Building Recursive Industrial Clusters and Economic Institutions using Blockchain: vision from 482.solutions at the IEEE DLT Forum 2023

The 2023 IEEE 1st Ukrainian Distributed Ledger Technology Forum (UADLTF) convened as an online event October 27-29, 2023 in Kyiv, Ukraine. Organized by the IEEE Ukraine Section and the IEEE Blockchain Technical Community, the forum was a hub of discussion and innovation in the blockchain sphere.

This year’s UADLTF was focused on nurturing the seeds of future Blockchain and Distributed Ledger Technologies (DLTs), scrutinizing their societal benefits, and unfolding their potential. In an era where economic ecosystems and network architecture are being rethought, Blockchain and DLT systems stand out as harbingers of a new wave of peer-to-peer services and applications. From classical DLT applications to industry-specific solutions, blockchain networks aim to provide robust support and open up a realm of possibilities.

The Forum assembled a diverse array of experts from the academic, industrial, and governmental sectors, all united by a common vision for blockchain and DLT's future. Among the notable participants were representatives from the Ministry of Digital Transformation of Ukraine, the European Commission, the Enterprise Ethereum Alliance, the University of California (Berkeley), IEEE Standards Association, Distributed Lab, and our firm 482.solutions. These leaders in R&D and applied solutions in Web3 and DLT shared their latest achievements and insights, shaping the discourse on the technology’s trajectory.

Amid this congregation of innovators, Roman Kravchenko - the CEO of 482.solutions and Ambassador at the Global Blockchain Business Council (GBBC) - participated as a keynote speaker. His presentation, "Blockchain, Institutions, and Markets," dove into the essence of blockchain through the lens of New Institutional Economics, revisiting the transaction cost theory by Ronald Coase. Roman’s presentation unraveled how blockchain is reconstructing markets, hierarchies, networks, and managing transaction costs in the formation of recursive cluster economies.

This presentation contains theses and conclusions from the latest series of R&D projects, which are a continuation of research, the results of which were previously published in the scientific paper "Blockchain as a Transaction Protocol for Guaranteed Transfer of Values in Cluster Economic Systems with Digital Twins" (https://ieeexplore.ieee.org/document/9061233).

About IEEE.

“The world’s largest technical professional organization dedicated to advancing technology for the benefit of humanity”.

A non-profit organization, IEEE (http://ieee.org) is the world’s leading professional association (more than 400,000 members in more than 160 countries) for the advancement of technology. The IEEE name was originally an acronym for the Institute of Electrical and Electronics Engineers, Inc. Today, the organization’s scope of interest has expanded into so many related fields, that it is simply referred to by the letters I-E-E-E (pronounced Eye-triple-E).

About IEEE Ukraine Section.

The IEEE Ukraine Section was founded on November 21, 1991 and representing the Institute of Electrical and Electronics Engineers (IEEE) in Ukraine and Republic of Georgia. The Ukraine Section, with more than 400 members, has 13 technical chapters of IEEE Societies and 2 affinity groups (young professionals and women in engineering), organizes and supports local events, has liaisons with local professional societies, and much more.

About 482.solutions.

Established in 2013, 482.solutions is a Singapore-based international company with headquarters in Ukraine, specializing in the development of industrial Web3 and blockchain-based solutions for the Green Energy, Green FinTech, and Sustainable Value Chain sectors. Leveraging Web3 and blockchain technologies, we create industry-focused infrastructure for Open and Transactive Energy, Voluntary Carbon, and Green Finance markets. Our solutions enhance traceability and transparency in ESG data management and sustainable digital asset management.

 

An overview of the key points of the research study and presentation.

In this context, the presentation justified the use of blockchain technology to meet the conditions of Ronald Coase's theorem and create a “Value Management Machine,” with the aim of minimizing transaction costs in economic systems.

The Coase theorem states that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. The proposed approach applies this to blockchain technology as follows:

A. Open and competitive market = Open DAO (Decentralized Autonomous Organization). This suggests that DAOs represent a modern embodiment of an open and competitive market, which is one of the conditions for the Coase theorem to hold.

B. Free access to market information = Public Blockchains for market transactions. In a Coasean world, free access to market information is crucial, and public blockchains can provide a transparent way for information to be shared, thereby reducing information asymmetry.

C. Property rights clearly defined = SSI & VC (Self-Sovereign Identity & Verifiable Credentials). For the Coase theorem to work, property rights must be well-defined. Self-sovereign identity and verifiable credentials on the blockchain can provide a clear and tamper-proof method of establishing and confirming property rights on assets.

D. Little to 0 transaction costs = Web3 protocols. One of the key points of the Coase theorem is the absence of transaction costs. Web3 protocols aim to reduce these costs significantly through decentralized coordination mechanism, thereby creating an environment where the Coase theorem can be applicable.

So this setup can transform external transaction costs to internal transaction costs and achieve an efficient (economically optimal) outcome regardless of the initial allocation of property rights. The presentation notes that negotiation and bargaining, key components of the Coase theorem, are facilitated in such an environment.

The overall conclusion is that blockchain and Web3 technologies provide a practical framework to realize Coase's ideas for efficient economic systems.

Blockchain for recursive sustainable cluster economy.

The presentation also demonstrated the practical application of the proposed approach for building a Recursive Sustainable Cluster Economy.

The proposed model defines an advanced concept of economic organization using the principles of Ronald Coase's theory adapted to Blockchain technology. Here's an analysis of the model:

Economic clusters: the model depicts economic clusters A and B, each composed of smaller units that can be interpreted as individual firms or entities. These clusters represent a hierarchy or a networked system where transactions and interactions occur.

Autonomous economic agent: the reference to autonomous economic agents as "Autonomous Platform or Machine" suggests the integration of AI or Automated decision-making (ADM) systems into economic transaction platforms.

Sustainable shared value: this concept suggests that the economic activities within these clusters are not only self-sustaining but also contribute to a shared value system, implying a balance of economic benefits with ESG responsibilities, which is a key component of sustainability.

Properties of recursive cluster economy.

  1. Recursivity: this property indicates that the system is designed to feed back into itself, which means that the economic output or benefits of one firm or cluster can contribute to the growth or development of another, creating a self-sustaining loop.
  2. Emergence: emergence in complex systems refers to new properties or behaviors arising from the interactions between the components that are not inherent in the individual parts. In an economic context, this means that the collective behavior of firms within a cluster leads to the co-creation of new economic value.
  3. Sustainability: this underscores the long-term viability of the economic system, with an emphasis on resource efficiency, environmental friendliness, and social equity.

The integration of Coase's theory into this model implies a system where firms are organized into clusters to reduce transaction costs and improve efficiency, similar to how specific firms are organized to minimize the cost of market transactions. However, by utilizing Web3 and blockchain technology, these clusters can operate with unprecedented levels of transparency, reduced transaction costs, automation, and decentralized governance.

It is important to note that within the EU's dynamic economy, industrial clusters play a crucial role as centers of innovation and economic activity. Among 7,000 global innovation clusters, about 3,000 are located in the EU. These clusters are not only innovation drivers but also significant employment providers, contributing to nearly one in every four jobs in Europe, totaling 61.8 million jobs. Their productivity stands out, being 25% above the average, with top performers reaching 140% above the norm.

In essence, the industrial cluster or the "Firm of the firms" can be seen as a meta-organization that emerges from the interaction (set of transactions) of different economic agents on the blockchain, creating an efficient system of hierarchical transactions managed by decentralized consensus rather than a single entrepreneur or central authority. This reflects a distributed version of Coase's theory where the role of the entrepreneur is replaced or supplemented by algorithms and smart contracts governing the interactions within and between the clusters and firms.

The practical application of the presented theory was carried out within the i4Trust project (i4Trust is part of the EU's research and innovation funding program under Horizon 2020), in the "Blockchain4ESG" experiment. This experiment aimed to develop a secure Data Space and the ESG.Electrodo application using i4Trust building blocks (FIWARE and iShare) and Blockchain technologies (Hyperledger Fabric) for ESG data management across participants in an industrial cluster in the Agri-Food Industry (Ukraine and Spain).