Blockchain and Agency Risk
Author: NEST Enthusiast - Jiuzhang Tianwen
People who are new to the blockchain are often confused about what kind of economic language to use to describe the meaning of the blockchain. Some people say it is cost, but they have not seen the cost of which industry has changed because of the blockchain; some people also say it is trust, but they have not seen a quantifiable description of trust under the blockchain, so many People turn to think that the value of the blockchain lies in its immutability. These are very superficial understandings,In the language of economics, the blockchain essentially changes the agency risk in the principal-agent relationship.
Agency risk is everywhere. You entrust someone else to do something for you, but he fails to fulfill it; you don’t take good care of the things you put in someone else’s place; or the service you paid for ends up going wrong, all of which are agency risks. What is really worrying is that your assets are entrusted to others, causing huge losses. For example, we invest in funds, we invest in P2P, and so on.Agency risk is the risk that the agent is unable or fails to fulfill the principal-agent relationship according to the rules.. All of the above seem normal and have nothing to do with the blockchain; but in fact, the real meaning of the blockchain is here: to realize the algorithmization of agency risk through public ledgers and decentralized consensus, that is, agency risk is implicit in In the code, and the code is open source and determined from the beginning, so the agency risk is completely known. This is the real value of the blockchain. De-trust refers to the removal of agency risks in the general sense: the risk of trust in people and institutions. Reducing costs means avoiding the risks of various adverse selections, thereby bringing about a decline in social costs.Therefore, the essence of the blockchain is a problem of the principal-agent framework. The technological change has brought about the revolution of the principal-agent. We no longer place the core risk on a third-party organization. The code is the law, and the code is the main risk.
We can give a few examples to illustrate this matter. Let’s talk about the most well-known bitcoin in the industry first. In an ideal situation, whether we are saving assets or transferring assets, we do not have the problem of relying on any third party. inviolable". This is not without risks. For example, the code may also go wrong (although it has been tested for 10 years, it cannot be said that it is impossible), but the code is open source from the beginning. For everyone, this risk is fully informed And it cannot be modified (except forks); more importantly, during this process, an individual or institution has no possibility of any influence on the transfer of BTC, and we can credibly complete point-to-point payments.This major technological innovation has completely changed the economic model of the past and brought us to a new era of trusting algorithms rather than individuals.
Let's take a look at another well-known blockchain project USDT, a digital dollar issued on Ethereum. Although USDT is on the blockchain, the system that guarantees the value of USDT is off-chain, that is, Tether, the issuer, promises that each USDT is equal to one dollar. Although Tether has done a lot of work to ensure the effectiveness of this commitment, such as hosting and auditing bank accounts, etc., but the whole process must be truly smooth, we must trust Tether, audit institutions, custodian banks, etc. BTC fully believes that the algorithms vary greatly. Although the blockchain is used, its value contains a huge agency risk. Once Tether and others fail to pay, USDT will become a string of codes instead of a dollar.
There is a special type of asset in the blockchain industry called platform currency, which embodies the value of a certain exchange platform’s fee reduction, transaction pricing, and profit return. This type of asset, such as BNB, as the token of the Binance platform, regardless of whether it uses blockchain technology or not, is essentially the same as USDT, and contains huge agency risks, that is, Binance Exchange can change, revoke or even replace the token. The value on this token. what can we do You can only trust Binance.
In addition, there is a special category of assets, such as MakerDAO's stable currency DAI. In essence, it is a stable option. The DAI generated by ETH mortgage is an ETH-based option. It has a strict pricing formula, which is in line with our design that there is no agency risk in mind, only algorithmic risk. However, there is also a problem with DAI. The price variable that determines its risk value is artificially input. The price does not have a good verification mechanism. It is only input from time to time through several internal nodes. The basis for our closing positions is the so-called nodes. Enter the price. Obviously, this risk is not algorithmic, but needs to believe that these nodes will not do evil or make mistakes. Although the maker has a rollback mechanism, it introduces the trust risk of rollback: who will determine the need for rollback? Why trust them?
Through the above analysis, we can summarize a little:That is to say, in the blockchain world, a complete value interaction process, as long as there is an agency risk in one link, it is actually different from BTC, that is, we still introduce human risk instead of code risk.Therefore, in the blockchain world, decentralization and agency risk are two sides of the same coin, and they are different expressions. The former is an emotional description, while the latter is a rational definition. We use de-agent risk to measure The degree of decentralization is completely appropriate. Not only can we use this to judge the degree of decentralization of a system, but we can also discover which areas of agency risk can be solved by blockchain, so that we can truly enter the era of blockchain applications.
In a world full of agency risks, we have established a set of incentive systems based on laws, institutions, etc. to maintain the effectiveness of the principal-agent structure, so that the world can operate normally. But the cost is also huge. Imagine various corporate scandals and regulatory corruption. This is an inevitable risk of the past model. No matter how well our incentive mechanism is designed, this fundamental risk cannot be eliminated. It can be said that the evolution of human society is Stories of constantly shifting models to address agency risk. However,This revolution brought about by blockchain technology has the most thorough elimination of agency risks. It is no longer necessary to trust any third party, whether it is an authority, a hero or a saint, and only needs to trust the code! Trust the algorithm!This is a dazzling moment in financial history, worthy of our in-depth and comprehensive excavation, but most people have not come to their senses, thinking that it was just a small attempt, and it was quickly compromised in the traditional model, which makes people sigh.
