Market engineering refers to the process of prudently restructuring a market aiming at transforming it into efficient and effective means for execution of exchange transactions. Via presenting a holistic, interdisciplinary set of tools to systematically analyze, design, structure and build the elements of various market platforms, to determine fields of application and also to formulate theoretical design and develop evaluation procedures, the market engineering approach, is ideal to guide academic research on developing cryptocurrency, and blockchain based, markets.
A recently published paper presented a concise literature review of recent Information System IS research on various aspects of the blockchain technology. Based on this review, the authors of the paper introduced a Blockchain Market Engineering Framework, which can help both researchers and users to analyze and design the elements of blockchain based markets, on a global, as well as an individual level.
A Blockchain Based Market Engineering Framework:
The authors of the paper suggested a hypothetical foundation framework for blockchains in the form of IT-artifacts when the field of economic applications is considered. As such, they supported the determination of areas and applications, throughout which blockchain based financial systems can offer efficient and effective solutions. They built on the descriptive frameworks of previous researchers, such as those of Brenig and colleagues in 2016; and Glaser and Bezzenberger in 2015, via suggesting means to actively promote the construction of various blockchain based infrastructures, not only on the micro-level, but also on the macro-level.
The below figure represents the proposed Blockchain Market Engineering Framework, which introduces a holistic, integrated view of interrelated and essential elements of various blockchain based platforms along with the surrounding factors. To cope with the openness of the blockchain technology and its innate potential to extend through various elements of the Market Engineering Framework, the researchers added a multi-layer perspective. The environment layer represents the basic macro-layer; thus, it captures economic, social and legal constraints determined by the area of application, the transaction object, legal requirements and other external influences. It is worth noting that the transaction object is not solely limited to a physical object; instead, it may involve any form of object or information that can be transacted over the blockchain network.
The infrastructure layer is built on top of the environment layer and deploys the blockchain protocol, and in doing so, specifies the features of the virtual machine which will eventually run the application logic. Along the infrastructure layer, the protocol layer is delineated from the hardware layer. The hardware layer represents a heterogeneous group of interconnected machines that provide the processing power to run the virtual machine that represents the runtime environment of the decentralized system. The protocol layer, which is also known as the fabric layer, deploys the blockchain protocol’s actual code and as such, promotes the interaction between the nodes, determines the security level and enforces agreement. The protocol layer determines the basic elements of the IT artifact, which represents the decentralized database, the cryptographic protocol and the consensus algorithm, which allow for the tokenization of the economic value as well as the deployment of decentralized applications on a micro-level.
Collectively, the hardware and the software layer comprise the basic framework of the decentralized system and represent the backbone of the microeconomic design, i.e. the business and microstructure of applications within the application layer. As per these realized applications, the features and behavior of the interconnected economic agents, whether human or artificial, throughout the created ecosystem, can be thoroughly analyzed. In conjunction with the environment layer, which determines the foundation of the framework, the agent layer allows for analysis of the outcomes of the market outcomes, performance of applications, and other system characteristics from a microeconomic point of view. One important aspect, for example, is the user’s incentive to take part in the process of revelation of the truth, which can be in the form of monetary incentives, as is the case within the bitcoin system, over asymmetrically decentralized information or conflicts of interests, as is the case, for example, in the “Market of Lemons”, in order to reduce transaction costs.