Four principles for crypto regulation

This article was originally published in The Hill with Jay Jog.

There was a substantial surge in the market capitalization of cryptocurrencies recently, reaching nearly $3 trillion in 2021 but collapsing to under $1 trillion by the end of 2022. We also witnessed fraudulent behavior by many bad actors, from Terra (Luna) to FTX.

Any asset has fluctuations, and the fraudulent behavior was not due to an inherent flaw in distributed ledger technologies (DLTs) but rather bad governance and an absence of a predictable and reasonable regulatory framework. In fact, nearly all the fraudulent behavior took place offshore, at least in part because most cryptocurrency companies have viewed the U.S. regulatory framework as too confusing or ambiguous to set up shop.

Distributed ledger technologies, often referred to as “web3” (or the new generation of the internet for short), use the blockchain to provide ways for users to access, record and validate activity digitally. Although the process is not always fully decentralized, or “permissionless,” blockchain is an enabling technology for collaboration and economic activity often among many, geographically disparate people. Web3 tools include cryptocurrencies.

The expansion of DLT into all areas of the economy is inevitable because it is simply better at doing the job than existing centralized ledger technologies, including in financial services. But the regulatory environment will influence whether the U.S. can take advantage of the technology to its fullest — or whether we sit idly by as other countries, such as the United Arab Emirates and Singapore, lead the charge in attracting investment, entrepreneurs and technologists.

We believe there are four important issues that must be reflected in regulation.

1. Impose licensing requirements on centralized cryptocurrency exchanges and other digital currency services that behave like banks.

Just because a company trades cryptocurrencies does not mean that it should be exempt from financial regulation. If the company serves as a custodian of consumers’ assets, and it lends those deposits to others, it is effectively operating as a bank and should be subject to similar regulations that banks are subject to based on their size and asset class. Sadly, many companies in this space have sought regulatory arbitrage by operating outside of the U.S. because of regulatory ambiguity and the opportunity to arbitrage on it. That’s exactly what happened with FTX, but what’s worse is that then-CEO Sam Bankman-Fried did so in plain sight and conversation directly with regulators that were supposed to be watchdogs.

What does adherence to regulatory requirements look like? For starters, it could involve capital requirements of the form laid out in the recent current and expected credit loss framework that requires that banks use “reasonable and supportable” forecasts to derive the amount of capital reserves they need to hold out in case of adverse economic events. Or it could involve basic cybersecurity and financial security regulatory requirements, like SOC 2 compliance.

Centralized crypto exchanges need to consider the effect that their failure has on the system, and simply arbitraging and evading regulation that already exists and that they should be under can provide the proper guard rails to mitigate future catastrophic outcomes.

2. Provide regulatory clarity about the specifics of legal web3 behavior.

Sadly, there is no single source that specifies the legal requirements for web3 builders. And, in some cases, the regulatory guidance is conflicting. Most notably, the Department of Justice has referred to tokens as commodities in its enforcement actions, whereas the Securities and Exchange Commission (SEC) has called them securities and enforced them as such. Creating guideposts for legal activity will promote not only greater innovation since more companies will build within the U.S. regulatory sandbox, but also more consumer protection since enforcement will have more legal precedent and the bright line for legal activity will be clearer.

Clear and consistent regulations are essential for companies operating in the cryptocurrency space. Regulators should work to create regulations that are easy for companies to understand and follow and that do not create unnecessary barriers to entry. An example of clear and consistent regulations is the New York State Department of Financial Services issuing a “BitLicense” specifically for companies operating in the cryptocurrency space, which sets clear and consistent requirements for companies to meet to operate in the state.

The U.S. has the luxury of experimenting with different approaches because of the varying state-level capabilities. For example, Wyoming passed legislation that recognizes certain types of cryptocurrencies and blockchain tokens as legal property and created a new type of bank specifically for cryptocurrency companies, which allows them to operate in a more permissive regulatory environment. Similarly, Tennessee passed legislation that recognizes decentralized autonomous organizations (DAOs) – a new form of governance that leverages the use of smart contracts and tokens – as limited liability corporations, which provides additional liability coverage for DAO members.

3. Harmonize international standards.

Because of a rigid and stringent regulatory framework, many web3 entrepreneurs and companies locate outside the U.S. for business and residence. Much like developed countries meet to coordinate economic policy through the G20 annual meetings, and the OECD has published international guidelines around the ethical use of artificial intelligence, U.S. regulatory agencies should cooperate with others to identify a common set of principles and standards.

Although many look to the SEC for guidance, they too can learn a lot from international counterparts. For example, they could work with the European Securities and Markets Authority (ESMA) to share information and coordinate regulatory efforts to combat fraud and protect investors in both regions. Similarly, the U.S. could learn from best practices in other countries, including Switzerland’s regulatory sandbox, which not only provides much more clarity on the distinction between security tokens and their counterparts, but also safety in piloting a token as long as the amount raised and transacted upon is below 1 million Swiss francs.

4. Foster dialogue with researchers and industry practitioners.

The cryptocurrency industry is rapidly evolving, and it’s important for regulators to stay informed about the latest developments and trends. Unfortunately, regulation and even the hiring process in the federal government does not yet move fast enough to accommodate these trends, so it is important for regulatory bodies to participate in the web3 community and promote dialogue with researchers and practitioners. For example, the U.S. Commodity Futures Trading Commission (CFTC) could regularly hold public meetings with industry leaders, academics and other experts to discuss the latest developments and trends in the cryptocurrency space.

Fortunately, there are many platforms for facilitating these dialogues. For example, the Center for Digital Finance and Transformation at Columbia University frequently brings industry practitioners and academics together, and sometimes helps convene and participates with federal and state policymakers. Policymakers, especially in the SEC, CFTC and DOJ, should seek opportunities to work with and delve into details with practitioners and researchers.

These recommendations are certainly not exhaustive, but they reflect a general set of governing principles that would improve U.S. economic and social competitiveness, while simultaneously mitigating against the risk of tail outcomes, like those observed over the past year in the crypto community. Most importantly, we encourage regulators not to take a one-size-fits-all approach to web3 regulation, but to understand the context and allow for experimentation and dialogue.

Christos A. Makridis is a research affiliate at Columbia Business School, Stanford University and the University of Nicosia, and CEO and founder of Dainamic, a startup that aims to democratize access to AI for mid and small sized banks. Jay Jog is co-founder of Sei Labs, the first sector specific L1 blockchain specialized for trading. He was previously an engineering lead at Robinhood.

Educational Research Made Accessible

This article was originally published in City Journal with Goldy Brown.

“Equity” has become a major issue in education policy, but it is a politicized, ambiguous word. Does the concept mean that all outcomes must be equal, or do its proponents simply endorse equal opportunity? The policies that have been advanced in equity’s name are generally anchored in the dubious premise that different outcomes stem necessarily from injustice.

Requiring schools to right the wrongs of the past puts an impossible burden on the educational system. Other institutions share that responsibility, from families and philanthropic organizations to civil society and political actors. The world of education, by contrast, needs to focus on helping students learn effectively and find success in life.

Our new book, The Economics of Equity in K-12 Education, recommends specific changes to education policy and programming. We endorse strategies from the scientific literature that could improve the life chances of American students. Social scientists have conducted a vast amount of empirical research in education policy and the economics of education. Our aim is to make this research accessible for interested readers and policymakers, who can use scientifically informed best practices on the job.

Student achievement has continued to deteriorate, even as education funding grows. In fact, reading and math scores recently hit a 30-year low, according to the 2022 National Assessment Education Progress (NAEP) exam results, while federal funding for education grew to nearly $90 billion. These alarming results provide a warning: our emerging workforce is less prepared to handle the increasingly complex demands of the future. Left unchanged, that dynamic will accelerate the inequalities that educational-equity proponents have decried. Any conversation about improving student outcomes should consider how children accumulate skills and cultivate their abilities, also known as “human capital.”

Without implementing evidence-based priorities, recent idealistic proposals may treat a symptom without addressing the cause—making them ineffective and possibly counterproductive. The proposals in our book are for state and local governments, educational leaders, and anyone interested in the American education system’s top priority: to supply students with the necessary skills to participate, flourish, and grow in the American economy.

Christos A. Makridis is a research affiliate at Stanford University and other institutions. Goldy Brown III is an associate professor in Whitworth University’s graduate school of education.

Mozart’s Ghost

This article was originally published in The Return.

I am deeply passionate about promoting human flourishing: people are created with a unique purpose and have so much potential, but so many fundamentally fail to succeed. That wasted potential not only harms the person who failed to live out their calling, but also fails to bless the many people who could have benefited from their gift.

But these are not new ideas – we all grapple with the importance of calling and see people living it out, and (many) others who are not. And perhaps that wasted potential is most evident in the performing arts, where our internal surveys in Living Opera show that over half of performing artists take up a job outside the music sector – often a low-wage job in retail or customer service – to finance their music career. That’s especially damaging, as my research with Jonathan Kuuskoski at the University of Michigan shows, because their hearts are not in these second full-time jobs, and they earn lower wages. Meanwhile, these artists are still burdened with the high college debt that they paid for with their music degree without any practical training.

So, what can we do about it? Three years ago, I got to know two of the world’s leading opera singers, Soula Parassidis and Norman Reinhardt, who have become my best friends. They launched Living Opera in 2019 to provide performing artists with educational content and lessons learned about what it takes to thrive in the business. Nearly two years ago, I joined as a co-founder and led our rebranding as a web3 multimedia startup using blockchain technology to promote and produce transformative experiences through classical music.

On September 30, 2022, we had a soft launch of our first major NFT collection called Magic Mozart, consisting of 1,791 initial pieces each with a portrait of Mozart containing different elements from his final opera, The Magic Flute. It also comes with a personalized musical minuet based on Mozart’s development of the first widespread generative art game. (Our launch date was specific since The Magic Flute premiered on September 30, 1791 in Vienna, Austria!) 

The discovery that Mozart was a pioneer of generative art – which we talk about in detail here – served as the inspiration we needed to get involved in web3 without just jumping on the bandwagon when NFTs and generative art were popular. Indeed, the discovery highlights a throughline between one of the oldest art forms (opera) and one of the most recent social and technological fads (generative art).

But the artistic element of the collection is only the front end: we also just launched the Living Arts Foundation – a nonprofit decentralized autonomous organization (DAO) that will function as a decentralized grantmaking platform for helping and empowering artists. The novelty of the DAO is that it allows us to create stronger incentives on both sides of the “market.” 

Here’s how it works. Artists – whether already part of the Living Opera community or not – can take our free arts entrepreneurship curricula. If they complete it, they earn a digital credential that lives on the blockchain. That digital credential gives them access to our grantmaking platform that allows artists to post short funding proposals detailing their requested amount, how they plan on using it, and why it is important. Then, the Magic Mozart NFT holders, or the micro-philanthropists, have access to the platform and can view and vote on proposals. Once a threshold is hit on a proposal, the artist is funded through a direct transfer to their digital wallet. Artists then record a video documenting their experience resulting from the funds and share it on social media. A line of communication opens up between the micro-philanthropist who voted for the artist, and the artist, with the ability to keep in touch and share.

This approach strengthens incentives on both sides. Furthermore, the micro-grants community provides an organic and experiential way of imparting arts entrepreneurship know-how, including presenting ideas and building accountability around their execution. And we also are helping onboard artists onto web3. While we’re only at the beginning of this journey, we are excited to have Living Arts Foundation formally filed with provisional nonprofit status and are in the process of selling more of the collection and building the technology stack for the platform.

The DAO offers a wide array of advantages, notably more accountability and transparency compared to the norm in the non-profit space. Somehow, funding for non-profits continues to grow, yet the challenges they are trying to solve only worsen. While there are some great non-profits, many are burdened by fraudulent behavior, waste, and ineffectiveness. We believe that decentralizing grantmaking is a tool within the non-profit realm and we have a community of performing artists to pilot it on – and onboard them onto web3!

We have much more to learn and test in the journey ahead of us, but we believe that the best is yet to come and that classical music plays a role in it. Moreover, we see blockchain technology as a complement to human ingenuity – not a substitute.

Putting NFTs in perspective 

We might be tempted to look at NFTs as a speculative boom-and-bust market. Although some collections, such as CryptoPunks and Bored Ape Yacht Club, garnered international attention in 2020 and 2021, these profile picture projects (PFPs) were simply status symbols – not art.

One of the worst parts about this era of trading activity was the fraud and whitewashing of NFTs. For example, a project might launch and plan among a group of friends to buy up the NFTs to give the impression that the collection “sold out,” thereby driving up the perceived value to less savvy or unfamiliar market participants. Perhaps even more deceptive is when a founder would create multiple digital wallets and buy their own collection from a different address to pretend there is interest and sales when the activity was just a show.

But these boom-and-bust dynamics are not unique to NFTs. For example, the run-up of house prices from 2003 to 2006 in the United States, right before the collapse in 2008 to 2009, was another example of what can happen when there is speculative trading on assets. Although the explanations for the financial crisis are still subject to debate, what is clear is that many homeowners who entered the market without a steady income, received a loan based on financial models that simply assumed house prices would continue to appreciate. 

My research on foreclosures during the financial crisis finds that these loans were often adjustable-rate mortgages that had two or three years of fixed interest rates, but would experience a discontinuous change (mostly a jump) in their interest rate subsequently.

The price of any asset is a function of its intrinsic value and the expectation of future cash flow. If expectations don’t align with reality, then the “economic laws of gravity” eventually kick in and the asset price will decline. That is also what happened since the boom in the NFT and crypto market since 2021 – the low-quality projects have plummeted and, while the web3 market has taken a hit (much like the market as a whole), high-quality projects have survived.

The importance of the arts and the role of web3

Few readers would disagree with the statement that the arts matter. Clearly we care about how we dress, what furniture looks like in our residence, the rhythm and lyrics of music, and so on.

Simply put, the arts and culture sectors overwhelmingly influence peoples’ outlook – for better or worse. Much of the viral music does not point to what is good, beautiful, and true, but instead to fairly wicked and shameful behavior that some are trying to normalize. But when people listen to it on repeat – and sometimes not of their own choosing (e.g., if it is the default track in a store), they cannot help but get affected by the messaging.

But sadly, rather than rewarding skilled artists, many people have retreated from the arts all together. Yes, some pretty weird operas get cast, but some pretty weird startups launch. Does that mean we retreat from entrepreneurship? Or do we engage and start contributing to the culture we want to see?

The classical music community – and specifically the community we’ve cultivated in Living Opera – is a highly trained community. These are people who speak multiple languages, can read music, have trained their voice, and can perform and act in front of audiences. These are not the random pop artist who goes viral because of a deal with a record label and a lot of auto tuning that goes on in the background – it’s live music and performance at a high caliber.

So something has to change. Fortunately, web3 provides a catalyst to change the incentives. Now, micro-philanthropists have a more transparent way of contributing, and artists have the tools to build their fan base, rather than rely on institutions that may not have their interests, or those of society, at heart. DAOs – and what we look forward to doing in the Living Arts Foundation – offer new ways to coordinate activity among potentially geographically disparate people connected by a shared objective and community. 

It’s Not Too Late to Prepare for the Next Housing Crisis

This article was originally published in Barron’s with Mark Calabria.

The housing cycle lives. Many economic models predict a housing crisis at some point in 2023 or 2024. The combination of high consumer debt, a slowing labor market, and inflated housing prices has created a ticking time bomb. It will explode – we just don’t know exactly when. But it is never too late to prepare. Luckily, policy makers can look back on past recessions to help refine approaches to mitigating the damage

Yes, some of the worst mortgage products behind the 2008 crisis are history. Unfortunately, they have been replaced with other troubling practices, such as record debt burdens among borrowers, as measured by debt-to-income. Significant numbers of recent borrowers are also already underwater on their mortgage or at risk of becoming so. Appropriately provided loan relief during the pandemic has also inflated borrower credit scores, making it significantly harder for lenders to accurately judge risk.

The federal state governments tried several strategies to mitigate the 2008 crisis, including the Home Affordable Modification Program. Those approaches were complex, convoluted, and often ineffective. New approaches were developed in 2020, in response to Covid, that can better serve both borrowers and the taxpayer. The means-testing of assistance in the 2008 crisis inadvertently resulted in massive disincentives for work. Delinquent borrowers often lost 31 cents of their mortgage assistance for every additional dollar earned. That contributed to one of the slowest job recoveries and biggest declines in homeownership in history.

In contrast, pandemic forbearance was based on time, not income. Borrowers were given a bridge to their expected unemployment insurance benefits, which can take weeks, if not months, to arrive. 

Moving away from means-testing also greatly reduced the paperwork required of both borrowers and lenders. Pandemic mortgage assistance provided through Fannie Mae and Freddie Mac assisted almost 3 million borrowers, twice that assisted under HAMP. Perhaps more importantly, the pandemic programs were set up six times faster. While HAMP helped mitigate the severity of the financial crisis on consumers, it only reached a third of its targeted indebted households because it overlooked important design elements in mortgage finance.

Speed and ease of use in government programs can be, and often is, an invitation to fraud and abuse. This was first addressed by requiring that any missed mortgage payments be repaid. Payments were paused, not forgiven, reducing the incentive to game the system.

Assistance was also paid for within the mortgage market, not by the taxpayer. The HAMP program cost well over $20 billion, not even including a $25 billion settlement with lenders or the $10 billion hardest-hit-fund. In contrast, pandemic assistance provided through Fannie and Freddie was largely paid for with a modest fee on high-income refinancings. The support provided to the mortgage market was paid for in the mortgage market, as it should be. Since the assistance was provided in a budget neutral manner, it also did not add to the inflationary pressures created by other pandemic assistance programs.

Policy matters because it not only directly shapes incentives and economic activity, but also indirectly influences consumer and homeowner expectations. Newly-released research from one of us, using data from the Federal Housing Finance Agency over the past three years, shows that homeowners who are more optimistic about the housing market at the time of their loan origination are roughly 2 percentage points more likely to enter forbearance compared with those who anticipated the housing market will stay the same. That’s significant given that the average rate of forbearance among homeowners was 4% in 2020.

But it’s not necessarily a bad thing – these homeowners who entered forbearance were likely more determined to get back on track with their payments, rather than lose it all and eventually get foreclosed upon. In fact, researchers from the Urban Institute released a report titled “normalizing forbearance,” suggesting that there should be expanded provisions that allow homeowners to share the requisite documentation about extreme events to their servicer and delay payments. In this sense, policy that promotes optimism also indirectly influences the efficacy of loan renegotiation.

There were comparable results among homeowners who anticipate future unemployment and income declines. Crucially, all these results control for a wide array of demographic factors, as well as other individual characteristics, such as credit scores and attitudes about risk.

The tight link between borrower expectations about the housing market at the time of origination and the likelihood of entering forbearance points to an important result: Homeowner attitudes matter and shape the decisions that ultimately might precipitate situations that require federal intervention. That means policy makers should not think about intervention from a static perspective, but rather a dynamic one where the choices they make today have consequences for how consumers and firms behave in the future and, in turn, impact the economy as a whole.

Christos A. Makridis is a research affiliate at Columbia Business School and Stanford University, and the founder/CEO of Dainamic, a financial technology startup. He holds dual doctorates and masters in economics and management science & engineering from Stanford University.

Mark Calabria is the former Director of the Federal Housing Finance Agency, and author of the forthcoming book, Shelter from the Storm: How a COVID Mortgage Meltdown was Averted.

A Biblical Perspective on Web3 – Crypto, NFTs, and the Metaverse

This article was originally published in Faith Driven Investor.

Technology has always had the potential of advancing human flourishing, or promoting wicked agendas. Technology’s effects depend crucially on the heart and capabilities behind the people wielding it. The rapid proliferation of web3 technologies – fungible tokens (“crypto”), non-fungible tokens (NFTs), and the metaverse – is no exception. And now we have a new opportunity to influence the new frontier of the internet and demonstrate the heart of God to a world that is crying out for signs, wonders, and miracles. To do so, we need to acquire knowledge about web3, for it is written in Hosea 4:6 that “My people are destroyed for lack of knowledge.”

People often refer to web1 as the initial revolution of the internet where content became digital and web2 as a comparable transformation where content was sharable and personalized. But now we are at the precipice of a new frontier where we can own digital assets and the ownership structure is decentralized on distributed ledger technologies (DLTs). That means that the consensus mechanism – or the way that people decide what activity is recorded on the blockchain – is decentralized, rather than centralized and decided by a single organization or sub-group within the organization.

While there are certainly applications of web3 technologies that are concerning, that should not stop us from seeking the Lord about His heart about the frontier. We cannot be a church body that flees from innovation. Rather, we must spend the time in prayer, intercession, and communion to figure out how the Lord wants us to use innovation to be salt and light. 

Over the past few years, and especially the past two, I have become an active practitioner and student over web3 technologies, authoring over 25 articles in the press and two peer-reviewed scientific papers. I have also launched a web3 multimedia startup called Living Opera, which produces digital assets (e.g., NFTs) anchored in classical music, especially opera. 

Admittedly, there is so much more to continue learning, but the journey has given me perspective on the types of web3 use-cases that are aligned with God’s heart, and we should embrace.

1. Cryptocurrency for delivering secure payment to the persecuted church

Many Christians, among other religious minorities, face such incredible political persecution in some countries that there is no way for them to maintain a traditional bank account. However, if they could access a phone with an internet connection, they could be gifted a digital wallet that receives airdrops of tokens from support groups and these could be converted into dollars or other fiat currencies if needed through standard marketplaces or even decentralized marketplaces, like Uniswap. Furthermore, a digital wallet would allow the persecuted church to access international capital and digital labor markets even if the area that they live in is hostile.

2. Remunerating content creators

Content creators, including artists, are taken advantage of by large technology and media companies. Many people overlook the reality that we are the product in the web2 environment. Technology companies, such as Google or Meta, own our data and they make billions off it. But web3 tools are fundamentally about authentication and ownership. In Living Opera, we view NFTs as a tool for remunerating artists: when they “mint” an NFT, that becomes a token that their fans can purchase and receive services (e.g., video or audio files). NFTs, therefore, provide a direct line between the content creator and their fans on a decentralized network, meaning that the NFT lives forever, and no centralized entity can decide to censor or remove it. Of course, there are still many quirks that need to get resolved, especially relating to enforcement of property rights, but the reality still stands that NFTs are the key to remunerating creators of all shapes and sizes.

3. Reduction in physical barriers

The metaverse allows for immersive experiences is virtual spaces. Although the applications of the metaverse today are often crude, they point to such a wide array of possibilities. Imagine getting baptized or visiting the Sistine Chapel in the metaverse. God is the origin of all creativity, and He works without limits; Jesus is the word made flesh. That means mountains must obey the sound of His voice (and thoughts), as do the waters and every living creature. Embracing the metaverse as a new frontier to build in opens the floodgates for creative expressions of His character. 

Christos A. Makridis is an entrepreneur, professor, and policy adviser. Among other responsibilities, he serves as the CTO/COO and co-founder of Living Opera, a web3 multimedia startup. He holds doctorates in economics and management science & engineering from Stanford University.

‘Deflation’ is a dumb way to approach tokenomics… and other sacred cows

This article was originally published in Cointelegraph Magazine.

Having taught and studied token economics at the University of Nicosia, I’ve found that students often have some decidedly muddled beliefs about how what tokens are and how business and token economies work.

Unlike microeconomics and macroeconomics — which are based on decades of research, debate and inquiry that have produced some commonly accepted principles — tokenomics is a much newer field of study full of people without economics experience.

There are many self-professed “experts” who provide advice that sounds fine and is often even sensible in theory but that fails in practice.

When designing a token economy, what you really want to focus on is:

• Is the economic strategy repeatable?

• Is there some way of diagnosing when and how to deploy the strategy for your token and the estimated value of doing so?

• Is there research that validates the strategy so you can talk about it more credibly?

Deflationary tokens

Take, for instance, the idea held dear by many that deflationary tokens have an absolute advantage. “Deflationary” means an ever decreasing supply of tokens, which in theory increases the purchasing power and value of each remaining token. “Inflationary” means the opposite: an ever increasing supply which, in theory, reduces the value of each token.

You’ll hear commentary along the lines of “how deflationary tokens empower a crypto project’s value” from blockchain pundits such as Tanvir Zafar celebrating the limited supply of Bitcoin and the deflationary supply of Ether following the Merge.

It’s an idea even propagated by a widely recognized community for tokenomics best practices, the Tokenomics DAO, which has a “Tokenomics 101” page that states: 

People who understand Bitcoin will see great value in the fact that it is so simple, elegant and has a limited total supply. Bitcoin’s tokenomics have created digital scarcity that is enforced (through token incentives) by the network.”

But while many token designs emphasize deflation, “they are not optimally designed,” according to Will Cong, the Rudd family professor of management and faculty director of the FinTech at Cornell initiative at Cornell University.

Taking their cues instead from tweets and community ideologies, “many platforms also can’t even write down a logical objective for their token supply and allocation policy,” Cong continues.

Focusing on whether a token is inflationary or deflationary shifts attention to second-order issues. The price of a token can always adjust to meet supply, and each token can be arbitrarily fractionalized, so a fixed supply is a moot point if the token does not provide value to end-users. 

“In fact, some inflationary coins with robust burn rates may regularly switch between being inflationary or deflationary, like Solana,” explains Eloisa Marchesoni, a tokenomics consultant. “The inflation rate started at 10% and will reach its final rate of 1.5% in about 10 years, but there are also deflationary features, like a percentage of each transaction fee getting burned.”

With enough transactions per second, the transaction fees that are burned could be even higher than 1.5% per year if many transactions occur, which would bring Solana’s inflation rate to 0% and make it deflationary in the long run.”

Token price falls and deflation

Although cryptocurrencies behave very differently than traditional asset classes — according to research by professors Yukun Liu and Aleh Tsyvinski — they are heavily influenced by momentum and market size. In other words, investor sentiment and the number of users on a platform are significant predictors of cryptocurrency returns and volatility.

Fluctuations in the valuation of traditional asset classes may not have a direct effect on crypto, but they can indirectly affect it through spillover effects. For example, changes in interest rates will dampen the risk appetite of investors who are heavily exposed to sectors like real estate.

In this sense, even if a token has deflationary properties, a common macro shock that stifles aggregate demand renders these deflationary properties less useful since the decline in demand lowers the price of the tokens, and as a result, they cannot buy as much.

That said, in general, the cryptocurrencies with the highest market cap are also the most resilient to the current global recession, so we are mainly talking about Bitcoin and Ether.

Novelty tokenomics

Many tokens with novel tokenomics have risen with transient social media momentum but subsequently collapsed as the fads passed.

“SafeMoon relied on heavy selling fees and deflationary mechanics to convince holders that the price would go up endlessly even though the protocol never actually identified the problem it was actually solving,” says Eric Waisanen, chief financial officer of Phi Labs Global.

“Similarly, Olympus DAO inflated their OHM token in accordance with its price, even advertising (3,3), a misrepresentation of simple game theory, which told holders that if none of them sold, they’d all get rich.”

Another big shortcoming of tokenomics strategies is their emphasis on holders staking their tokens to earn a high yield. A large yield that lasts for a day, or even a month, is not helpful for consumers and investors who take the long view. Instead, it attracts the wrong crowd.

“The use of staking options to lure extractive users into the project usually does not end up well, causing volatility or the risk of market prices and token price fluctuations, which will stress the whole tokenomics and may end up breaking it if not adequately tested already with simulations under extreme conditions,” Marchesoni explains.

Take, for instance, Helium, a project that uses open-source technologies to create a decentralized and trustless wireless infrastructure. Its tokenomics strategy offers people the possibility of becoming a validator by staking at least 10,000 of its native HNT token, but those who do risk significant volatility by locking up their tokens for months — perfectly demonstrated by the fact its price went from over $50 to $2 within the space of approximately one year. 

Other projects — such as the business-focused VeChain ecosystem, which specializes in supply chain tracking – have endeavored to address the volatility in token prices by creating two separate tokens. The first, VTHO, is used to pay for network access and deals with the predictable component of supply and demand for the product or service. The other, VET, serves as a value-transfer medium, with VET stakers “generating” VTHO.

What APR is too high?

While proof-of-stake protocols such as Ethereum rightly incentivize staking because it secures the network, the emphasis can get misplaced the further down the line you go. 

“Now we’re seeing inflation rates well over 20%. Evmos, an EVM-compatible chain in the Cosmos ecosystem, currently has a 158% APR for staking. Similarly, layer-2s are giving staking rewards just for holding a token without having a blockchain to secure,” Waisanen says. 

These “APRs” for holders are misleading because the supply of the tokens continues to grow, but the liquidity of the token is constant, so these APRs are not sustainable.

Moreover, when you see high yields, you have to ask yourself how they are sustainable. Ethereum co-founder Vitalik Buterin summed it up best on Twitter during 2020’s DeFi “yield farming” craze, stating:

Honestly I think we emphasize flashy DeFi things that give you fancy high interest rates way too much. Interest rates significantly higher than what you can get in traditional finance are inherently either temporary arbitrage opportunities or come with unstated risks attached.” 

While these incentives have been abused, staking can be important for securing a network and ensuring price stability. 

“Too much emphasis on tokenomics has been placed on generating returns for early adopters and users of tokens rather than driving utility values,” says Gordon Liao, chief economist at Circle.

“In this deep crypto winter, the sentiments around tokens have entirely shifted. Even VCs are starting to place more weight on the equity components rather than the token component when considering new investments. Some protocols have even opted to airdrop USDC instead of their protocol-specific tokens.”

Crypto airdrops

Some projects have turned to airdropping users with tokens for marketing purposes. And while my research suggests that airdrops, on average, have a positive effect on market capitalization and volume growth, how the airdrop is done also matters. 

For example, those that use bounties – or establish requirements that involve boosting and posting on social media to claim the airdrop – tend to perform worse. Airdrops on decentralized exchanges and those that involve governance tokens tend to perform better.

“Uniswap and Ethereum Name Service launched successful airdrops where the greedy users were converted into active members of the community, thanks to the great game-theoretic model that these projects had put in place,” says Marchesoni.

There was great turmoil on Sept. 17, 2020 when Uniswap airdropped its UNI token, but it was also only a matter of time until most users cashed out. But over two years later, there is still a group of dedicated UNI holders, and tokens are still being claimed today. 

Uniswap remains the leading decentralized exchange, and its UNI token provides governance rights to those willing to get involved. The Ethereum Name Service airdrop was also fairly successful, turning many recipients into active members of the community thanks to its game-theoretic approach to the airdrop.

Admittedly, however, there have also been many failed attempts at airdrops, including the most recent APT airdrop by buzzy project Aptos, set up by some of Meta’s former Diem team. It airdropped between $200 million and $260 million in tokens, but when news of FTX hit – with FTX Ventures co-leading its round of funding – the momentum dried up, and people began to sell the token while they had a chance. As in comedy, good timing is essential, and projects need to recognize the broader economic environment that they’re operating under, who they accept capital from, and which blockchain they build on. 

Are crypto tokens like stocks?

A final misconception is that tokens are equivalent to stocks. While governance tokens or even NFTs can appear to inherit similar features as stocks — such as governance rights or dividends — most have not.

“The vast majority of NFT art projects […] convey no actual ownership for the underlying content,” according to Alex Thorn, Galaxy Digital’s head of research. There is nothing stopping nonfungible tokens from conferring greater rights and benefits, but collections have historically not been designed as such. Similarly, DAO governance tokens can provide dividends from project revenue, but many tokens, including Uniswap’s and Optimism’s, do not. 

Professors Cong, Ye Li, and Wang have shown in their research how tokens can solve important principal-agent problems, particularly for startups, but the reality remains that many tokens are receiving valuations commensurate with corporate stocks, which is not sustainable.

Token utility

Many projects should ask whether they need a token in the first place. Even if they do, they often struggle to articulate why. Indeed, a Web3 organization can easily exist without a token. For example, OpenSea and Rarible are both NFT marketplaces, but Rarible has a token and OpenSea does not. The answer really depends on the organizational objectives and strategy.

“Because the incentives for launching a new token are so high, there has been a proliferation of tokens. If they were to take a step back, most founders would quickly realize that they do not actually need a new token and that building on an existing crypto ecosystem would be a much more sustainable choice in the long run,” says Christian Catalini, founder of the MIT Cryptoeconomics Lab. “To date, only a handful of networks like Bitcoin and Ethereum have proven the value and usefulness of their native token.”

Projects that have a native token need to be thoughtful about anchoring its price in real assets. Some stablecoins, for example, hold reserves in fiat currency to hedge against the volatility of other crypto assets. While there is an active debate about the composition of reserves and how to signal proof of reserves, some collateralization is important for token price stability. In the absence of some stable collateral, a shock to the system can lead to the collapse of a token. The collapse of the Terra ecosystem and the role that FTT played in the fall of FTX are instructive.

Catalini commented that: “In the summer of 2021, we wrote a paper outlining the key weaknesses of algorithmic stablecoins, and how they inevitably lead to death spirals. The paper and insights were widely shared with regulators, academics, & industry participants well before the Terra/Luna meltdown. Sadly, the structure of the FTT token and how it was used as collateral suffered from the same fatal flaws.” Here, the “collateral” for both Terra and FTX was tied up in their own native tokens, which collapsed in price too.

Why tokenomics is important

To be sure, tokens provide a handful of advantages that traditional systems do not provide, but it is important to know when and why. First, having a token that is native to a blockchain provides a common system of account that reduces the probability that assets and liabilities will be mismatched in different units of account. And since native tokens can be linked directly to the history of activity on a blockchain, they provide a trustless mechanism for facilitating exchange that is insulated from the fluctuations in other asset prices in the economy.

Such benefits are especially important for creating markets over areas that may not have had a price mechanism rationing supply and demand. For example, there is a lot of optimism that tokens could help create a market for credibly trading energy or emissions credits. Existing implementations of emissions trading have been challenged by compliance costs and liquidity, which tokens could help counteract by providing a common and credible unit of account.

Second, tokens can help secure credible commitments on both sides of a trade. Although the use cases of smart contracts are still limited and complex rules and contingencies have yet to be fully implemented, they reduce the risk of either side reneging, according to Cong, Li and Wang.

Consider an entrepreneur who distributes tokens to investors for an innovative new blockchain. Insofar as the founder succeeds, there is much less chance to cheat or mislead the investors since the tokens are fundamentally tied to the intellectual property and technology stack of the blockchain.

Third, tokens can reduce transaction costs and bring together heterogeneous buyers and sellers on a platform built around a specific economic transaction, according to additional research by Cong, Li and Wang. In other words, they provide a measurement tool for differentiated buyers and sellers to coordinate around shared perceptions of value.

For example, consider the Akash Network in the Cosmos ecosystem – a cloud computing provider with a live service offering a decentralized alternative to Amazon Web Services and Google Cloud. “Even in a declining market, demand for Akash services is growing because of the security and price advantages decentralized compute offers,” says Lex Avellino, founder and chief marketing officer of Passage — a metaverse platform that’s also on Cosmos.

“That’s where the value comes from, regardless of token sentiment […] Web3 builders need to address traditional market concerns of value and demand before speculative tokenomic systems,” he says. Although transactions could be completed with fiat currency, tokens provide a platform-specific tool to conduct economic activity.

Further study

Academic institutions are beginning to offer curricula on the economics of distributed ledger technologies, including crypto, although the curricula are still extremely nascent. The University of Nicosia, for example, was one of the leaders in the launch of a master’s program on blockchain and digital currency. Select classes at other leading institutions exist, including “Decentralized Finance: The Future of Finance” — a set of four courses taught by professor Campbell Harvey at Duke University — and a digital finance seminar series led by Agostino Capponi at the Columbia University Center for Digital Finance and Technologies. 

Much more work remains to be done in educating people about the economics of tokens. Crucially, entrepreneurs and participants in the sector should view tokenomics as a mixture of economics, finance and marketing, drawing on established best practices and theories, rather than trying to invent new ones that have already been shown risky or ineffective.

The Case for Classical Music NFTs

This article was originally published in Right Click Save (with Soula Parassidis).

It may surprise you that roughly $1.2 billion of NFT sales have so far involved music NFTs. But given its importance to the prehistory of generative art, classical music is yet to realize its market potential in the NFT space. Aside from isolated examples, the classical music industry remains behind the curve, partly due to repeated COVID-19 lockdowns that have forced musicians to find novel solutions to the lack of live recitals. Sadly, a number of studies show that classical musicians have suffered disproportionately in their mental health over the course of the pandemic. While recent data reveals that, between 2019 and 2020, the US arts economy shrank at nearly twice the rate of the economy as a whole, with a 40% decline in motion picture and video production, performing arts presenting, and performing arts companies. 

As we pointed out in our recent whitepaper, in the US at least, artists have been earning below the national average income despite higher levels of educational attainment. Of course, the pandemic also catalyzed an NFT explosion that stands to level the playing field by allowing creators across the arts to build their own markets based on their skills and followings. The most recent available data shows that classical music streaming revenue more than doubled between 2016 and 2018 to $140.8 million worldwide. This proves that classical music has a future as a digital product. What needs to change is how musicians are compensated. By cutting out (or at least eroding the hegemony of) traditional publishers, NFTs allow creators to connect directly with their fans. Platforms like OneOf aim to support musicians by leveraging their brands, while Royal is purpose-built to ensure that artists receive income every time a song is streamed. 

Classical music has particular qualities that are tailored to the current market for digital art. First, with practically all classical music now in the public domain, digital artists can save on licensing fees if they want to use music to enhance audience experiences. Second, classical music provides an intellectual foundation for the recent surge of interest in code-based art, whose long history reinforces the cultural importance of NFTs in reviving generative practices. Multiple pioneers of generative art have spoken recently of the overlap between musical and visual systems, with Vera Molnar asserting: 

‍You know, [algorithms] have been around for a long time. I’ve been telling everyone this — did you know Mozart also used dice? He worked with chance. 

A seminal architect of musical systems, Mozart is often regarded as the originator of a dice game called Musikalisches Würfelspiel (musical dice game), whereby the roll of a dice is used to generate random combinations of numbers that correspond to precomposed musical fragments. Between 1757 and 1812, at least twenty musical dice games of this kind were published in Europe, enabling those who had not studied composition themselves to compose different forms of popular dance. 

Publications like Musikalisches Würfelspiel, which followed Johann Kirnberger’s own version of 1757, served as a model for subsequent games that use chance to determine art. It also inspired our own NFT project, Magic Mozart, which offers passages from Mozart’s composition for The Magic Flute (1791) with a governance stake in Living Arts DAO, providing mentoring and micro-grants to musicians around the world. 

Aleatory music experienced a revival in the twentieth century, with chance serving as the basis for visual compositions by Marcel Duchamp and other members of the Europe-wide Dada movement. It also underscored John Cage’s seminal Music of Changes (1951), while Iannis Xenakis developed a stochastic synthesis algorithm to find order within musical chaos. Today, indeterminacy forms the basis of much techno, though dance music continues to rely on an underlying eight-beat structure. How far artists should control the level of randomness in a work was a constant source of debate between Vera Molnar and the composer, Pierre Barbaud.

‍Barbaud claimed that [when you write] a program in which randomness or chance plays a part, that program has value on its own. You shouldn’t intervene — you can’t. That was his opinion. My opinion was that randomness was a tool you could use, a sort of artificial intuition. (Vera Molnar)

The NFT’s ability to commodify ephemeral art forms suggests that music can benefit from tokenization in much the same way as contemporary generative art. One of the challenges is safeguarding NFT projects with watertight licenses in a way that offers both security for creators and clarity for collectors over what they are actually buying. To this end, Andreessen Horowitz recently proposed some basic templates based on the Creative Commons model. The beauty of many works of classical music is that, because they are now in the public domain, they are easily adaptable to digital art collections. 

‍What makes classical music classical is that it has stood the test of time, which is why Apple was so keen to acquire the classical streaming app, Primephonic, back in 2021. 

Two core affordances of NFT technology — authentication and ownership — have also defined the cultural valuation of individual musicians throughout history. Before the modern era, classical musicians used to train under a mentor, who would not only mentor them but also vouch for them as their agent. That mentor would receive some remuneration based on the musician’s future revenues, but ownership of the work resided principally with the musician. In a case from the early nineteenth century, the English composer Isaac Nathan persuaded the well-known tenor John Braham to lend his name to the title page of Nathan’s Hebrew Melodies (1815) in return for fifty percent of any profits.

At a time of widespread skepticism about NFTs and cryptocurrencies, reframing classical music as a prehistory of generative art can bolster the NFT in the public eye. At the same time, NFTs can help to revive the market for classical music and the livelihoods of individual musicians right now. Art and music’s close relationship is nothing new. What is new is technology that allows individual musicians to package and personalize transformative experiences for their own fan communities. As the NFT opens up avenues across the creator economy, it’s time for classical music to realize its place in art history. 

Christos A. Makridis is the co-founder and CTO/COO of Living Opera, a Web3 multimedia startup that combines classical music with blockchain technologies. He is also a professor, writer, and adviser with doctorates in Economics and Management, and Science and Engineering from Stanford University.

‍Soula Parassidis is the lead founder and CEO of Living Opera. She is also an international opera singer, speaker, and passionate advocate against human trafficking with a BA in music from The University of British Columbia.

Never mind FTX — Fine arts institutions should still onboard to blockchain

This article was originally published in Cointelegraph.

The reality is that blockchain technology can still deliver substantial benefits, particularly within the fine arts. And for those who have been paying attention, 2022 has been a year of incredible normalization for nonfungible tokens (NFTs). Simply put, major institutions across various sectors have dipped their toes into Web3.

In November, Instagram announced that creators would soon have the functionality to make and sell NFTs. Apple similarly announced in September that NFTs could be sold in its App Store. Put together, that’s 3.5 billion people (2 billion from Instagram and 1.5 billion from the App Store).

Although each of these major institutions has its own quirks and rules, most notably the fees associated with using their platforms, the reality is that they are still some of the largest platforms in the world and will drive the onboarding of millions into Web3.

It’s not just the technology sector. Starbucks and JPMorgan Chase both recently partnered with Polygon, one of the leading blockchain infrastructure companies, to fuel their services. While both partnered for different reasons — Starbucks to launch a loyalty program and JPMorgan Chase to facilitate financial transactions — the diversity of legacy enterprises onboarding onto the blockchain in serious, multimillion-dollar ways signals that something is up.

It is far too easy to throw the baby out with the bathwater and dismiss crypto just because of the fraudulent activity of bad actors, such as FTX and Terra, in recent days. But they presented problems with governance, not crypto or blockchain. Any technology can be abused and misused: Surely we would not want to hold fiat currency or any other asset classes to the same standards?

The fine arts, particularly the performing arts, have not yet recovered from nearly two years of cancellations and theater closures — nor have its artists. Moreover, the sector was already facing difficulty and decline in the lead-up to 2020. Artists’ wages have been on the decline, not even taking into account the higher costs they incur as a result of changes in the price of education and the additional costs they incur simply to do their job (e.g., voice lessons and auditions).

These are serious challenges the sector must grapple with if it wants to shift its financial and social trajectory. But even beyond the fiscal challenges it faces, a new generation of consumers is emerging with an appetite for different types of experiences, ranging from digital assets that they can buy and display in their social network to the authenticity and increased personal connection they want to have with the brands they buy from. Just consider a recent survey by Roblox of 1,000 Gen Z community members: 73% of the zoomers said they spend money on digital fashion, 66% said they were excited to wear brand-name virtual items on Roblox, and nearly half looked to digital fashion brands and designers for clothes that they can experiment with that they would not have otherwise worn in real life.

That does not mean consumers want purely digital experiences, but rather that digital becomes a complement to in-person goods and services. And that should come as a surprise — that’s the way music already is with the combination of streaming and in-person concerts. The differences here are the expansion of digital asset types and the fact that the asset lives on the blockchain rather than a centralized customer relationship management software.

Second, the labor market for artists has been struggling. While detailed data on artists is hard to gather, my research using data from the United States Census Bureau’s American Community Survey finds that real wages for performing artists have declined over the past decade. International evidence indicates that a similar pattern holds true across countries.

What’s worse, artists have been absorbing more costs over these years too, meaning that their disposable income has suffered. Although many artists may stick with their craft because of a love for what they do, the sector will eventually implode if the business model does not change.

These factors substantially reduce artists’ bargaining power when they negotiate contracts. This is why they are generally forced into giving up their intellectual property when signing with a record label — giving up their creative content in favor of a larger audience. But sadly, these agreements rarely deliver the finances they promise.

Therein is the opportunity for fine arts institutions: using digital assets to simultaneously expand their base of consumers and revamp the way that artists get remunerated so that they are financially empowered.

NFTs are just a means for establishing a line of communication between consumers and institutions with a digital paper trail around the intellectual property that ensures remuneration based on the agreed-upon terms.

While many fine art galleries are already beginning to work with digital artists, other types of fine arts institutions, like theaters, could also use NFTs.

The easiest place to start is with ticketing: An opera house could offer tickets as NFTs, and patrons could perform the transaction in a similar way with an email and password, but now have the NFT live on the blockchain.

That offers a handful of advantages, such as the ability for patrons to showcase their support for the opera on their digital wallet, while reducing fraud and/or piracy.

Furthermore, using NFTs establishes a two-way line of communication between holders and the institution, allowing an opera house to give attendees additional perks (e.g., photos from the event).

Web3 is not a panacea. It’s just another technology, but it offers the potential to fundamentally transform the way we interact and transact with one another.

It is easy to get hung up on all the new language and buzzwords, but an effective implementation of Web3 architecture ultimately should look and feel just as easy as what you’re used to. The only difference is that now the technology lives on the blockchain.

Fine arts institutions have much to gain from the strategic adoption of these technologies. It just requires an open mind and a willingness to put in the hard work with the right partners.

Christos Makridis is the chief operating officer and co-founder of Living Opera, a Web3 multimedia startup anchored in classical music, and a research affiliate at Columbia Business School and Stanford University. He also holds doctorate degrees in economics and management science and engineering from Stanford University.

How to Tell the Difference Between Expertise and Salesmanship

This article was originally published in Inc Magazine (with Bill Fotsch).

The business world is filled with self-proclaimed experts. They write a book or work with a prestigious client and suddenly they're a thought leader. Their following feels good about what the expert is selling because it sounds good. That's because there's usually a kernel of truth in it--it's just not the whole truth. Plenty of companies spend a lot of time and money on just part of the truth. One of us (Bill) even spent over 25 years selling the value of Open-Book Management, driving seminar, workshop, and consulting revenue for just part of the truth.

Our attraction to "experts" isn't anything new. During Copernicus's time, popular experts posited that the earth was the center of the universe. It made people feel good. It seemed to make sense. But Copernicus tested that hypothesis with research, and found it wasn't true. The truth made him unpopular, yet no one could refute his data. What today's business experts lack is just this--real research that proves the validity of their philosophy.

Rank and Yank, the approach widely popularized by management icon Jack Welch, suggested regularly ranking all employees and firing those at the bottom of the list. (Welch disliked the name "Rank and Yank," but probably so did the employees being yanked.) Some of Welch's HR staff set out to sell their trendy expertise and generated a lot of consulting fees. Now most of them deny having anything to do with rank and yank, as it has largely been discredited. In recent years, companies like Microsoft and General Electric have dropped the practice, but not before a fair amount of damage was done, all at the advice of experts.

So how do you tell if the latest management pitch is sound advice or just the latest fad that will end up in a Dilbert cartoon? What you really want to know is:

Is the management approach repeatable?

1. Is there some way of diagnosing your company and estimating the value of the approach?

2. Is there research that validates the management approach?

A good example of an approach that addresses all three is Net Promoter Score, originated by Fred Reichheld and Bain & Company. Lots of folks offer advice on how to drive customer satisfaction, but Reichheld's insight was captured by the repeatable Net Promoter Score (NPS) tool. Several Bain competitors have criticized NPS, but they can't refute that it enables any company to benchmark itself against hundreds or thousands of others. Great as that is, it's lacking--it says nothing about how the company stewards its employees. And how it relates to its employees will ultimately impact how it serves its customers.

William Kahn (coiner of employee engagement) recently expressed that most of today's "expert" work on the subject misses the mark. Despite companies spending billions on it over the past three decades, employee engagement has not meaningfully improved. In Kahn's 1990 qualitative research, he clearly defined three key drivers of employee engagement: meaningfulness, safety, and availability. Given that these three are largely absent from most employee engagement work, Kahn's disappointment is understandable.

These three drivers parallel the three drivers that Dan Pink's MIT research developed: purpose, mastery, and autonomy. It's worth noting how similar his research results are to Kahn's. Pink analyzed four decades of scientific research on human motivation and found a contradiction between what science tells us works and what organizations actually do. Most experts seem to reflect on the latter.  

Whether you prefer Kahn's drivers or Pink's, their likeness emanates from a common source: research. Both suggest that many of today's experts in their field are missing something essential: research. Experts on Agile, Scaling Up, KPI/OKR, Love + Work, Open-Book Management, Total Quality Management, Lean, etc., have either no basis in research or have adopted others' research and modified it to suit their needs.

That's why we've pioneered the concept of Economic Engagement, creating a survey of 15 questions that relate to five pillars: customer service, shared economic understanding, transparency, shared compensation, and employee participation. Our subsequent five years of research with Harvard Business School defined and tested our hypothesis. After 10 waves of 50-150 companies per wave, the results were captured in this article. 

Our research showed time and again that companies in the top quartile of Economic Engagement were enjoying double the profit growth of their peers. In short, companies that adhere to these proven best practices around Economic Engagement also perform much better financially. We will be publishing an update, but the results in the last year were very similar, and our learning continues.

The research fits surprisingly well with Kahn's and Pink's. Maybe that's because we too were just trying to understand how employees relate to their work, and how that work relates to the customer. 

• Meaningfulness - Purpose - Customer Engagement, Economic Understanding

• Safety - Mastery - Transparency

• Availability - Autonomy  - Employee Compensation and Participation

Moreover, our research also shows employees are willing to pay for work environments that utilize the features of high Economic Engagement--that is, workplaces where employees feel appreciated, receive development and training opportunities, and so on.

Too often, "experts" are trapped with a business model that is antithetical to learning the whole truth. So next time you hear a good speaker or read a good article (hopefully ours is included in that set)--ask questions. Is there data-driven substance underlying the claims, or is it just a series of well-spoken words? A true expert will jump at the chance to validate their ideas. If they hesitate, think twice before working with them.

5 tips for riding out a downbeat market this holiday season

This article was originally published in Cointelegraph.

These forecasts are driven by deteriorating structural fundamentals. For example, credit card debt has surged past even 2020 levels, with interest rates charged by banks that are just slightly higher than those observed leading up to the post-2000 dot-com crash. And yet, labor force participation rates — or the proportion of the population that is able to work and is working — have still not recovered to pre-pandemic levels. Furthermore, inflation — as measured by the consumer price index — has surged over the past few years.

Economic forecasts suggest that we are in for greater economic turbulence. The United States has been in a recession and that recession is expected to continue, with the Conference Board forecasting a further decline in gross domestic product (GDP) by 0.5% in Q4 of this year. It also anticipates that the recession will continue into at least Q2 of 2023. That was before the collapse of crypto trading platform FTX, which had profound downstream effects on investment portfolios and non-crypto companies. Other more optimistic forecasts, such as those of the Federal Reserve Bank of Philadelphia and S&P Global, are just barely positive for 2023 at 0.7% and 0.2%, respectively.

These macroeconomic indicators are common outside of the U.S. too. Many – even the International Monetary Fund — have pointed out the increase in inflation as a result of higher energy prices in Europe, which is one factor, among others, that contributes to the European Union’s recent forecast of nearly zero GDP growth for all of 2023. That is on top of its already long-run demographic challenge that there are too many people aging out of the labor force and not enough new entrants, which has dire implications for GDP growth.

While these macroeconomic fundamentals are outside your control, there is still a lot within your control. We need to remember that we have substantial agency over our lives and do not need to get dragged into an economic tailspin just because that’s what might be happening to the aggregate economy — we can still individually thrive during a famine.

Here are five tips for doing just that.

Optimize the wait. Make the best use of your time every day, which might mean picking up a new skill or taking up a freelance job that deploys your broader skill set. Especially with the emergence of artificial intelligence and automation, certain tasks are becoming obsolete and other new creative opportunities are emerging — and you can leverage that trend by acquiring the skills to perform these tasks. There are substantial mismatches in the demand and supply in certain parts of the labor market, such as artificial intelligence and cybersecurity jobs, so consider picking up a new skill that you can put to work.

Reflect and take inventory. It is far too easy to look at the circumstances we personally or as a society are in and get worried, but take stock of what is going right and what you’re thankful for. The holidays are an especially good opportunity to do so. By putting your circumstances in perspective, you avoid a lot of mental rabbit holes that could cause you to become more anxious and disappointed, which unfortunately only further amplifies challenging circumstances. Even when circumstances look bleak, remember what you have and what you have been through — it will inspire you to go on.

Grow your network. Building relationships is part of the adventure we are on. Focus on people as actual human beings, rather than potential doors of opportunity. People are indeed doors, but treating people in transactional ways warps your perspective of life and ends up closing those doors, because people do not like being treated as vending machines. (Would you like it if people only talked to you based on what you could give to them?)

Related: 5 reasons 2023 will be a tough year for global markets

Cherish small wins. We often focus on the big and flashy goals or aspirations, but overlook what is immediately in front of us. We have a lot more agency than we give ourselves credit for! Whether you are taking care of your property or writing an excellent report at work, demonstrating excellence in everything that you do creates a lot more optionality in the long run that yields truly fulfilling and fruitful employment opportunities.

Always carve out some proportion of your earnings for savings. Consider investing it in structurally sound digital assets. There is no substitute for setting aside resources every month, whether crypto or fiat, that you can draw on when you’re most in need. There will always be an element of unpredictability in the world, so view these savings as your insurance policy on market downturns. Even though crypto has been in a winter, all assets have been struggling because the entire market is in a downturn. But the future of the major tokens, such as Bitcoin (BTC) and Ether (ETH), remains hopeful, and it’s just a matter of time before they rebound. Moreover, as governments become more volatile and inflation continues to grow, crypto can be a useful hedge and diversification strategy.

Don’t despair even when the economy is faltering. You and your household can still thrive!

Christos A. Makridis is a research affiliate at Stanford University and Columbia Business School and the chief technology officer and co-founder of Living Opera, a multimedia art-tech Web3 startup. He holds doctoral degrees in economics and management science and engineering from Stanford University.

This is what it will take to be successful in Web3

This article was initially published in Fast Company with Soula Parassidis.

The vast majority of technology is a distribution system. PayPal and Stripe connect merchants and customers; Facebook and Twitter distribute content across societies; Microsoft and Apple build hardware and software that form the infrastructure for the digital economy.

While idea generation for these companies and many others is a creative process, the technology actually serves very basic and fundamental needs. Creators need to build things that are so simple to understand and use that even their grandparents would buy the product or service. That same principle holds in the Web3 era.

But each of us thinks and builds differently. And one of the hardest things for artists is that we are not taught to go past the step of creativity into the operations and business development that is needed to build a profitable and sustainable business. We are fantastic at coming up with creative ideas that captivate an audience, but not necessarily for seeing it through. That’s been a big lesson for me, Soula, to learn throughout the process of launching Living Opera.

The biggest differentiating factor that we artists bring, however, is the focus on people. Our focus is often around people, and we’re often discouraged from thinking about profit. Neither extreme is good. Just focusing on people without operations leads to a cute idea that never takes off, but just focusing on profit produces a transactional and transient technology that at best is here today and gone tomorrow.

We believe that the solution is to focus on creativity, then people, and then profit.

Let’s unpack that. Artists do not think of their customers as “users.” Rather, they are our audience and even our patrons; we perform and produce to serve them. In fact, at the end of an opera, the audience renders a verdict about the performance by applauding (or not).

That accountability and transparency is not available in many businesses, especially the areas of the economy where there are monopolies, and consumers have only one or two choices.

THINK LIKE AN ARTIST

When you finally realize, as an artist, that you have to build something to sustain your livelihood, then you’re faced with a choice. Either to partner with people who can take the kernel of what you’re doing and make it profitable, or, take a nonprofit model where you find really passionate patrons who can support you.

Although most artists take the former path, especially in pop culture, the business operators end up focusing heavily on narrow metrics, especially follower counts, at the expense of connecting with and learning from actual people.

Metrics are great, but not when they get so narrow and disconnected from the lives of producing transformative and uplifting experiences in the lives of individual people. Economists call this phenomenon multitasking. It was a term originally used to describe a class of “principal-agent problems” in organizations where a manager measures the performance of an employee according to a narrow set of metrics that ultimately incentivize employees toward unintended and often perverse behaviors, even if the initial metrics are satisfied.

That’s arguably why the arts and entertainment industry is larger than ever, but society has become more tribal and transactional. Society, in many ways, has become more siloed and our taste for quality has been dulled because of the focus on products and services—especially in music—that are made for the masses, not for improving individual lives.

The tendency to focus on the masses has emerged since artists are often forced into these dual extremes of “partner with a big label and go commercial” or “align with a nonprofit and focus on donations.” Sadly, there is not much middle ground for artists to simultaneously hold onto their intellectual property and earn a meaningful wage. But Web3 is changing that.

The central thesis in the Web3 movement is decentralized ownership: In other words, consumers should own their data, and content creators should own their intellectual property. When the individual has ownership, they are empowered with the freedom to make choices without being held as an economic hostage. For example, artists today routinely sign deals with record labels, but many of them would choose differently in a different competitive landscape.

The scientific literature also has found that more decentralized countries and organizations perform better than their counterparts. We are entering an era where there is collective appetite for real community—not more of the same mass media—and Web3 has the potential to fuel it by endowing creators with the technological tools to generate sustainable income.

BUILD LIKE AN ENGINEER

Engineers are architects who help design the process and ensure that every part of it is working as intended. Whether writing statistical code to analyze data or building a website, an engineer focuses deeply on operational details and processes.

That’s good when you know why you’re building and who you’re building for. But it’s bad when you don’t have answers to those fundamental questions. No amount of venture capital funding is going to enable transformative experiences for your audience of interest if you have not thought of people first and actively built relationships with them.

In fact, one of the challenges today is that we’ve become so data-savvy and focused as a society that we have sometimes elevated engineering skills—or at least the quest for metrics—over other skills and the “why” behind what we’re doing. Engineering skills are undoubtedly important and one manifestation of creativity, but they’re different from the artistic kind.

If we can bridge the gap between thinking like an artist and building like an engineer, we believe that we’ll see an explosion of profitability and value-creation through true creativity that lasts generations. As entrepreneurs, we need to be so in love with the audiences we’re serving and willing to accept feedback that no fancy technological gadgets or prospect of funding can throw us from our “true north.”

Remember, you’re building for people. A great idea cannot scale into a profitable movement unless you are truly passionate about helping people flourish. That means using technology as a tool, rather than an end in itself. NFTs, and the Web3 movement, have the potential to create tremendous value, but they must be centered around specific use-cases that address peoples’ needs. The approaches of both artists and engineers can play a complementary role in unlocking a flurry of creative activity to do just that.

Soula Parassidis is the CEO and lead founder of Living Opera. She is also an international opera singer, speaker, and passionate advocate against human trafficking.

Christos A. Makridis is the CTO/COO and cofounder of Living Opera. He is also a professor, writer, and adviser.

Classical Music and Blockchain Taught Me to Think Like an Artist

This article was originally published in Entrepreneur & Innovation Exchange (EIX).

Most people would never think of putting classical music and blockchain in the same sentence. With my training in engineering and economics, I wouldn’t have either -- if it were not for my getting to know and partner with two of the world’s leading opera singers, Soula Parassidis and Norman Reinhardt. 

Through this partnership and the business we built together, I learned (and am learning) much about classical music and the performing arts – knowledge that has enhanced my ability to think entrepreneurially. I saw and experienced the potential to create transformative experiences, leading us to launch and brand Living Opera as a web3 multimedia startup where blockchain technology was not just a feature, but a driving force behind our multimedia. By marrying blockchain and classical music, we unleashed a wave of value-creating opportunities for artists.

This article passes along the fresh perspectives I gained from working with passionate artists and building our business. These perspectives can provide a new way for other entrepreneurs to think creatively about opportunities and the audiences who can benefit from them. 

ADDRESSING CHALLENGES FOR ARTISTS

While classical music is a world-wide phenomenon, the sector has struggled for at least several decades because of rising costs and institutional rigidity. We’ve seen that artists are earning less and being asked to pay more of their own costs, such as for agents and traveling. The schools and conservatories that train future artists have not helped them prepare for these realities. In fact, as we have presented a white paper that aims to decentralize philanthropy and grantmaking, artists have actually experienced declining real earnings, at least in the U.S., on top of the additional costs they have to incur.

From working with Soula and Norman, we saw an opportunity for distributed ledger technologies to fundamentally improve the economics for artists across the board. These technologies give  artists a way to directly communicate and interact with their fans without the wide array of intermediaries that typically leave artists with little of the total revenue and no intellectual property over their created content. 

Our venture, Living Opera, offers non-fungible token (NFT) collections anchored around classical music. For example, our upcoming collection called Magic Mozart is based on Wolfgang Amadeus Mozart’s composition of The Magic Flute, which premiered on September 30th of 1791. We are producing unique digital art where each layer comes from a feature of The Magic Flute, and we are giving each buyer a personalized minuet based on a replica of Musikalisches Würfelspiel – a dice game that is attributed to Mozart.

WHAT ARTISTS CAN TEACH ENTREPRENEURS

But my training years ago at Stanford with dual doctorates in economics and engineering, coupled with my publication of over 70 peer-reviewed research papers, did not prepare me to think like an artist and come up with creative ways of telling stories. I really learned this skill by working with Soula and Norman.

Here are three main lessons for entrepreneurs.

1. Business is fundamentally about providing a service to an audience.

Funnily enough, one of the hardest things for artists is that they are not taught to go past the step of creativity into the operations and business development that is needed to build a profitable and sustainable business, whereas entrepreneurs are generally trained the opposite.

However, artists are far better at focusing on people, sometimes so heavily that profit does not enter the equation! Neither extreme is good – but the lesson here is that focusing solely on profit produces a transactional and transient technology that at best is here today and gone tomorrow. Living Opera’s approach is to focus on creativity, then people, and then profit. And that extends even into the way we talk about our customers as our “audience,” rather than our “users.” In fact, at the end of an opera, the audience renders a verdict about the performance by applauding (or not!). Similarly, the audience for a product renders a verdict by buying it (or not.)

Entrepreneurs must actively and intentionally think about their audience and build a product or service that is so simple to understand that even their grandmother may want to buy it. This involves creating a story that is captivating to the audience – a story that sings the praises of its qualities as a solution to the problem it solves!

2. Respect excellence in a domain even in the absence of knowledge about how it operates.

Before getting introduced to the fine arts, I assumed that performers were generally just really talented at their jobs if they decided to pursue a career in it. But it actually requires years and years of practice. The talent is only the ticket to the game, but intentional and deliberate practice is what will drive excellence and allow an artist to truly build a working career out of it. Soula, for example, had been playing an instrument since she was five, and cumulatively Soula and Norm have nearly 30 years in the performing arts around the world.

How is that relevant for entrepreneurs? From knowing Soula and Norm I came to understand that performing at the highest levels in classical music is like performing in the NBA or MLB – it’s an extreme sport that requires deep understanding of the body, skills in memorization and acting, and incredible diligence and an investment of time. When you begin to respect excellence in other domains, even ones that you’ll never fully understand, it gives you a sense of humility and curiosity to learn about others.

Entrepreneurs who lack those essential attributes of humility and curiosity will risk becoming transactional and lose their creativity. And they will be blind to the highest-impact ideas -- those at the intersection of seemingly disparate areas. We need to be open to learning new things every day and not shut ourselves off to learning about people and things outside our core area.

3. Good communication requires great listening

Often we are taught that communication – or producing content in social or formal media – is about having clear, persuasive points and sticking to a content calendar. (And there are an analogous set of best practices for verbal communication.) But an equally important part of communication that is often overlooked is listening.

Mozart is attributed to having said that “the music is not in the notes, but in the silence between” – or the “rests.” That is a profound statement since it implies that the rests are what make a piece of music come alive and give signals to the performer. Learning to pay attention to those rests requires hard work, diligence, and concentration, but it means that artists cultivate an incredible amount of concentration. Imagine if we ran business meetings with more listening?

Entrepreneurs can only become effective communicators when they have learned to listen. Active listening builds humility and serves as the bedrock for genuine understanding.

TAKING STOCK

There is no cookie cutter approach in entrepreneurship and life. If you would have asked me a decade ago about my future portfolio of work, a classical music and blockchain startup would not have even been on the list. But this journey has unlocked a new wave of creativity and interests – and hopefully these reflections are helpful for you too!

Christos A. Makridis is the CTO/COO and co-founder of Living Opera, a web3 multimedia startup that combines classical music and blockchain technologies. He is also a professor, writer, and adviser with doctorates in economics and management science & engineering from Stanford University.

Quantifying the Harm of Religious Restrictions

This article was originally published in City Journal.

Covid-era limitations on worship led to more isolation and unhappiness among religious observers.

My newly published research in the European Economic Review finds that the introduction of Covid-related restrictions on houses of worship led to a substantial decline in subjective well-being and an increase in social isolation among religious adherents relative to non-religious people.

Using a sample of 50,000 Americans surveyed between 2020 and 2021, I find that the adoption of these restrictions reduced current life satisfaction and made it more probable that religious people would isolate themselves. These effects remained after controlling for demographics, income, political affiliation, industry, and occupation—and they wiped away nearly half of the life-satisfaction advantage that religious people generally enjoy over the non-religious. Limits on exactly how many people can gather were associated with more harm than were percentage caps on occupancy.

Further, my research finds no public-health benefits to these restrictions—they did not limit the spread of Covid infections or deaths, on average. This finding joins a large body of empirical literature identifying adverse economic effects, no public-health benefits, and dreadful benefit–cost ratios for Covid restrictions. Some evidence showed an association between the restrictions and a reduction in Covid in the early months of the pandemic, but as sample sizes grew, these benefits disappeared.

A common criticism of such results is that confounding factors render it hard for researchers to isolate the effects of specific policies. (Of course, that has not stopped advocates of such measures from claiming that they work.) Fortunately, a large body of state-level data, compiled by Gallup, now lets researchers study individual outcomes before and after policy interventions. My research compares religious and non-religious individuals in the same state before and after the adoption of restrictions on houses of worship.

What explains these reductions in well-being? A major factor is the rise in self-isolation. Another seems to be social capital: the negative effects of restrictions are slightly larger in counties that rank higher in their level of social capital—that is, their degree of norms, trust, and networks. This is consistent with sociologist Rodney Stark’s theory of “moral communities,” which notes that people can help reinforce positive norms among their associates.

A mountain of empirical research demonstrates that religious attendance and participation benefits health and well-being. My research offers evidence that Covid restrictions on religious communities have had adverse effects.

Despite ‘Crypto Winter,’ New York’s Art Scene Is Opening Up to NFTs

This article was originally published in the New York Sun.

Many people have pronounced non-fungible tokens as dead, calling them a fading trend as a result of a reduction in sales and OpenSea’s wave of layoffs. 

Even Starbucks’ recent partnership with Polygon Studios — a leader in scalable and energy-efficient production on the blockchain — has been mocked since the announcement last week. The partnership offers Starbucks NFT holders access to a unique set of perks, ranging from a virtual espresso martini-making class to access to unique merchandise and artist collaborations.

While these critics are right to point out the large decline in sales, there are also many signs of strengthening demand — and an emergence of even more use-cases for NFTs.

At their core, NFTs are fundamentally about authentication and ownership. Distributed ledger technologies, often referred to “blockchain” for short, are good at decentralizing consensus-making and deciding what activity gets recorded. 

Whereas traditional digital ledgers in an organization are under the stewardship of a department, or often even a specific person, these distributed ledgers aim to decentralize decision-making, often among geographically disparate individuals connected by common interests. 

NFTs, which are stored on the blockchain, signal ownership of an asset. That is why art and music are such important use cases — their creators make original versions that are necessary to protect from fraudulent knock-offs, ranging from fake Gucci purses to Rembrandt paintings.

Just last week, the William S. Paley Foundation announced that it would “auction off at least $70 million in art masterpieces this fall to expand the digital footprint of the Museum of Modern Art (MoMA) in New York and possibly acquire the museum’s first NFTs.” 

Even though MoMA contributed data from its full collection to Refik Anadol, a leading artist using methods from artificial intelligence, to build the NFT exhibition titled “Unsupervised,” it does not own any tokenized artwork on the blockchain.

The interest from established institutions, like MoMA, in art NFTs is not an isolated occurrence but a building trend. 

The Artist Rights Society — an organization that helps artists with copyright and licensing — launched its own web3 platform called Arsnl on September 9. It began with a series of NFTs by Frank Stella, an artist widely known for his paintings from the 1950s and 1960s. In addition to the digital artwork, each NFT holder also receives the rights to the 3D images, which they can use to print physical models.

The sale of not just artwork, but also rights, is substantial for the NFT community. At a time when many NFT projects have failed to delineate what holders are actually receiving, according to a recent Galaxy Digital report, clarity for the NFT holders is paramount. This has led to many disputes between NFT holders and the projects that they bought from, as well as some instances of fraud.

Moreover, the move toward greater clarity is a leading indicator that the market is maturing: Potential customers are increasingly aware of the questions that need to be asked. 

That contrasts with the early days of the NFT boom when projects, like the Bored Ape Yacht Club, soared, promising that holders “own the underlying Bored Ape, the Art, completely.” These promises have not always been kept. 

The owner of BAYC, Yuga Labs “implicitly acknowledges that the NFT holder does not, in fact, own the art.” Many NFT holders have also grown discontent, leading A16z to propose several intellectual property templates for NFT projects so that founders adhere to best practices.

Another example is Pace Gallery, one of the oldest and most established galleries in New York City. In 2021 Pace launched a dedicated NFT gallery called Pace Verso. While its aspirations have not yet come into focus, it’s obvious that Pace wants to embrace NFT technology and has already begun working with Art Blocks, a leading generative art web3 company, to showcase new artwork.

Bitforms and Postmasters — two other galleries — are working with emerging and mid-career artists on a more hands-on basis in respect of NFT projects. In particular, they are allowing artists to lead NFT projects that coincide with their exhibitions, offering buyers and fans additional opportunities to interact with their creative content. 

Manfred Mohr — one of the artists working with Bitform producing mathematically oriented art — has talked about the importance of the  physical manifestations of digital art.

Lydian Stater takes yet another approach, focusing on the intersection of contemporary and crypto art that is neither located in the physical nor digital worlds, but is rather a hybrid of both. They also care deeply about helping to train artists to use these new digital tools and applications on their own. Lydian State recently unveiled a virtual reality space of their current exhibition.

These trends tell us that NFTs are not just a passing fad — they are here to stay. The growing adoption of NFTs from reputable and established institutions demonstrates not only serious interest, but also a commitment of brand and vision.

The emergence of all these use-cases also counters the narrative that people just buy NFTs to funnel money around to avoid regulation or other compliance requirements, particularly around securities. The U.S. Securities and Exchange Commission defines securities according to three features, but the most controversial is the “expectation of profit” among those who get involved. 

Although some NFT projects and tokens exist only because they are trying to circumvent regulation, many other projects that exist bring substantial value and equitable remuneration to the owners.

Just as every organization is different, every NFT project is different. For example, we in Living Opera — a web3 multimedia startup — just launched a collection called MagicNFT Mozart that pioneers a novel approach to philanthropy using decentralized grant-making toward performing artists. 

Our initiative is hardly a “get rich quick” scheme; it is a collection anchored in engagement with the arts and philanthropy. Amid all the noise in the NFT market, many are making incredibly exciting discoveries and progress with applications well outside the digital landscape. 

Some NFT projects will survive — and those will be the ones that are truly creative and deliver long-term value to their holders. What we’re seeing in New York City alone is incredible momentum with the arts and NFTs, a trend that will continue.

NFTs are not Dead – Artists Shouldn’t Give Up as Real Wages Decline

This article was originally published in BeInCrypto with Soula Parassidis.

NFTs are not dead. Innovations in how NFTs are used are giving artists new opportunities to thrive. Now is the time for artists to embrace NFTs, says Living Opera founders, Soula Parassidis and Christos A. Makridis.

If you just look at financial indicators, whether it’s the price of Ethereum or the S&P 500, you might think that crypto – or all asset classes – are down. But that’s normal. The price of an asset is a function of its intrinsic value and expectations of future cash flow. So economic sentiment will generate cyclical volatility. The long-run question that matters is whether there is intrinsic value behind an asset – and the answer behind NFTs as a technology is yes.

One of the clearest use-cases for NFTs is in the arts. Our research in Living Opera has found that real wages for artists in the United States have declined since 2009. Moreover, their wages are below the national average. This is despite their having greater degrees of educational attainment. If the arts continue business as usual, it will implode – we need a solution.

NFTs offer them another pathway to success – and despite the downturn in the market, innovations in how NFTs are used are giving artists new opportunities to thrive. 

NFTs are not dead, they are here to democratize

You might not be surprised to hear that artists don’t earn as much as data scientists. But the reality is much worse. There are many more musicians than jobs and artists have only been losing more of their bargaining power over time. This is even in music genres where people might assume artists are fairly well compensated, such as pop and hip-hop. Artists have had to give up much of their intellectual property to record labels. Many are forced to leave their creative skills behind to support themselves. In fact, the Global Well-being of Artists survey we launched in Living Opera earlier in the year found that 53% had jobs outside the arts to pay the bills.

NFTs present another path to creative freedom for these musicians. Web3 tech exists to simplify and streamline value-creation. This provides people with secure pathways to connect directly with one another and get remunerated for their talents.

That’s why we’re launching a decentralized autonomous organization, or DAO for short, called the Living Arts DAO. We will create a decentralized grant-making ecosystem for artists to submit funding proposals and journey directly with philanthropists who want to be kept updated on their efforts.

There haven’t been all that many projects that have combined elements of Web3 tech with the classical music world. Yet artists in this space are uniquely positioned to explore how they can benefit from NFTs. Because classical music is in the public domain, artists do not need to worry about licensing rights. Classical musicians and ensembles tend to have loyal communities of audience members and fans. Supporters may be more likely to purchase NFTs related to their favorite pieces, particularly when they play an active role in supporting artists. 

NFTs are not dead… despite concerns

Many artists and arts organizations have legitimate concerns about NFTs – but the bear market could lead to positive change. 

The elephant in the room, of course, is that much of the market activity surrounding NFTs has given them a bad name. The bear market seems to have exacerbated this problem – between May and August 2022, the average price of an NFT sale fell 92%.

But the bear market isn’t all bad. Our research has found that lulls in the market have been times of innovation that have spurred generational projects. So we should not fear or dread the bear market, but dive into a lasting use-case for NFTs. Which is, connecting all kinds of creators directly with their supporters and ensuring that ownership remains with the creator. We’ve written before about how NFTs allow artists to retain licensing rights over their content. This allows them to become more financially independent and improves their bargaining power in negotiations.

We’re beginning to see more use-cases emerge even in retail. Recently, Starbucks and Polygon created their Odyssey partnership, providing NFT holders with perks.

Ryan Wyatt is the chief executive officer of Polygon. He said, “Big brands are starting to recognize the importance of how they digitally interact with their community in more immersive ways. Through Polygon, users can own their digital items and data, allowing for unique digital innovation that we’ve never been able to accomplish before. The Starbucks partnership elevates and advances what reward programs can do to empower users in a new way.”

Artists Own Their Work

At their core, NFTs provide a way for artists to own and license their work without the clutter of all the intermediaries, allowing others to build upon it.

Although the bear market is raging in the NFT world, innovation is still happening. New use cases for this technology are emerging every day. That’s why now is the time for artists to explore all the different ways they can use NFTs to connect with new people and expand their support networks. NFTs allow people to create tradable assets where there previously were none, So artists can enhance how people can engage with their work – and who can engage with it in the first place. 

NFTs are not dead. So, dear artists, now is our time. Let’s use this technology to innovate, create new experiences, and build new bridges in the world. 

The SEC is bullying Kim Kardashian, and it could chill the influencer economy

The article was originally published on Cointelegraph.

The feds should have tried to work with Kardashian to establish more transparent norms for influencers rather than slapping her with a $1.26 million fine for promoting EthereumMax.

The Securities and Exchange Commission announced on Oct. 3 that Kim Kardashian settled an allegation that she promoted “a crypto asset security offered and sold by EthereumMax without disclosing the payment [of $250,000] she received for the promotion.” While she cooperated and closed the case with $1.26 million in penalties, the charge highlights the liability that “influencers” increasingly face as a result of an activist SEC that has failed to establish regulatory clarity.

Pushing influencers to leave the United States

Addressing the agency’s action against Kardashian, Jacob Robinson, a legal scholar and host of the Law and Code podcast, noted that “The net-positive is [that] this probably leads to less shilling by celebs who have zero knowledge of the underlying project & are just receiving a big payday.”

Thanks to the proliferation of social media platforms, content creators and influencers have emerged and are working with brands to promote products and services. Sadly, the “creator economy” has also had downsides. In particular, influencers have often sold products and services that may not serve everyone’s interests, accepting payment from companies in exchange for their support.

While that privilege can be, and often is, abused, influencers are not doing anything systematically different than what corporations do when they take out paid advertisements in the media and on television, or even when board members join and take on a retainer to share their network and promote an organization. When a corporation takes out an ad in a large paper or magazine, such as The New York Times or Vogue, are the media outlets equally liable for not disclosing their acceptance of payment to all the readers? Clearly not, and the media’s business model would quickly crumble if they were unable to accept such paid advertising opportunities.

So, why are influencers treated so differently, and why can they personally be liable and targeted by a federal agency? Consider the car market: If a used car salesperson sells a customer a car that is later recalled or turns out to have some other flaw, are they singled out by a regulatory agency? The car company might be — as we have seen with Volkswagen, Toyota and others over the years — but the individual employee is generally free from such liability.

The SEC’s action against Kardashian risks alienating and stifling other members of the creator economy. While she can “afford” the $1.26 million fine — a little more than $1 million in excess of what she earned — many content creators are not making six-figure-plus salaries each year. The action also threatens to push many content creators outside the United States to countries that have more favorable policies.

Defining securities and liability

The SEC has adhered to an old Supreme Court ruling from 1946, SEC v. W. J. Howey Co., which led to what is now known as the “Howey test.” The Howey test defines an “investment contract” if the following conditions are met: 1) an investment of money 2) in a common enterprise 3) with the expectation of profit 4) derived from the efforts of others.

The test, however, was introduced in an entirely different economy than the one we have today. To be sure, many projects that involve the release of fungible tokens easily fall into the category of a security regardless of how liberal one wants to be with the definition. But other projects, especially nonfungible token projects, are in a much grayer area. Many NFT projects do not convey any expectation of profit to their potential holders but rather emphasize perks and exclusive access to events, classes or deals.

Admittedly, the SEC’s recent regulatory action went after Kardashian for her promotion of EthereumMax (EMAX) without disclosing that she had received payment rather than for EthereumMax being a security, as it was arguably an easier, more clear-cut case. But the case highlights a major challenge influencers will inevitably face in the Web3 economy if they have to worry about regulatory risk against themselves for promoting different projects, even if they just make a social media post.

Other countries are taking a vastly different approach toward Web3. For example, the United Arab Emirates has gone on record saying that it wants its economic success to be measured according to its “gross metaverse product” rather than the conventional gross domestic product that has become the norm for cross-country comparisons in productivity. The UAE, among others (such as Singapore), has become a hub for entrepreneurs and startups.

What happened to Kardashian could happen to others

If the regulatory concern is that influencers are abusing their authority by promoting products and services without disclosing receipt of compensation, then Web3 lends itself perfectly through greater transparency and accountability on the blockchain. In particular, influencers could have their digital wallets open for viewing so that their remuneration is open and their own purchases visible. (There is still a need for privacy-preserving blockchains since everything in everyone’s lives should not be on full display, but with the blockchain, there is much more potential for transparency and accountability where it matters.)

Web3 also allows content creators to receive payment for their creative content without having to rely as much on centralized entities for brand deals and partnerships. NFTs, for instance, allow artists to transform audiences into communities that engage with their content directly.

What happened to Kardashian could have happened to several influencers. While regulatory actions without penalties admittedly do not have much bite — and often, such penalties are needed to signal that an agency is serious — an alternative strategy would have been to reach out to Kardashian and galvanize support among a body of influencers to establish stronger, more transparent norms around the promotions of products and services, particularly crypto projects that could be classified as securities. Such an approach is more collaborative and would contribute to establishing shared norms and best practices among crypto enthusiasts.

Christos Makridis is an entrepreneur, economist and professor. He serves as chief operating officer and chief technology officer at Living Opera, a Web3 multimedia startup, and holds academic appointments at Columbia Business School and Stanford University. Christos also holds doctorates in economics and management science from Stanford University.

Employee ownership could be the future of capitalism–but it doesn’t work unless workers earn it

This article was originally published in Fortune.

A recent op-ed published by Fortune suggests that “shared company ownership may be the missing path to the American dream.” From today’s vantage point, it’s a tall order. Authors Darren Walker and Pete Stavros go on to say that “investors, financial institutions, and labor advocates are among a growing movement that believes that employee ownership would resolve the structural challenges faced by the economy.” A tall order, indeed.

We tend to forget that employee ownership largely built the American dream through the first hundred years of our country’s history. The “company” was typically a farm, stable, or dry goods store. Participation in the family business was a given, as was employee engagement. The “company” was handed down over generations. And not much changed until the 20th century made way for mass production.

Mass production meant lower product costs, and subsequently lower cost of services—again, the stuff of the American dream. However, with great growth came a great separation between owner and employee. Customers were delighted. Fortunes were made. But over time, wealth concentrated at the top, while unrest accumulated at the bottom. As employees were pushed out of ownership, engagement petered out. The ownership culture that was once so evident, so American, became the exception.

Many well-intended business owners muse, “We want our employees to think and act like owners, so let’s make them owners.” They hand out stock, enjoy a round of applause, and wonder why nothing changes. It’s akin to a university distributing degrees to students who haven’t begun their studies. Business ownership–like home, car, or pet ownership–is about responsibility.

Corey Rosen notes in his Harvard Business Review piece, “How Well Is Employee Ownership Working?,” “ESOP (Employee Stock Ownership Plan) companies that instituted participation plans grew at a rate three to four times faster than ESOP companies that did not.” Without participation, or taking on of responsibility, there’s no documented increase in performance. With participation, results improve significantly.

Using survey data from the past five years, we’ve found that partnership and participation substantially and consistently improve business performance. In fact, companies in the top quartile of the Economic Engagement index have double the profit growth of their peers, as seen in 10 waves of research of 50-150 companies per wave.

This philosophy is anchored in “economic engagement”, a way of running a business founded on partnering with employees to serve customers profitably, improving both business results and the lives of the employees who drive those results.

An economically engaged company can be identified by the following five practices:

1. Customer engagement is the starting point since customers define value and, thus, the economics of any business.

2. Economic understanding aligns all employees in a common understanding of what defines success for the company.

3. Economic transparency enables all employees to see how the company is doing and learn from successes and failures.

4. Economic compensation gives all employees a shared stake in the results, making them economic partners in the company.

5. Employee participation leads to lower turnover and better relationships between owners/managers and employees.

That might sound obvious, but the practical implication is that these five components of Economic Engagement need to be explicit in an organization’s day-to-day working, otherwise companies risk touting talking points at the expense of partnering with employees.

Robert Griggs’ company, Trinity, is a great example. From an initial modest investment in 1979, Robert saw a rate of return of 22%, almost three times that of the S&P 500 over the same period. Using a combination of open-book management and continuous improvement, the company has involved employees in decision-making for decades. They did not start with employee ownership: They only recently made the natural move to an ESOP, benefitting owners, employees, customers, and their community alike.

Fortune’s recent article goes on to profile Hyperion Materials & Technologies, which “granted all 2,000 of its employees ownership in 2019 alongside a robust internal employee engagement effort.” Profit margins increased by 57%. Ownership is great, but without effective employee involvement, it does not change long-term results.

Once employees understand the economics of the business, they can make autonomous decisions, with the organization becoming more agile, responsive, and profitable. This is what really makes employees feel and act like owners.

Southwest Airlines (SWA) has outperformed the rest of the industry for over 50 years and seems to run on fierce company pride. It’s clear where that pride comes from. As other airlines repeatedly go bankrupt, they continue to turn a profit. When downturns come, competitors lay off employees while Southwest retains its talent. Yet how they arrived at employee ownership behavior is instructive.

In 1990, the pilots agreed to an unprecedented 10-year union contract. In exchange for a five-year pay freeze, they were granted options to acquire up to 1.4 million shares of the company’s stock each year. Employees were not simply given equity–they purchased it. The stock soared.

Earning ownership, and actively participating in the running of the business, are essential to effective ownership for both employees and the company. This is where incremental performance and wealth gains come from. This came naturally at SWA–after all, it was a pilot who invented the fabled Southwest “quick turn.” Their “Plane Smart Business” Economic Engagement initiative with Orlando Pilots generated $2 million in fuel and productivity savings in six months. But this crucial relationship between involvement and ownership isn’t unique to Southwest, nor should it be.

Other examples of strong participation, responsibility, and ownership abound, including Feuerborn Engineering (their cumulative revenue went up 300% and profits up 400% cumulative in seven years, without no layoffs), Boardman Fabrication (after applying economic engagement principles, sales grew by 55% in the first year, and profits were more than the past three years combined across the entire company), and Adams Beasley Remodeling (sales doubled and profits grew even faster).

The benefits of a self-funded, well-working employee ownership program? Well, it just might be the answer to the economy’s current uphill battle. But what makes it work? It turns out it’s been there all along–the employee. Employees who understand, drive, and share in the wealth they create think like owners–and participate in the American dream. 

Christos A. Makridis is a professor, entrepreneur, and adviser. He serves as an adjunct fellow at the Manhattan Institute and holds Ph. D.s in economics and management science & engineering from Stanford University. Bill Fotsch is a business strategist and writer.

Music NFTs will take gaming to new levels

This article was originally published in Cointelegraph.

The GameFi industry has surged since 2020, with some estimating a market capitalization of $55.4 billion as of February 2022. While others have much lower estimates closer to $3 billion, one thing is for sure: The industry grew rapidly from zero and is poised for continued growth. What matters, however, is not the day-to-day or even month-to-month market cap, but rather the continued rise of users who feel like they’re extracting value.

Games are created so that people have fun. But the rise of “gamification” refers to the application of gaming principles into otherwise boring, but usually value-enhancing, activities. For example, many educational activities can be boring until they are gamified. Technology can be applied to more complicated classes in mathematics and science, but it can also be used to help students learn how to navigate a large university campus. One Arizona State University scavenger hunt, for instance, “guides users to landmarks around ASU’s Tempe campus for a fully virtual experience or to visit in the real world,” gamifying the way students learn about the campus.

But one aspect that is often forgotten when constructing virtual or augmented leisure activities, or other gamified experiences, is the role of music.

In-game music

One of the most underappreciated aspects of games is the music. Everyone always thinks of the imagery, storylines and technical performance, but we sometimes forget about the music. To be sure, all the aforementioned factors are crucially important, but music is also what enhances the in-game experience and makes it more realistic and memorable.

“Music is probably one of the most underappreciated yet high-impact parts of any game. When it's done right, you don't even notice that you are being influenced by the music, but when it's done incorrectly, it is very obvious. What we focus on in the games is the emotions we want the user to experience, it sounds simple, but in reality, finding the right array and options is exceptionally time-consuming,” said Corey Wilton, co-founder of Mirai Labs.

Studios often access sample packs or purchase an audio file from a website and modify it as they see fit. For example, audio packs of a specific genre often provide five-to-10 options and suit the tone for the game. Most developers will have hundreds of these stacked over time if they are a casual- or medium-sized studio that ships many titles. But the limitation of this approach is that the artist behind each song receives a small fraction of the contract size.

The reason for that is economic: studios buy audio in bulk at a much lower price than they would if they were buying individual songs. While the upside for them is a lower cost, the downside is that their search is often less directed. Similarly, the upside for the artists who produce songs is that they find some demand for their audio, but the downside is that they are not remunerated for their individual contribution – rather, they’re compensated at a discount based on where in the audio pack it lands.

Revolutionizing the sourcing of music

Nonfungible tokens (NFTs) have the potential to transform the way music is curated and even created for games. Rather than having to rely on large contracts that take forever to get approved, GameFi leaders can simply buy up individual music NFTs or commission a group of artists who agree upon an equitable split of the revenues and collectively mint an NFT. Once done, the NFT would immediately plug into the game and the artists could receive remuneration for their created content based on the popularity of the music. This could be implemented through ratings and other feedback mechanisms.

Classical music NFTs have a special role to play. There is simply no audio substitute for the epic nature of classical music, ranging from Wagner’s “Ride of the Valkyries” to Carl Orff’s “Carmina Burana.”

Fortunately, adding music NFTs to games isn’t much of a stretch. Digital assets are already being traded in games. One project — House of Blueberry — has created more than 10,000 assets that people can buy to express who they are and to use in games and online communities.

And music NFTs can also create value for games that are not purely blockchain-based. The only difference is that the creators would purchase the NFTs on the blockchain and find a way to remunerate the artists.

“I work hard to remind them that the end-user wants ease of access (i.e., download and account creation), games that are quick to start and learn but hard to master, instant purchasing ability if they wish to spend money in-game, and a game that is heavily engaging and keeps them coming back for more. If they are unable to execute these foundational game design elements with blockchain, they are creating themselves a losing formula,” Wilton added.

Christos A. Makridis is an entrepreneur, economist, and professor. He serves as chief operating officer and chief technology officer for Living Opera, a Web3 multimedia startup, and holds academic appointments at Columbia Business School and Stanford University. Christos also holds doctorates in economics and management science from Stanford University.

Crypto developers should work with the SEC to find common ground

This article was originally published in Cointelegraph.

Regulators are tasked with balancing between protecting consumers and creating environments where entrepreneurs and the private sector can thrive. When markets face distortions, perhaps due to an externality or information asymmetry, regulation can play an important role.

But regulation can also stifle entrepreneurship and business formation, leaving society and its people worse off. The United States Securities and Exchange Commission has been particularly hostile against cryptocurrency companies and entrepreneurs. For example, SEC Chairman Gary Gensler has remarked that he views Bitcoin (BTC) as a commodity but that many other “crypto financial assets have the key attributes of a security.”

He reiterated the line in an explosive Aug. 19 op-ed penned for The Wall Street Journal, arguing that “you could replace ‘crypto’ with any other asset” when talking about the regulation of securities.

But rather than “regulating by op-ed,” as some crypto enthusiasts have framed it, a better strategy would be for developers, investors and regulatory agencies — like the SEC — to work together at least around common standards that can raise the quality of projects overall and establish best practices that the entire community of Web3 participants will benefit from.

“Regulators are effective when they’re also in the trenches with the innovators and industry builders,” Mirai Labs co-founder Corey Wilton told Cointelegraph.

That means there needs to be an open and free dialogue between regulators and developers. “Developers need to become familiar with Know Your Customer (KYC) best practices, vendors that are available, and how those KYC services are integrated, and how they need to manage user roles [and] capabilities,” said Simon Grunfeld, vice president of Web3 at Cogni.

Defining securities

Almost every article on crypto regulation points out the classic Howey Test based on a 1946 Supreme Court case that established precedent around the definition of a security. But Gensler has honed in on arguably the most important one of the criteria, namely that “the investing public is hoping for a return.”

To be sure, many nonfungible token (NFT) projects launch, and their founders promise investors large returns that turn out to b patently false or at least exaggerated. However, the problem with these projects is not that NFTs need to be classified as a security, but rather that these founders are engaging in dishonest marketing and making claims that they simply cannot deliver on.

According to the Howey Test, an “investment contract” exists if there is: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, and (4) to be derived from the efforts of others. But what if we applied the Howey Test to a house? A household could be considered a common enterprise, especially if there is a family business, and every homeowner invests with the expectation of house price appreciation. 

One counter is that a household is too small to constitute a common enterprise. But where is the bright line? What if the family is big? Or what if the immediate family lacks the resources and relatives contribute to help finance the house? Or what if a handful of people decide to rent a bigger house in anticipation of spending some time in it but also intend to rent it out on Airbnb as they travel and spend time in other locations? The problem with the Howey Test is that it was designed for a much more specific and narrow situation — one that involved leasing to farmers.

Sadly, the absence of a clear bright line between securities and commodities in the digital asset space has created substantial regulatory risk for Web3 entrepreneurs and companies, causing many to locate their activities offshore. Given the inherent anonymity involved in the Web3 community, particularly related to company formation, quantitative estimates are unavailable, but anyone who spends any amount of time talking to people in Web3 quickly sees that they are outside the United States.

However, even then, both users (especially in GameFi) and owners must be cautious. “I see no path for U.S. regulators to come after a (U.S.-domiciled) individual for gaming on an illegal site unless that individual is using that site for money laundering or other illicit activities involving other U.S.-domiciled individuals,” Grunfeld said.

“Otherwise, the individual assumes the risk of depositing funds,” he added. “In many cases, these platforms may trick people that they are subject to U.S. regulation. Then, the regulatory risk is all on the platform — it’s the platform’s responsibility to comply with local and international laws, and if they are opening accounts for U.S.-based people, then they run the risk of being touched by the long arm of the U.S. Treasury.”

A Web3 compromise

Standards have an important role to play in markets. They establish a predictable threshold for minimum quality. The best types of standards are those that emerge organically as a result of demand and coordination in a community whereby members recognize everyone is better off by adhering to a set of best practices. A common set of open-source and organic standards is perhaps best demonstrated by the W3C standards, which cover the spectrum of application development.

In particular, the W3C standards for verifiable credentials and decentralized IDs have proven to be principal sources for coordination and adoption in global education. Organizations, ranging from governments to large publicly traded companies, need interoperable technologies that do not lock them into specific vendors or systems that could create unnecessary risk— (e.g., if one system goes down or a business fails. These types of standards become a requirement for true global adoption; without them, pioneering technologies will remain bespoke and never reach scale.

We are seeing how open-source standards within the use case of education provide an opportunity for anyone, regardless of where they are in the world, to scrutinize a technology and ensure that it has passed through rigorous trials for privacy, security and interoperability, providing clarity and comfort for large-scale institutional partners who can bring new technologies to the masses.

“Bringing Web3 education to the masses would be impossible without a firm standards-based backbone… all of the innovation happening in our industry would eventually become a fragmented mess of systems that do not communicate or exchange, no different than the centralized systems of the past,” said Chris Purifoy, chairman of The Learning Economy Foundation.

The question for us in the cryptocurrency space is whether we can develop a similar set of standards as the W3C standards for verifiable credentials in the market for education. Such standards create not only interoperability but also norms and best practices that ensure minimum quality. That would take the burden off regulators to look so intently at NFT and other crypto projects since the quality of projects would be higher overall and the incidence of “rug pulls” would be much lower.

There is no simple solution here, but both sides need to understand each other’s positions better. That will only happen when they meet each other in the middle.

Christos A. Makridis is the chief operating officer and chief technology officer for Living Opera, a Web3 multimedia startup, and holds academic appointments at Columbia Business School and Stanford University. He holds doctorates in economics and management science from Stanford University.

Consumer sentiment matters more than inflation and unemployment numbers–and it has never been so bad for so long

This article originally was published in Fortune.

Much like the unemployment rate, inflation numbers can miss the mark on properly reflecting a country’s economic mood because these figures offer an incomplete picture of a country’s economic health.

Consumer sentiment, on the other hand, reflects our attitudes about the current state of the economy and expectations about its trajectory. And by all accounts, consumer sentiment is at record lows–and its decline has been more protracted than during past dips.

In June, the University of Michigan Survey of Consumer Sentiment reported the lowest-ever level of consumer sentiment on record–even worse than that during the “stagflation” in the late 1970s or the financial crisis in 2008. Additionally, it reported the highest level since the late 1970s of expectations for future inflation of 5.3% or more.

There is preliminary evidence that consumer sentiment has been higher in August–but much of the recovery could be seasonal and it seems unlikely that it will last.

“Wages are not keeping up with rapidly rising prices, causing Americans’ purchasing power to erode and their confidence in the economy to deteriorate,” John Leer, chief economist at decision intelligence company Morning Consult, told me.

Morning Consult surveys roughly 6,000 U.S. adults each day on a range of economic subjects, and despite a slight national uptick in July, the company’s Index of Consumer Sentiment is down at least 15% in all 50 U.S. states compared to July 2021.

The Conference Board, another organization that measures sentiment, reported similarly low levels of consumer sentiment for July. Only 17% of consumers said business conditions were “good,” down from 19.5% in June–and about a quarter (24%) of consumers said business conditions were “bad,” up from 22.8% in June.

Only half of consumers said jobs were “plentiful” and 12.3% said jobs were “hard to get,” up from 11.6% in June. Expectations over the next six months are mixed at best: Only 14% expect business conditions to improve, relative to 14.6% in June, and 27.2% expect business conditions to worsen, which is a slight improvement from 29.7% in June, but still grim.

No matter how you look at the data, consumer sentiment and expectations about the labor market are deteriorating. Focusing on unemployment figures and inflation numbers runs the risk of painting a misleading picture of the economy.

Low consumer sentiment can also help explain the 0.9% decline in gross domestic product (GDP) for Q2 of 2022 in the U.S., which comes on top of a decline of 1.6% in Q1 2022. Pessimistic consumers fuel a contraction of GDP and investment since they are more likely to save up for the future or simply allocate less time towards economic activity by working and consuming less.

My recently published article in the European Economic Review provides new microeconomic and causal evidence connecting economic sentiment and consumption. Using daily data from Gallup on consumer attitudes about the current and future state of the economy, I found that increases in economic sentiment are strongly associated with increases in the consumption of non-durables (such as food and clothing). When people are optimistic about the economy, they spend more.

That might sound obvious, but economists have struggled to pin down the relationship because there are so many confounding factors at play when looking at both consumption and sentiment, so obtaining an actual quantitative relationship between the two is tougher than it sounds.

Social networks play an important role in propagating information and ultimately economic activity. Some of my other ongoing research with Tao Wang from Johns Hopkins University, for example, shows that social networks can explain why some counties experienced such a sudden decline in consumption during COVID-19 even when their areas were actually not facing large or even moderate infections: People in those counties were connected with friends in counties experiencing a rise in infections. Given that 74% of individuals reported using social media as a way to stay connected during COVID-19, the importance of social networks probably comes as no surprise.

I have also leveraged data from Facebook’s Social Connectedness Index and compared individuals in zip codes that vary in their social networks and their relative housing markets. That is, if you live in a zip code that is connected–based on Facebook connections–with others in the U.S. that are experiencing housing booms, you are going to receive more optimistic economic information than a friend who is in a zip code that is more connected with other zip codes experiencing housing busts.

Similarly, the media share at least some of the responsibility for declining consumer sentiment. Bad stories sell more than good stories, so it is easy for bad news to spread and dwarf various good pieces of news.

That does not change the reality that consumer sentiment, expectations about the economy, and views of the labor market are at record lows. Nor does it change the reality that consumer sentiment is driven by changes in the real economy, meaning that artificial stimuli or subsidies will do little to curb economic deterioration.

The U.S. remains the most entrepreneurial place in the world and great potential continues to exist whether its economy is in a boom or a bust cycle. If we can remove some of the barriers that are squashing supply, ranging from energy to the labor market, we can see the economic tide turn again.

Christos A. Makridis is a professor, entrepreneur, and adviser and serves as an adjunct fellow at the Manhattan Institute. He holds Ph.D.s in economics and management science & engineering from Stanford University.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.