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EP 9: It's Market Design
How to be a Puppet Master 101, with Economics (jk)
I'm testing a new format. Newsletters will be a summary of each weekly episode. Also, I've changed the format of YouTube. Tell me if you prefer it!
TLDR below. This is not financial advice.
Market design is a field in economics that is relatively young. It is the design of the environment, which your participants (and tokens) exist in. Market design is a form of microeconomic engineering that combines science with art, using tools, concepts, models, theory and practical aspect of the real world.
We need market design because it affects how our digital (crypto) ecosystem will evolve, the value add to the users and valuation of your ecosystem.
1. Why A Need for Market Design
Markets are not stable. Hence, they are not efficient. When they are not efficient, there are lots of issues, including market failure. Designing a market cross borders and geographical distance only enhances any market failures and efficiencies.
Markets exist to promote certain outcomes. We can achieve this with rules and different constraints to alter certain behaviours.
2. Why Study Market Design
New digital markets. Markets are no longer the traditional physical brick and mortar shops, where traditional economics hold. The cost structure like marginal costs, differs, hence the economics of these new markets. We have to design new economic models and systems for these new markets.
Market failure. Market failure is only enhanced when there are less constraints like jurisdictions. When creating our own economies, we are also designing these rules. Understanding why and how they fail will be crucial to our success.
To know what is good design. There is no "holy grail" of design, where it fits every objective. Hence, it is important to understand what is good design and apply these aspects to the ecosystems that we are building and designing.
3. Market Design in Token Economics
Why do we need market design in our token ecosystems? Because people are naturally uncooperative (think: game theory). With formal rules engineered, we can increase cooperation between participants.
For market design to work well, we need 3 ingredients: market thickness (think: network effects), low congestion and safe for participants to transact within your ecosystem.
What Does this Mean
Thickness means things like increasing potential transactions available, increasing relevant offers, increasing time required for consideration and tap into network externalities.
To reduce congestion, allow for the right amount of options available, instead of limiting or overwhelming the users. Transaction throughput rates can also be adjusted either via the blockchain platform infrastructure or validator nodes on your ecosystem to achieve consensus.
Safety is another important aspect because if users are transacting outside of your ecosystem, the ecosystem does not capture value to the users and this reduces valuation of your token ecosystem. This can be in the code level of encryption and cryptography, to user level of privacy features, staking and transparency.
This episode compares the example of Airbnb's market design with various recommendations on how you can design your token market. There is no "one size fits all" market design model, it all depends on the objective and behaviours you want to optimise in your ecosystem.