A Lesson on Blockchain Finance
Since returning from my exciting peregrinations around the country — exploring Gerry Frigon’s Israeli strategy, Otoy’s new unicorn plans, Lumotive CMOS imagers, ASOCS private 5G wireless, and Matt Scholtz’s threefold biotech empire — I’ve reentered glumly the bleak wastelands of Maskachusetts. Here, Governor Charlie Baker is launching scores of thousands of COVID police across the state and suppressing any glints of business spirit or public life.
It reminds me of East Germany, but worse. Erich Honecker never thought of denying Germans the right to display their faces! I scarcely have time to write and research my dailies and monthlies and read my emails, my EETimes and IEEE Spectrum, before I have to endure this continuous and utterly unsupportable threat of demented pols to our economic and spiritual lives.
And now I face a new threat. Books. New books. Thrown down as gauntlets at my door, books — hundreds of pages and scores of thousands of words, marching remorselessly across the pages — mounting an impossible intrusion on my beleaguered life in Bakerland.
My old pal and counsel Ralph Benko arrived with a particularly menacing attack yesterday. Written with sultry, sapient math and finance nerd Dawn Talbot, the new work is entitled (yawn!) Redefining the Future of the Economy: Governance Blocks & Economic Architecture. I had to struggle to get beyond the bog of the title on into the swamp of the opening chapter: “Is this Book for You?”
I was ready to bellow out “Lord, no!” And that was even before I read the part about “sell-side triads” that “can be geometrically diagrammed as a ‘forms and states’ mesh” with “those familiar with Synergetics [recognizing] the tetrahedral architecture which can be the building block of geodesics…
“Moving from Fano plane to octonion, the seven points correspond to the seven standard basis elements of octonion, further enhancing the ability to expand the design…” And so on, in Benko’s strangely labored prose, only slightly relieved by gnomic quotes from Plato and Ted Nelson or fun riffs from Neil Strauss of Rolling Stone on Bitcoin cult panjandrum Brock Pierce.
But Benko is a rollicking raptorial supply-side writer who I met when he was a microchip laser processing entrepreneur. And Dawn Talbot is a combinatorial-explosion wonder-woman. And Robert Fano was a key collaborator at MIT with Claude Shannon in the development of the Information Theory behind my new economics. So I pushed dauntlessly on.
A Pleasant Surprise
Boy, am I glad that I did. I discovered that this book, despite its slow start, is a just-in-time blockbusting chain-reactive manifesto for a revolutionary second generation of blockchain for finance. If you are involved with the Cryptocosm, or with finance, or with artificial intelligence, or have enough real intelligence to see through COVID, you have to read it. And if you’re not, you still need to know what’s in it.
Maybe you’ve read the last chapters of Life After Google. That’s where it’s coming from: the imperative need to consummate the blockchain and bitcoin technologies with an understanding of money and finance.
The difference is that Talbot, a super savvy investment strategist, and Benko, a paladin of money theory, actually know why the movement is bogging down and how to fix it. Beyond the limitations of existing blockchain, they understand the egregious mis-regulation of finance under what I call the “outsider trading scandal,” in which the SEC botches a knowledge economy with the rule: “Don’t invest in anything you know about.”
They understand the stultifying menace of black-box automated trading which reduces everything to computational stupidity. They grasp the intrusive madness of Sarbanes Oxley accounting rules and the suppressive monkey wrench regulation of Fair Disclosure requirements that shadow and ambiguously criminalize many effective ways of investigating companies.
In an exciting climax, they show how an AI-based blockchain can remedy all these disorders that have decimated Initial Public Offerings and halved the number of US public companies in 20 years. The authors explain:
“The exchange of asset ownership is the heart of any exchange system. It is at the heart of every capitalist system. It is possible to design such a system on blockchain… [But] the original generation of blockchain developers focused on the transaction price record rather than on the market dynamics” that determine prices…
For this reason, we contend that today’s blockchain-based financial instruments, exchanges, tokens and currencies would be a ‘great leap backward’ for institutional investors who have, perforce, avoided them.” It turns out that neither existing blockchains nor existing regulations can begin to address the wreckage of capitalist institutions wrought by the administrative state and the COVID mania.
A peer-to-peer transaction network alone has no way to assess relative value, volatility, demand, or supply. So to migrate from the original blockchain architecture to an ‘institutional-quality’ system, more functions must be added.”
The authors outline these functions in convincing detail and show how they can be executed in blockchain “state machines” in seven steps between a request for capital to launch of a financial instrument. This is not just a matter of immutably recording transactions. It is a complex process, facilitated but not controlled by artificial intelligence (AI).
Fulfilling a fiduciary regime, the process steps or “states” progress from product sizing (how many units to be sold) through research by analysts of real asset quality to ratings by bankers and analysts of the instrument. They incorporate market making by bankers, investors, and traders and include assurance of liquidity and research to aid efficient execution. They describe the structuring by bankers of the final financial instrument, and end with price discovery in the marketplace.
The new augmented blockchain architecture uses combinatorial mathematics in a new “Fano plane” governance block. With combinatorial math, it splits the process of public offerings into seven groups. With an intricate mesh of feedback loops in triads, the three elements per group allow the origin of an ingenious new governance structure on a layered blockchain with no two participants paired more than once.
Don’t worry. There are many complexities, but the book ends with a lucid exposition of a new governance blockchain.
“Disintermediation for its own sake is not a compelling investment motivation.
Making workers more effective and productive is.
The nation-state — a ‘state machine’ — is at some level nothing more than a consensus mechanism that determines the state of the network.
With economic architectures to choreograph [layered blockchain] of ‘oracle meshes’ and ‘delegate networks’ to provide the requisite feedback loops and incorporate the forms of democracy and states of capitalism, the United States will become a different entity, a computational one. If America does a blockchain for every county, adding them all together and valuing the state of the union you have the Digital United States.”
It is a model that can fulfill Life After Google with a new system of true money and cryptocosmic internet security at last. It is a new way to fulfill the promise of the Daily Prophecy for investors in a world of woe.
Editor, Gilder’s Daily Prophecy