Episode 59: Today I’m speaking with Cathy Barrera, Founding Economist at Prysm Group, an economic consulting firm that specializes in incentive design, monetization, token economics, and governance design for startups, enterprises, institutions, and governments working with blockchain and digital assets. As you may already know, Cathy and the team at Prysm Group have done research and consulting on The Graph.
Cathy is a brilliant economist. Her academic credentials are world-class, including a Ph.D. in Business Economics from Harvard University. As you will hear during the interview, Cathy has unique expertise that enables her to explore the intersections of emergent technology, like blockchain, incentive design, and economics.
During our discussion, Cathy and I talk about her background and path into blockchain, her ideas on how blockchain, crypto, and Web3 are impacting the economic landscape, and some of her thoughts on The Graph.
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Cathy Barrera (00:00:13):
This type of marketplace, this type of system. What I think is really interesting about The Graph is that the mechanisms that have been designed so far are much more sophisticated than what we’ve seen certainly back in 2018. And I think what we see across some of the competitors
Welcome to the GRTiQ Podcast. Today I’m speaking with Cathy Barrera, founding economist at Prysm Group, an economic consulting firm that specializes in incentive design, monetization, token economics and governance design for startups, enterprises, institutions and governments working with blockchain and digital assets. And as you may already know, Cathy and the team at Prysm Group have already done research and consulting with The Graph. Cathy is a brilliant economist. Her academic credentials are world-class, including a PhD in business economics from Harvard University. And as you’ll hear during the interview, Cathy has unique expertise that enables her to explore the intersections of emergent technology like blockchain, incentive design and economics. During our discussion, Cathy and I talk about her background and path into blockchain, her ideas on how blockchain, crypto and web3 are changing the economic landscape and some of her thoughts on The Graph. We began the conversation by talking about Cathy’s educational and professional background.
Cathy Barrera (00:02:19):
So my relevant experience is I got my PhD in business economics from Harvard Business School, and I specifically studied contract theory and organizational economics while I was there. After my PhD, I went onto the tenure track at the Johnson School at Cornell, the business school there, and taught business for a couple of years, did research. My research was really focused on how new technologies might impact the economy, how are they going to reshape the way we organize ourselves, the way we work. And I realized that academia wasn’t really the right place for me. So after a few years there, I decided to see what else I might be interested in doing. So I left Cornell. I left academia. I was working with ZipRecruiter at the time that I was at Cornell. So that work was ongoing and we can talk about that. But I was looking around for different opportunities, different things that might satisfy this sort of interest in these emerging technologies and how they’re reshaping the way that we do things, the way we live.
And got into this blockchain rabbit hole that people find themselves in. Started learning more about the technology and doing my own research and realized a lot of the arguments that were being made about why this technology could be particularly game-changing were arguments about economics, about markets, about incentives, things that I studied in my PhD program. And I was really curious about how were these platforms building the economic mechanisms inside of them and what expertise were they relying on, basically, to do that effectively. So I did some research about that and realized that a lot of these protocols and projects didn’t have any economists helping them. And I thought, “Well, I think there might be a need for this.” So that was how we ended up starting Prysm Group. As I said, my areas of study in economics were contract theory that houses the whole field of incentive design and organizational economics.
That talks a lot about when does activity happen inside of a firm, when does it happen in a market? These are things that are really relevant for blockchain. But I thought there’s some important stuff around how are markets designed? How are things priced in markets? How do market participants find each other? That’s going to be important for a lot of the projects working in this space. So I called up my friend and colleague from grad school, Stephanie Herder and I said, “Do you want to go on this adventure with me and try to see what we can do in the blockchain space?” And very luckily she said yes, so we founded Prysm Group together in 2018.
So I want to go back in time a little bit to when you first became interested in economics. And I’m asking this question because I’ve always found that there are a lot of fields that trace their heritage back to economic thinking. And primarily two fields that are close to my heart, marketing and strategy, those disciplines go all the way back and trace themselves to economic theory. So I’m curious what it was about that discipline of economics that drew your interests.
Cathy Barrera (00:05:54):
It’s funny that you mentioned strategy, because that’s what I taught when I was at Cornell. And I love the field of strategy and thinking about how economics shapes decision making of firms around how to enter markets and how to compete effectively with other market participants. My interest in economics was very roundabout and I guess, maybe includes a little bit of a story about teen angst. So I was always a math nerd, literally my entire life I have been a math nerd. And so when I went to college, I knew for sure that I wanted to study math, just because I found it fun. I didn’t think that I would pursue a profession in the field of math or closely related to the field of math, but I wanted to study something in college that would be very different from things I’m good at.
And I always found, I’ll say the social sciences, I think that’s maybe a misnomer, but I found the study of people, what are people up to? Why are they doing what they’re doing? What’s going on there? Those kinds of questions I found really interesting. I didn’t have any answers to those questions. I found people much more confusing than numbers. So I thought, “Well, maybe I should study one of these things and see if I can understand better what that’s about.” And so it’s kind of a funny story, but I ended up deciding to have my second major in communication studies and the classes that I… They didn’t have concentrations within majors, where I went to school, but I essentially concentrated in organizational communication. So most of the classes that I was taking were about group decision making and problem solving and organizational communication, these sorts of things.
And in one of my communications classes, which the professor had a background in social psychology, we were talking about some things like the prisoners’ dilemma and tit-for-tat strategies and things like that. And you get to do the fun exercises in class. And at the end of the class, the professor said, “An economist study that’s using math. Who could believe that? How would someone ever do that?” And I just immediately thought, “Where do I sign up for that?” That is clearly what I need to be doing with my life. So that’s essentially how I discovered economics.
And the teen angst portion of the story is when I first started college, my mom said to me, because she had just gone back to school for a master’s degree and she said, “I’m taking this economics class and I think you would really like this.” And I thought economics was accounting or something like that. And I just thought, “What are you talking about? I don’t want to beat you with that. Stop telling me these things.” So it was three years later it comes full circle and I’m like, “No, this is really what I want to do with life.”
I love that background. If you had to recommend the one economics book that every human should read to make sure they understand or at least have a base understanding of economics, what’s the book they should read?
Cathy Barrera (00:09:11):
Yes. Okay, so the book that you should read is by Al Roth who won the Nobel Prize in economics in 2012. He has a popular press book, so it’s not a textbook. It’s a great read. It’s called Who Gets What – and Why. And the big reason why I recommend this book, I mentioned earlier that when I was 18, 19, I thought that economics was accounting or something, or a lot of people think that it’s macroeconomics and just what’s happening with GDP and what’s happening with the stock market, things like that.
But a lot of economics in particular, microeconomics is about how people make decisions and how lots of little decisions aggregate into these patterns we see in our daily lives. Not just in markets, not just in businesses, but these hidden patterns that we might not even recognize as being part of an economic landscape. And he really illustrates that extremely well in this book. And so I think that it gives any reader, even someone who’s maybe not of a more technical background or doesn’t want to look at a bunch of math, a really clear idea of what economics as a field has to teach us about our social economic system.
Do you think there were any early economists or thinkers in the field who predicted or thought that web3, crypto, blockchain would emerge? Right? I mean, is there some paper buried out there where Milton Friedman or somebody like this said, “The best circumstances for an economic situation is…” And then they described what we’re endeavoring now. Do you think something like that exists?
Cathy Barrera (00:10:54):
So it’s funny that you asked that because early on in my ventures into the blockchain space, and my advisor from my grad school days is also an advisor to Prysm Group, and he sent me one of his papers from 1990 and told me to look at footnote 15. And I looked at it, and it’s not exactly about blockchain, but it’s talking about how, if there was a publicly available mechanism for verifying information, then we would be able to do X, Y, and Z. But without that, then it’s harder to do X, Y, and Z. So I think that there are strands of thought within economics that pick up on some of the aspects of blockchain that are valuable without forecasting that blockchain would exist.
I want to now go to this move you made from academia into the private sector. And as you said before you went to ZipRecruiter… For listeners that don’t know what ZipRecruiter is, it’s a place where you can go to find employment, people can recruit people for employment. So it’s almost like an online platform for job placement. People are looking to recruit, people are looking to get hired. What was it like moving from academia into the private sector and going to work at ZipRecruiter?
Cathy Barrera (00:12:15):
I started working at ZipRecruiter as an advisor when I was still at Cornell. And so I guess I should preface this by saying many online platforms, including online marketplaces like ZipRecruiter. So other online marketplaces are Airbnb, Uber, eBay, lots of them, but even ones that are less like a marketplace, like, well, Google of course has Google ads, but Google is a good example. Amazon, of course, is somewhat a marketplace, but also not. All of these tech companies hire lots of economists to help them with lots of different questions about design, about how to bring groups of users together to interact successfully.
But particularly for online marketplaces, you need to bring in, I will say, buyers and sellers. For an online employment marketplace of course, that’s firms and potential employees, candidates, in order to try to match them, in order to try to create successful interactions of these two sides of the market. And economists help in a lot of ways to try to provide some input on how that can be done well in support of the strategy that the firm is pursuing. So with that preface in mind, I began working with ZipRecruiter while I was still at Cornell and was doing that for about six months before I decided to leave Cornell for unrelated reasons. But then I luckily got to continue to work with ZipRecruiter in a more full capacity after I had left Cornell.
So that move is interesting to me because so much of the national discussion on the topic of economics comes down to labor and people working. And so here you are a trained economist with advanced degrees in the field. What was that like? What was it like going from a classroom to right in the trenches of what was happening in the economy and what were some of the observations you made about things like the labor market and its impact on the economy?
Cathy Barrera (00:14:29):
So as an economist working for one of these marketplaces, I think it’s really important to understand the broader context of, in general, how the market for whatever this services is working. So if you’re an economist at Airbnb, you really have to understand the leisure market. If you are an economist at Uber, you have to understand transportation. And if you’re an economist at ZipRecruiter, you have to understand the labor market. So we spent a lot of time analyzing data about the labor market from the government in addition to the data that we’re getting just out of the platform. So we see one cut of things, but the government data is providing a different angle or a different sample of information. I think the time that I was working at ZipRecruiter, those years were an interesting time for the labor market. Now, the current time in early 2022 is also a very interesting time in labor market.
You’re hearing about things like the great resignation, those types of trends were starting to show themselves in 2017, 2018 when I was working at ZipRecruiter. And we were starting to see, there were all these questions about, are we at full employment? There was so many jobs being added every month. And again, these questions around, can this level of growth be sustained over time or are we approaching this limit where everyone who wants to work is going to be matched with some job. But because the labor market was doing so well at that time, there was lots attention being paid to things like quits.
If it’s easy to get a job, then maybe a lot of people will be happy to leave their job. And so there is a lot of really interesting data that you wanted to look at in terms of, what are people doing? Where are people going? What types of industries are hiring? How many jobs are being added? Are people coming back into the labor market? Again, this is at the tail end of the recovery from the great recession. And so I think that there was really a lot of cool stuff to look at and to try to understand about these broader trends in how the labor market moves forward.
So then just zooming out a little bit, and I’d be remiss if I didn’t ask an economist this question. When you look at the current state of the US economy, maybe even the global economy if you want to speak on it, but what are some of the things you’re thinking about? And particularly are there any concerns? We hear things about the housing market being too hot, we hear things about inflation and interest rates. What are some of the things that you’re keeping an eye on?
Cathy Barrera (00:17:20):
So I’m going to answer this, actually. There was a great segment that Al Roth was a guest, I think on Morning Joe, in 2012, shortly after he won the Nobel Prize and they tried to ask him about macroeconomic trends, and he very jolly said, “There are many different types of economists, and I am not that type of economist.” So I mean, I think right now there’s a lot of people who are talking about concerns about inflation. There’s a lot of people talking about the great resignation. There’s a lot of people talking about the housing market. A lot of people who know a lot more than me would be able to speak on those issues.
So in addition to your work at Prysm Group, and we’re going to talk a lot more about Prysm Group here, you also work as an advisor, and so you have worked as an advisor for the World Economic Forum. You’ve done work at MIT, and I know the list goes on and on. Can you just describe for listeners what your role as advisor is at some of the organizations that you’re currently working with?
Cathy Barrera (00:19:42):
Sure. So usually these advisor roles serve as an umbrella to assist with, in a targeted way, on specific projects that fall within the rubric of whatever that organization is doing. So for example, the WEF has a blockchain group and they do lots of interesting work, lots of different reports on the state of the blockchain industry, but also on pilot projects of different, usually NGOs, sometimes governments, how they’re utilizing blockchain or facilitating the launch of a pilot project to try a blockchain experiment.
And so we, myself and my partner, Stephanie Herder, when we advise on these projects, we try to bring a little bit of our expertise and some guidance on the economic design of these sorts of projects, how economic design can help them. I’d say the one other way that we tend to interact with these groups is sometimes helping out on some of those reports that I mentioned. So bringing in that economic expertise, usually there’s cross disciplinary collaboration on these things. So you’ll have those organizations serve as a fulcrum to bring together economists and legal scholars and others in order to try to understand the potential impact of blockchain from these various different angles.
When it comes to the World Economic Forum, occasionally there’s these reports that are made a big deal in crypto Twitter about what the World Economic Forum thinks about crypto, what it thinks about blockchain. As someone who’s kind of been on both sides, you’ve worked as an advisor within the group. You’ve probably been on crypto Twitter and seen some of these sensationalized headlines and things. How do you think entities like the World Economic Forum are approaching blockchain and crypto? Are they skeptics? Are they looking for ways to grow it and adopt it or something in between?
Cathy Barrera (00:21:48):
I think much more the latter, looking for ways to grow it and adopt it. I think that they’re pragmatic. So a lot of times when you read these reports, they try to take a balanced view showing, here’s some opportunities, here’s some challenges that need to be overcome. But in my experience, they’re certainly trying to work on ways that these technologies can be implemented for good and perceiving optimistically that this can bring real change and bring real value to communities around the world.
Another group you work with a lot is the Wharton School of Economics. You do the Blockchain and Digital Asset program. I’m very curious about this for a variety of reasons. How would you describe what this program is for listeners that have never heard of Wharton’s Blockchain Digital Assets program?
Cathy Barrera (00:22:36):
The Economics of Blockchain and Digital assets program is a six weeks online asynchronous course. I wouldn’t call it an introductory course. It’s a intermediate, probably not an advanced course either, right? It’s not super technical, but it’s meant to help anyone. But maybe folks who are working in enterprises, maybe their enterprises are thinking about utilizing blockchain or launching a blockchain pilot and they want to understand better, both the underlying technology, how the technology is being used, what are all these things I’m hearing about DeFi, NFTs, et cetera, and what’s that going to mean if I sit down and try to launch this project? Or what do we need to do as an organization to move our project forward? So the course again, starts from the fundamentals of what is this technology? Tries to quickly cover that, which is difficult because blockchain technology is quite complex, but I think we manage well. And then goes right into dive into what are the economic implications of this? What are the business implications of this? And different aspects of the technology.
So all kinds of digital assets, fungible tokens, non-fungible tokens, security tokens, governance tokens, all these different things. What does all of that mean? How are they different and how do they get implemented? And then smart contracts, what functionality does that give us? What kinds of applications are there for that? And then we go on to talk about DeFi. So building on those building blocks of smart contracts and digital assets. This is how things are starting to get implemented and what we’re seeing all this activity around in the blockchain space. And then one thing we’re really proud of is our module on digital asset valuation. So we introduced some of the techniques that we’re using at Prysm Group to try to understand the fundamental value of different digital assets. So of course, different digital assets give the owners of those assets different kinds of rights. So different valuation techniques need to be used for different digital assets. So that’s something that we talk about in great detail. So I think that’s that’s a high level summary of what the course covers.
Yeah, that’s perfect. Is this an online course or do you have to be enrolled at Wharton to be able to take this course?
Cathy Barrera (00:25:15):
It’s online and it’s open to anyone who wants to sign up for it.
So I’d be curious about your observations having taken part in this course, and it sounds like an incredible course. What are you seeing in terms of next gen talent or interest in the space or maybe even existing professionals that are coming in? What are you learning about people and their interest in this space?
Cathy Barrera (00:25:40):
It’s been remarkable to me what a diversity we have in enrollees in this course. We have people from all over the world, from all kinds of industries. We have folks who have been in the blockchain space for a long time. We have folks who are entirely new to blockchain, but may have had long careers in Fortune 500 companies, for example. I think one of the things that gives so much value to the course as well is that there’s a lot of discussions throughout the course. So you can bring together all of these folks with these different perspectives and they can help each other learn and digest the material that’s being provided.
A question I have for you about that group, and maybe this even extends more broadly to the clients that Prysm works with, or maybe just your own experience, is this question of diversity within the industry. And early on, I think when crypto… You look back in time, there were a lot of questions and discussions around, is crypto the space itself more diverse and welcoming than maybe traditional technology industries? And I’m curious what your experience has been. Is crypto more diverse and welcoming?
Cathy Barrera (00:26:57):
That’s an interesting question. So I actually feel more comfortable answering the question with respect to crypto versus the field of economics. I think I don’t personally have enough experience in the tech industry to really be able to compare the two. A couple things I will say, I think it’s really interesting that both crypto and economics within the past few years have been heavily criticized for their lack of inclusion, I’ll call it. Which I think it’s important to say is not just a lack of visible diversity, but in many cases, it’s a lack of a welcoming attitude, I think.
And that’s not to call out these two fields as being exceptional in their lack of inclusion. I think most industries probably have a lot of work to do. But yeah, I think just sitting a stride, these two spaces, it was notable to me that they were both experiencing this revolution, if you will. Maybe it ended up being not quite the revolution that folks wanted it to be. I guess a couple of other things that I will say are when I first started in the blockchain space in 2018, I was asked to be on a lot of block of women in blockchain panels, and I started declining them. I started saying I’m an economist with a PhD in economics. Oh, I see on your agenda you have a panel about the economics of blockchain with zero economists on it. Well, maybe you want an economist on that or maybe you don’t.
But yes, I’m a woman but am not an expert on gender workplace dynamics. So maybe you can rethink how you want to place your guests in your conference. So yeah, I think experienced a lot of that. It was surprising to me in 2018 that things were that way. I think things are a bit different now, I however, think there could be a lot more inclusion both towards women and towards people of color within the blockchain space. But yeah, I wish I had solutions. I wish that I knew how to make that happen. And as I said, economics has exactly this problem, and it’s something the American Economic Association sort of has put out a list of recommendations and guidelines for their members, and it’s unclear how much effect that’s having over time. So I think it’s a big problem generally that maybe more brains can help come up with solutions for that.
So I just want to ask one follow up on this topic, and GRTiQ is lucky to have a lot of women listeners, and so I know what you say and how you answer this will have an impact. For women who want to get more involved in the crypto space, or maybe they’re not even in the crypto space, they’re in web2 or some related field. You have battled in economics now you’ve moved into crypto and blockchain, so you know what it’s like to face some headwinds, but yet to grow as a thought leader and to make really substantial contributions, what’s your advice to the women listeners who want to do similar things?
Cathy Barrera (00:30:30):
There has been some research within the last decade that has shown that women are less likely to apply for a job if they don’t tick every box on the job description than men. So men are much more likely to just reach out and apply for something even if they don’t necessarily have all of the qualifications that the employer is purportedly seeking. Why is this important? I think that there might be women out there who have this kind of attitude toward blockchain that, if I don’t already know about blockchain, then I’m probably, maybe I’m not going to be the most qualified person. Maybe it’ll be difficult for me to get that job. My biggest piece of advice, which I’ll direct towards women, but I think it does apply to anyone, is that blockchain needs your expertise in things that are not blockchain. So I’m an economist.
I brought to the table my expertise in economics. I learned blockchain stuff over time, but that’s… Blockchain itself is not my comparative advantage when I’m coming to a conversation, when I’m working with a client. My comparative advantage is my economic expertise. And if you are a lawyer, if you’re a marketing professional, if you’re an HR professional, if you are an engineer of some type, whatever your background is, whatever your area of expertise is, before blockchain, you have some perspective that you can offer that may not exist on the team that you’re talking to. So those are the things that I would emphasize, and you don’t have to tick every last box or already be an expert in blockchain in order to be able to contribute.
Well, Cathy, I appreciate you giving that advice and I think it’s great advice for any listener that listens to the podcast and wants to find ways to advance themselves professionally and personally. So I want to now turn our attention to blockchain, crypto and web3 more generally and ask you some questions about Prysm, but whenever I have the opportunity to talk to a guest like you, I like to get at the definitional level of some of these concepts because for example, with web3, there seems to be a lack of consensus of what web3 actually is and what it means. So when you talk about blockchain and crypto and web3, are you talking about them in a way that they are three divergent threads each with their own history and future? Or do you bundle all these things together and how do you explain them when you’re talking to others?
Cathy Barrera (00:33:13):
I definitely think of them as being three separate concepts, although they are certainly interrelated. So blockchain is a general purpose technology that is a shared database with distributed control over a large group of participants. I will say the definition of blockchain that I use would include permissionless, open, public blockchains, and it would also include DLT or permissioned blockchains. I know that not everyone would include permissioned systems within their definition of blockchain, which is fine, but this definition really focuses on it being a database with distributed control, so that database could really be tracking any number of things. It doesn’t need to incorporate a cryptocurrency or token or coins or any analog to money or digital assets.
So I think that there’s a lot of activity going on in the enterprise space, more in this permissioned setup where they’re looking at use cases that don’t involve digital assets. And so that to me is the real big divide between blockchain as this general purpose underlying technology and crypto or digital assets which use that underlying technology for their security, for their record keeping, et cetera. And then web3, I think as being all of the applications and use cases that are built on top of crypto and blockchain. So web3 is the new internet with dapps, applications, et cetera, that utilize cryptocurrencies as their means of payment.
When you think about blockchain, a lot of the framing around this topic is that it’s facilitates greater participation, it creates equanimity, it creates privacy, all of these different things that blockchain and these different things enable, but it’s also discussed from the standpoint of being a disruptor. And the more I do this podcast, the more I speak with people like you, the more I realize that blockchain has the potential to disrupt, but probably not every industry will be disrupted by blockchain. So as you think through that, what are your thoughts? Will blockchain disrupt everything or will it be more narrow, specific use cases?
Cathy Barrera (00:35:42):
I definitely think it’ll be more narrow specific use cases. And the big reason why I think that is because of my background in contract theory. So when we’re thinking about the design of incentives, and I guess I’m going to go down a little bit of a technical rabbit hole here, but the thing about designing incentives that is difficult is finding performance metrics that will work well. So there’s two things that are required for a good performance metric. One is that your performance metric is linked to something you care about. So I can go into some examples of performance metrics that failed, but this tends to be an important place where performance metrics fail. The second thing is that the performance metrics need to be related to something that’s under the control of the person you’re trying to incentivize. So if you’re giving incentives based on some outcome that happens, but there’s nothing that the person can do to change that outcome, then that can’t possibly be providing an in incentive.
So the issue is that you tend to have access to data, potential performance metrics that are in one or the other bucket and not really in both. So things that we can observe and can measure tend to either be really highly correlated with something that’s under the control of the person we want to incentivize, but don’t really have very much to do with the thing we actually care about, or have a lot to do with the thing we care about, but have very little to do with anything that this person can do. And I think my favorite example of incentive failure is probably the highly publicized Wells Fargo debacle of 2016, 2017. So they paid their bank employees based on the number of new accounts that were opened, and of course there was heavy gaming of the system and potentially outright fraud where bank employees were opening accounts for clients who didn’t know accounts were being opened for them.
And so this is an example of a performance metric that is extremely under the control of the people that you’re trying to incentivize and not very aligned with the things that you actually care about, which would be bank profitability, but bank profitability, if you were to give every employee an incentive based on that, the employees themselves don’t have a whole lot of control, there’s very little… The link between the individual employees efforts and the profitability of the bank is very weak. And so that doesn’t really provide a good incentive either. And so a lot of times we of see these incentive systems designed in a way where we just pick whatever metric we can find, whatever data we happen to have lying around and we say, “Okay, let’s pay them prefer performance on this thing.” And then we end up with a bunch of outcomes that are not great.
And so there’s actually a lot of professions, in fact, perhaps most professions do not involve pay for performance because it’s better to not pick a bad performance metric than to choose whatever performance metric we have around and give incentives based on that. So that was a long tangent to get to this question of is blockchain going to sort of disrupt everything? Is it going to be, is it be universally applicable? The issue is that blockchain requires that the smart contracts read some computer readable data in order to make a determination on how rewards are distributed or whatever it is that the smart contract is doing. Well, the issue outside of blockchain is we have problems finding data that represents what we need it to represent. That’s a good measure of what we need to be measuring in order to get people to do the things we want them to do.
And blockchain doesn’t fix that. And so it’s perhaps the case that we’ll get better data over time, that it will be easier to measure a lot of different things in a lot of different industries over time. But that to me is orthogonal to the development of blockchain. And as long as there remain industries where quality is not a thing that can be measured by computer or maybe can’t even be measured quantitatively, it’s going to be really hard for blockchain to disrupt those sectors, those areas. So that is my very, very long-winded answer to your question.
No, it’s a brilliant answer and I appreciate you taking the time to explain that. I had several light bulb moments as you were going through that. So now I want to turn our attention to Prysm Group. You’ve mentioned a couple times, you and your business partner Steffi founded the Prysm Group. You’re both economists, you met in grad school. What is the Prysm Group and what is the objective or vision of what you’re trying to provide to the world?
Cathy Barrera (00:41:00):
Prysm Group is an economics consulting firm focused on emerging technologies and very in particular blockchain technologies. We work with, what I would call, blockchain native projects. So these are folks who are starting Layer 1 protocols or dapps or other applications that are being built on blockchain. And these applications, these projects that these clients are starting, do not exist outside of blockchain. We also work with enterprise clients who are trying to move part of their business or move part of their function onto blockchain, or start a consortium that will allow them to implement blockchain to improve the efficiency of some processes.
But we’re really focused on how do these systems need to be designed in order to achieve the objectives of the folks who are putting them out into the world. And so as I discussed before about finding your comparative advantage, and so looking at what you bring to the table that’s perhaps not already there, Prysm Group is very focused on the economic design of these systems and how this technology can be used to align incentives and how the marketplaces that it supports are designed and what mechanisms improve the efficiency and the functionality of those marketplaces.
So Cathy, one of the reasons we’re speaking is the Prysm Group has gone to work on The Graph protocol in analyzing and evaluating some of the economic activity and incentive design. What can you share with listeners about what your impressions are of what The Graph is doing and trying to accomplish what this economic system, so to speak?
Cathy Barrera (00:43:25):
So The Graph to me is… I guess I’m going to start off by how I put The Graph into context. When I started in the blockchain space in 2018, it was right after the ICO craze, and there were a lot of projects at that time that were seeking to establish distributed marketplaces between buyers and sellers, where the service being provided in that marketplace was some type of computing service. So computer storage, computer processing, there’s any number of these that I’m sure you know many examples of. So to me, The Graph is the next generation of this type of marketplace, this type of system. What I think is really interesting about The Graph is that the mechanisms that have been designed so far are much more sophisticated than what was seen certainly back in 2018. And I think what we see across some of the competitors, I will say, I think that these are difficult problems to solve.
So I think that there’s still a lot of work to be done, and I think that the teams that are working on The Graph Network and the distributed marketplace are aware of all of those issues and are working systematically to try to move that market toward more decentralization. I think that is the correct approach, I think that. Whereas historically there have been examples where folks have just put out the code and then not much ends up coming of it. I think that the groups that are working on developing The Graph are being careful to cultivate this marketplace over time so that it can be sustainable.
Past guests of this podcast have described The Graph as a sandbox, a micro economy, where maybe researchers in the future will do study and research on how this marketplace that was generated worked and how different participants contributed and interacted. I’m curious if you’ve had the same observations about your experience with The Graph or if you’ve had any aha moments.
Cathy Barrera (00:45:43):
As I mentioned, I think of The Graph as being one example of these distributed marketplaces for computing services. I think that that style of marketplace or that idea, that very basic idea, that idea should be of particular interest to academic economists in the field of organizational economics, which was the field that I studied in grad school. And the reason for that is within organizational economics, and I think I mentioned this before, but within organizational economics, there’s this question about, when should activity take place inside a firm, versus when should activity take place in a market? And there’s a lot of theories about where’s the boundary of the firm? Why is the boundary of the firm where it is? So it’s not a new question. And economists feel like they have a pretty good handle on the potential answers to that question.
I think that The Graph specifically, but these marketplaces in general, provide a new angle for thinking about that question. So whereas the existing research might look at something like an auto manufacturer and say, “When does the auto manufacturer produce their own input or when do they buy the input from a different supplier? When does that transaction take place inside the firm or when does it take place inside the market?” I think we’re seeing a different question now, which is, “When does the provision of computing services happen within a firm like Amazon Web Services or when does that the provision of computing services happen in a marketplace like The Graph or other of these marketplaces that are trying to do it for different types of computing services?” And I think that that’s a different question because it looks at the market more broadly.
Instead of taking a snapshot of a specific transaction or a specific activity, it looks at how are the consumers or customers of this market being served, and do we end up having most of the activity happen in one or two firms or is it a much more distributed type of activity? And I think that by observing and collecting data from marketplaces like The Graph, that we might be able to improve upon our theories of why. Where’s the boundary of the firm? Why do firms exist and when can markets do better than firms? So I don’t think that the existing theories of the firm answer well, should AWS win or should The Graph win? And that’s why I think that these are very interesting questions to look at in very interesting data together.
Cathy, in general terms, can you describe what Prysm Group is doing at The Graph? And I’m not necessarily looking for specifics here, but are you looking at and researching the different interactions of participants? Are you looking at more general economic themes? What’s the nature of what you’re doing?
Cathy Barrera (00:49:18):
Absolutely. So The Graph is also interesting because there are several different types of participants that are identified in the network, if you will. So you have Curators, you have Indexers, you have Delegators, and all of these different types of participants need to be provided in incentives, to do what we hope that they’ll do. So we are looking at the different mechanisms that are provided in protocol and sometimes out of protocol, in order to provide those incentives and conducting economic analysis to see, do the participants behave the way that we anticipate that they’ll behave? Are there ways to tweak or improve these mechanisms in order to get the outcomes that we hope to get?
Cathy, in the context then of your work at The Graph and your observations more generally of blockchain and crypto and web3, what are your best guesses about how these types of things will impact the global economy?
Cathy Barrera (00:50:18):
Well, we talked earlier about how I don’t think that blockchain will disrupt every industry. I guess the flip side of that is that I think blockchain does have the potential to disrupt some industries and hopefully to improve efficiency in a number of places in our economy. So I think that that’s the big potential value from blockchain is… Well, I guess it’s twofold. So one is to improve efficiency in some processes. So examples of that might be if blockchain is implemented to help settle some types of transactions more quickly than they’re currently being settled in the financial sector, that could reduce overhead greatly. It can reduce the time to finalization of those transactions. It can reduce the number of transactions that might need to be reversed for whatever reason, and it reduces the redundancies that these organizations need in place to triple check all of their ongoing transactions.
So I think that that’s one piece. And then the other piece is, I think, reflected in the ethos of The Graph itself, which is are there ways that we can incorporate markets into more places within the economy, so we can disaggregate areas where firms are really dominating those activities and make them more market driven. So there’s lots of discussion in the blockchain space about the potential benefits of doing that. These things include reducing monopoly powers, potentially reducing prices, reducing censorship, so potentially allowing for more participation in these markets. These things certainly have, we could easily build economic models around how much value might be created by allowing that sort of disintermediation or decentralization within some industries. I think the question is, and this goes back to my comments earlier, is how many sectors or how many places within the economy are there where the code is going to be able to do at least as good of a job in ensuring the quality of service or ensuring that incentives are aligned and that participants are doing what they’re supposed to be doing, through smart contracts and relevant performance metrics?
So I guess, I think that ends up being a technical question on how good can our data get, how good can we get at measuring outcomes that are well aligned with what we care about? And I guess I’ll throw in one anecdote here, which is there’s actually from an academic economics paper about the theory of the firm, so it’s about long distance trucking. So the question that was addressed by the paper is, why are most tractor trailers are owner operated rather than being owned by a transportation company or owned by the company that’s trying to ship the goods? And there’s actually observed differences in how that happens depending on what goods are being shipped. So I believe in refrigeration and goods that need to be refrigerated, that you’re more likely to see the tractor trailer that’s actually towing the goods be owned by the company that needs to do the shipping.
Whereas again, most of those tractor trailers are owned by the driver who drives the vehicle. So one thing that was observed in this paper is that it’s very, very difficult or has historically been very, very difficult to observe or measure the maintenance of a vehicle and how it’s being driven and what’s the depreciation of the vehicle based on the way that the vehicle is being driven. And so a great way to solve that, right? So if you’re a shipping company and you own a tractor trailer and you hire someone to drive it and you’re paying them however much to get the goods to where they need to go, the vehicle driver is not going to care very much about the depreciation of your vehicle. So a way to solve that problem is that the driver owns the vehicle and then they care very much about that depreciation.
So we align the incentives by placing the asset in the ownership of basically, who’s going to maintaining it, who’s going to be actually responsible for that depreciation. Now, I believe it was in the late ’90s, some technology became available where we can now see all kinds of things about how the vehicles being driven, what is the speed that it’s at, how long is it being driven, how often is it being stopped, how long is it being stopped for? All of these things that tell us a great deal about the relationship between how the vehicle’s being driven and the depreciation of the vehicle itself. Well, when this technology becomes available, then we see a big shift in who owns the trucks. So now that we can clearly observe what these drivers are doing and perhaps make some contracts based on that data, that information, now the shipping companies start to own the trucks more often, and we align the incentives using the data available.
So again, I’ve gone on a big tangent. The reason for that is, I don’t think that an economist knows when a new technology like this vehicle monitoring technology is going to become available. So I think there’s probably a lot of technologists out there, a lot of engineers who have a lot of foresight into different technologies that are going to be developed over time that are going to provide us with different data on different performance metrics that might be used in smart contracts, sometime in the future. And perhaps the amount of disruption that could happen could be on quite a wide scale. So from the perspective of the data that’s available today, I think there’s very few industries where smart contracts could make a big difference. But if we develop all kinds of new technologies for monitoring, that give us better performance metrics, then maybe that disruption could be very broad.
Cathy, I want to ask you one final question, and it relates back to something you’ve mentioned several times in which I believe is at the heart of economics, which is incentives. What’s the one thing you’ve learned by virtue of your work as an economist about human incentives?
Cathy Barrera (00:57:24):
So I’m first going to talk about an insight, not exactly about incentives, and then I’m going to circle back to the incentives piece. One, I think, common misconception about economics, there is the economic way of thinking about behavior is that all rational agents, all rationality is essentially profit maximization. And the definition of rationality within economics is really that the agent has some objective function that they’re trying to maximize. And that could be profits, but it could be a number of different things. And in particular, what we call pro-social behavior or behavior that’s not just maximizing profits, but also taking into account, impact that one might have on a broader community or on specific other participants. That behavior can be rational, you can have an objective function that includes both profits and these other factors. And I think we’ve observed, in a number of networks that pro-social preferences, pro-social rationality seems to be present at least, if not an important influence on these networks on the outcomes that they achieve.
And so circling back to the issue around in incentives. If you have a lot of participants that are pro-social, that are interested, for example, that the network succeeds or that it’s secure or what have you, I think that that has a reasonable impact on what you need to do to provide incentives. And so there’s often a talking point around providing these monetary incentives to ensure that nodes join the network or what have you. But for these participants who are pro-social, maybe that’s not the optimal way to provide incentives to them or to encourage them to engage in specific behaviors. So I think that that is something I would really highlight as certainly worthy of more thought, more research around.
Well, I appreciate that answer, Cathy. And now it’s time for the GRTiQ 10. These are 10 questions I ask each guest of the podcast to help listeners learn something new, try something new and achieve more. Are you ready?
Cathy Barrera (00:59:54):
Number one, what’s a book or article that’s had the most impact on your life?
Cathy Barrera (01:00:10):
This might sound strange, but it’s Twelve hours of sleep by Twelve weeks old by Suzy Giordano. It’s a sleep training book for infants.
Is there a movie or TV show that you think every human should be required to watch?
Cathy Barrera (01:00:23):
I’m going to go with the HBO mini series, Chernobyl.
What’s the best advice someone’s ever given to you?
Cathy Barrera (01:00:30):
Figure out your superpower.
If you could listen to only one music album for the rest of your life, what would you choose?
Cathy Barrera (01:00:37):
I’ll go with Paradise Circus by Massive Attack.
What’s one thing you’ve learned in your life that you don’t think most other people know yet?
Cathy Barrera (01:00:46):
When incentives don’t work.
What’s the best life hack you’ve discovered in your life? Maybe something that helps you refocus when you’ve lost focus, or something that’s made you more efficient, save more time. Any life hack?
Cathy Barrera (01:01:02):
I have a weekly priority list, which is just separate from my to-do list. It’s three items to keep at top of mind.
Based on your own experiences and observations in the world, what’s the one habit or characteristic that you think best explains people finding success in life?
Cathy Barrera (01:01:21):
So this isn’t quite a habit or characteristic, but I’m going to go with the choice of your life partner, like who you choose to be your life partner.
And the final three questions, Cathy, are finish these sentence type questions. So complete the sentence. The thing that most excites me about web3 is…
Cathy Barrera (01:01:41):
The experiments that will help us update economic theories.
Another one, complete this sentence. If you’re on Twitter, you should be following…
Cathy Barrera (01:01:50):
Derek Thompson, staff writer at The Atlantic.
And the last one, I’m happiest when…
Cathy Barrera (01:01:56):
I’m on an adventure.
Cathy, thank you so much for your time. I really enjoyed meeting you and hearing some of your thoughts and ideas, not only about The Graph, but about blockchain and economics. If people want to learn more about you and follow your work or the work at Prysm Group, what’s the best way to do it?
Cathy Barrera (01:02:21):
Our website, at Prysm group is Prysmgroup.io. You can follow me on Twitter or on medium. Cathy Barrera, PhD. C-A-T-H-Y B-A-R-R-E-R-A, PhD.
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DISCLOSURE: GRTIQ is not affiliated, associated, authorized, endorsed by, or in any other way connected with The Graph, or any of its subsidiaries or affiliates. This material has been prepared for information purposes only, and it is not intended to provide, and should not be relied upon for, tax, legal, financial, or investment advice. The content for this material is developed from sources believed to be providing accurate information. The Graph token holders should do their own research regarding individual Indexers and the risks, including objectives, charges, and expenses, associated with the purchase of GRT or the delegation of GRT.