 Sep 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
17
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

19. 29 Sep 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
18
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

20. 29 Sep 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)
19
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

21. 29 Sep 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
20

22. 29 Sep 2018
Blockchain
Securities as a Service
21
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

23. 29 Sep 2018
Blockchain
Net settlement: Municipal finance example
22
Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains
State ContractorTaxpayer
Bond
State ContractorTaxpayer
Current Method: 15-year IDB Future Method: Smart Contract
Smart Contract monthly payments

24. 29 Sep 2018
Blockchain
Net settlement: Municipal finance example
23
Source: http://www.cabq.gov/economicdevelopment/business-owners/services-programs/bonds
15-year IDB
Bond
Investor
+
-
State
+
-
Contractor
+
+
Taxpayer
-
-
Contractor
+
-
State
++
Taxpayer
+
-
-
2
1
• State borrows full amount in
bond offering
• State chooses contractor and
pays contract in installments
• Contractor receives
installment payments from
State
• Taxpayers pay tax payments
to State
• State pays interest to bond
holders and repays principal at
maturity
Future Method: Smart
Contract Municipal Project
Current Method: 15-year IDB
• State selects contractor and
supervises project
• Smart contract monthly
payments: taxpayers to
contractor

25. 29 Sep 2018
Blockchain 24
systemic risk.

26. 29 Sep 2018
Blockchain 25
Source: http://timreview.ca/article/1109
 Blockchain business networks
 Single shared business processes
 Multiple private views

27. 29 Sep 2018
Blockchain
business networks.
26
digitized assets.
instantaneous transactability.
shared business processes.
the world is your VPN
Source: http://timreview.ca/article/1109

28. 29 Sep 2018
Blockchain 27
real-time balance sheets.
off-balance sheet obligations
disappear.
diminished risk.
Source: http://www.europeanfinancialreview.com/?p=21755
rethink risk.

29. 29 Sep 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. 29 Sep 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. 29 Sep 2018
Blockchain
future.
30

32. 29 Sep 2018
Blockchain
store money.
31
old model.
networks.
banks.
new model.

33. 29 Sep 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. 29 Sep 2018
Blockchain
power of the press.
33
old model.
networks.
newspapers.
new model.

35. 29 Sep 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. Melanie Swan
Philosophy, Purdue University
melanie@BlockchainStudies.org29 Sep 2018
Slides: http://slideshare.net/LaBlogga
Smart Network Economics:
Debt, Risk, and Payment Channels