Coase in CryptoLand : a convertible ecurrency is born

Facebook makes its money by selling its users’ data to advertisers without compensating users for that information. In micro-economics this is labelled a ‘free ride’ and ‘an externality’ and is an example of market breakdown. Markets have a habit of rectifying themselves and, indeed, Ronald Coase won the Nobel prize for discovering that markets will internalise these externalities so long as property rights are clearly allocated and enforceable. The Coase Theorem argues that Facebook’s ‘free data ride’ can be rectified by giving users ownership of their data. Users are then free to trade these rights with whomever they choose.

While Facebook’s free ride (and they are not alone!) is well established, rectifying the ongoing plunder has escaped the online community. This is as much due to the naivety of users who quite freely permission application developers to take all the data they can feast on, as well as the difficulty of coralling and controlling one’s data so that it remains safely guarded. Is it possible to construct a system where data remains the property of the individual?

Crypto, Smart contracts and Blockchain would seem to offer a solution to this problem. As Coase pointed out, the critical element for a market solution is the allocation of property rights. It is one thing to claim ownership of data, but is another thing to be able to exclude others from using it (unless they pay). If every individual were to maintain a secure Digital Data Wallet (DDW) then their data is theirs to deal with. Most of us keep our data in our head or written down or on a private network and stored out of the sight of others, so the DDW is an easy concept to implement. Tokening linked to a Smart-contract comes into its own now, since not only can it be used to buy or sell data, it also can be tagged to each data item that is permitted to be used by, say, Facebook. Together with a private blockchain, this tag will follow the use of the data item and only permit its use for the agreed purpose. The token/contract is like a licence which is paid for by Facebook (or others), tracked by blockchain and protects the data from third-party distribution without the permission of the owner.

The value of the data is open to negotiation and can change with behaviour and evolution of the internet itself. Standard currencies such as USD are acceptable numeraires to facilitate transactions but an online Crypto-currency seems better suited to price an online asset such as data. In fact, a currency that is backed by DATA would seem to have real value as opposed to just being the electronic rendition of regular fiat money. By this I mean you could think of a generic unit of ‘DataCoin’ representing ’10 email addresses of people who earn $100k per year’. The issuer of DataCoin has purchased 10 email addresses of people who earn $100k per year [or 20 email addresses of people who earn 50k per year] for every coin they dispense and any owner of a DataCoin is entitled to convert one DataCoin for 10 email addresses should they want to cash it in. The ownership of the data passes from one group to another upon conversion or an investor could just elect to accumulate a fortune in DataCoins representing all those email addresses that people have sold.

What does this all add up to in the end? First, the likes of Facebook are forced to pay their users for their data. Second, a ‘convertible Crypto’ is born.