Blockchains create net new markets

For most of financial history, the supply of new markets — not demand — was the bottleneck. Blockchains remove that bottleneck. I believe this will unlock an explosion of net new markets.

Markets are mechanisms for transferring risk. Every trade is simply two counterparties agreeing to move some exposure at an agreed price. Abstractly, risk can be expressed along two separate axes:

• The unit: the underlying exposure (i.e., a company’s cash flows, a barrel of oil, an election outcome, a borrower’s credit, a GPU-hour)
• The instrument: the mechanism that transfers that exposure (i.e., spot, dated futures, perps, options, event contracts)

Almost all of financial history is the story of slowly innovating on one axis at a time. Spot grain markets existed for thousands of years before Chicago listed grain futures in 1865. Currencies floated in 1971 and got futures in 1972. Equity options lived as bespoke dealer contracts for centuries, then became a listed market in 1973 when the CBOE and Black-Scholes arrived. The ETF did not exist until 1993.

New units of risk have been even rarer. Interest rates only became widely tradeable in 1981. Default risk waited for the credit default swap in 1994. Volatility waited for VIX derivatives in 2004. Event outcomes only became a real market in the last few years, through prediction markets.