Distributed Ledgers: Design and Regulation of Financial Infrastructure and Payment Systems

by Robert M Townsend

An economic analysis of what distributed ledgers can do, examining key components and discussing applications in both developed and emerging market economies. Distributed ledger technology (DLT) has the potential to transform economic organization and financial structures. In this book, Robert Townsend steps back from the hype and controversy surrounding DLT (and the related, but not synonymous, innovations of blockchain and Bitcoin) to offer an economic analysis of what distributed ledgers can do and a blueprint for the optimal design and regulation of financial systems. Townsend examines the key components of distributed ledgers, discussing, evaluating, and illustrating each in the context of historical and contemporary economies, reviewing featured applications in both developed economies and emerging-market countries, and indicating where future innovations can have large impact. Throughout, Townsend emphasizes the general equilibrium impact of DLT innovations, the welfare gains from these innovations, and related regulatory innovations. He analyzes four crucial components of distributed ledgers—ledgers as accounts, e-messages and e-value transfers, cryptography, and contracts—assesses each in terms of both economics and computer science, and forges some middle ground. Relatedly, Townsend highlights hybrid systems in which some of these components allow useful innovation while legacy or alternative pieces deal with the problem of scale. The specific applications he analyzes include an intelligent financial automated system that provides financial services to unbanked and under-banked populations, and cross-border payments systems, including financial systems that can integrate credit and insurance with clearing and settlement. Finally, Townsend considers cryptocurrencies, discussing the role and value of tokens in economies with distributed ledger systems.

Genres: Computer Science

240 pages, Paperback

Published October 6, 2020

Reviews

[Neil]

Tyler Cowen: Bitcoin and crypto yes, but the more fundamental concept in this book is...distributed ledgers, which include Thai rice allocation schemes and Mesopotamia circa 4000 B.C. It is highly intelligent and well done, but somehow I think books like this work better when they are more speculative and future-oriented.

[Lee · Rating 3 out of 5]

much of the content is too technical for me, and i could not recommend to others. writing could have been improved with more vivid examples being reused across chapters to illuminate different aspects of the technology in memorable ways: eg, alice wants to buy a goat from bob. unfortunately the imagined reader is an economist familiar with things like monetary theory and mechanism design, so examples and vivid explanations are sorely lacking. nevertheless i found it useful summary of the main concepts and claims coming from the distributed ledger tech (DLT) crowd precisely because it isn't pitched at the usual reader in these topics. a virtue is that the emphasis is less on speculative novel uses of DLT and more on known issues in pre-DLT world that could be addressed with them.

thankfully absent from the book are the usual shitty political hobbyhorses of the crypto crowd--crank neo goldbugism and the ancap-flavored obsession with decentralization for its own sake. there is a defense of cryptocurrency and smart contracts as useful supplements to ordinary fiat currency and paper contracts. that said, neolib economists have their own hobbyhorses like microfinance, which i am unsure about.

one point i found especially interesting (tho briefly treated) is the need to translate between human-readable and machine-readable contracts. googling reveals some of the projects mentioned in the text as working on this are now defunct -- uh oh.

Best parts related distributed ledgers to historical inventions like tally sticks, islamic banking with trusted lenders, databases, M-Pesa in Kenya, double-entry bookkeeping, and balance sheets for firms. none of these comparisons are new, appearing in more popular books, but this book explains how DLT offers some new features these earlier technologies did not: eg, ensuring consistency between balance sheets kept by counter-parties (bob's sale is alice's purchase) and the utility of those features (public log of transactions facilitates lending based on anticipated cash flows, to bob's benefit here; or optimizing government money supply, to everyone's benefit). it also call attention to fact that DLT cannot escape long-appreciated constraints of other tech like databases: the CAP theorem says among consistency, accuracy, partitioning one must choose two.

i do not wish to read more on this topic for some time, and i suppose that is a credit to this book.

[Alex · Rating 1 out of 5]

I struggle to understand who this book is supposed to be for. It is as though the author wanted to conduct an economic literature survey, primarily of their own work (I counted 45 (!) distinct references to Townsend papers in the notes), and occasionally remembered that they were supposed to mention something about the topic in the title of the book, though often without much obvious connection to whatever was recently under discussion. What little discussion of practical distributed ledger systems there was tended to either be glossy, to misunderstand (or misrepresent) some aspect of the technology, and/or to lack much useful context or explanation as to why those specific technologies were examined and others were not. There is definitely plenty of opportunity for synthesis of ideas from economics and technology related to the titular topic, but it just did not seem to be present in this book. Disappointing, and difficult to recommend to anyone.

[Carter · Rating 4 out of 5]

An exploration, of what distributed ledger technology, may bring to the table in the future.