TNTcoin use cases
a more fundamental, mathematical perspective
Disintermediation: Economic Rents and Agency Costs
By Joseph Mark Haykov
September 18, 2024
Disintermediation is widely recognized for its ability to reduce costs and improve efficiency across industries. For example, large language models (LLMs), a form of artificial intelligence (AI) trained on legal databases, can significantly reduce the need for legal research staff, thereby cutting operational expenses. However, disintermediation through decentralized finance (DeFi) technologies goes far beyond mere cost savings. By eliminating unnecessary human intermediaries who are prone to rent-seeking and introduce agency costs, DeFi can greatly enhance efficiency, leading to better resource allocation and lower transaction costs. This, in turn, maximizes general welfare. As a result, DeFi has the potential to drive higher Pareto efficiency and real GDP growth.
Keywords: Disintermediation, Economic Rents, Agency Costs, Asymmetric Information, Rent-Seeking, Principal-Agent Problem, Financial Intermediation, Decentralized Finance (DeFi), Pareto Efficiency, Transaction Costs, Capital Allocation, Corporate Governance
JEL Codes: D23, D82, D86, G34, L14, O16, P16, G28, K42
Introduction
Despite the existence of various schools of economic thought1, modern mainstream economic theory is predominantly shaped by mathematical economics, with the Arrow-Debreu model serving as a foundational framework. The influence of this model stems from its formal structure, which derives key results—such as the First and Second Welfare Theorems—from axioms that define perfect market conditions, including unfettered exchange and symmetric information, using established rules of inference.
In this context, "mathematical" refers to treating economics as a formal system in the mathematical sense. Formal systems, as Kurt Gödel demonstrated in his 1931 proof of his first incompleteness theorem, are frameworks in which all logical claims—including theorems, lemmas, and corollaries—are derived from axioms using established rules of inference. This rigorous mathematical approach has profoundly influenced economics, leading to multiple Nobel Prizes and shaping key policies. For better or worse, major institutions like the U.S. Federal Reserve rely on equilibrium models to make critical decisions, such as setting interest rates.
Both mathematical economics and game theory posit as a key, fundamental axiom that individuals aim to maximize their outcomes, often framed as optimizing their payoffs in game theory. This idea is encapsulated in the concept of the rational, utility-maximizing agent, where each individual—or "player" in game theory—acts to optimize their subjective welfare or utility. In mathematical economics, terms such as use value, utility, and welfare refer to the subjective benefit a person derives from economic activities. Money serves as the medium of exchange, allowing individuals to purchase goods and services, thereby facilitating the realization of utility.
As a unit of account—a key role in the Arrow-Debreu framework—money provides a common measure for valuing goods and services. It reflects preference rankings indirectly through market prices rather than providing an exact cardinal measurement of satisfaction. For instance, the fact that someone buys a Bentley, which costs twice as much as a Ford, does not imply that their subjective utility from the Bentley is twice that of the Ford. However, their willingness to pay more for the Bentley indicates that they derive higher utility from it compared to the Ford, according to their personal preferences. Thus, in both economic theory and practical reality, individuals seek to maximize utility, often using wealth as a means to achieve their desired ends.
This pursuit applies to individuals universally—not only those driven by personal consumption preferences (often referred to as self-interest) but also those motivated by altruism (e.g., hiring boats to remove plastic from the ocean). Accumulating more wealth—easily convertible into spendable funds—increases one's ability to achieve various personal or altruistic goals, whether it involves personal satisfaction or funding environmental initiatives. In this view, regardless of whether motivations are self-interested or altruistic, wealth that is easily convertible to spendable funds reduces constraints and enhances the ability to achieve a wide range of objectives.
The Real-World Consequences of Rational Utility Maximization
Upon reflection, it becomes clear that the rational utility maximizer axiom, while central to mathematical economics and game theory, cannot fully capture the complexity of human motivations. This limitation stems from the nature of formal systems themselves. As Kurt Gödel's incompleteness theorems illustrate, any formal system is inherently constrained by its axioms, leaving certain truths beyond its reach. Similarly, economic models, which rely on axioms like the rational utility maximizer, are necessarily incomplete. In mathematical economics, utility (or welfare) is typically derived from commercial transactions and measured using money as a unit of account. However, in reality, individuals value much more than monetary gains, encompassing motivations and behaviors that extend beyond the scope of any single formal system.
Despite its limitations, the principle provides a universally accurate depiction of observed real-world human behavior. As wealth increases, individuals encounter fewer constraints on their ability to enhance their welfare, resulting in relatively greater subjective happiness than would be possible with less wealth. To reiterate, the relationship between wealth and happiness is ordinal, not cardinal, and subject to diminishing marginal returns, as research indicates that after a certain point, increases in wealth have a less pronounced effect on overall well-being. However, the principle that "the more wealth, the better" holds universally, as no rational individual has been observed to refuse a significant increase in wealth. The widespread drive to accumulate wealth among politicians, public employees, and private-sector workers supports the notion that wealth serves as a primary means to improve welfare. In any economy, wealth acts as a key constraint, making its pursuit a rational objective in both theoretical and practical terms.
It is undeniable that people are motivated by more than just money—charitable giving and the willingness to sacrifice one's life in war, for example, clearly illustrate that money is not an end in itself but rather a means to achieve other goals. Nevertheless, the utility maximization principle remains universally consistent with reality: individuals consistently strive to minimize the constraints they face in pursuing their unique objectives, and wealth, measured using money as a unit of account in mathematical economics, represents a binding constraint on maximizing subjective welfare. Due to its widespread applicability and consistency with observed behavior, the "rational wealth maximizer" principle can lead to both real-world and theoretical inefficiencies. This occurs because utility maximization involves not only seeking to maximize benefits but also minimizing costs, sometimes by exploiting asymmetric information. George Akerlof famously examined this phenomenon in his 1970 paper, The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, a work that later earned him the Nobel Prize in Economics in 2001.
Asymmetric information can lead to fraud because honesty, like other human traits—such as adherence to ethical standards, appearance, intelligence, athletic ability, or musical and acting skill—is unevenly distributed across the population. While this distribution may not necessarily follow a normal "bell curve," it is undoubtedly irregular, meaning that not everyone is equally honest, ethical, or trustworthy. This variation in ethical behavior implies that when opportunities for wealth accumulation arise without significant costs or consequences, some individuals may exploit them. As Akerlof explained, asymmetric information can result in fraud under such conditions.
A clear example of such unethical acts can be observed in San Francisco, where changes in law resulted in the non-prosecution of thefts under $950. This legislative shift led to a significant increase in retail theft, forcing multiple retailers to either permanently close or relocate their stores. This outcome is a matter of public record and can be independently verified, highlighting the real-world implications of changing incentives that motivate individuals to commit cost-free fraud.
The Rent-Seeking Lemma in Mathematical Economics
In this paper, we introduce the concept of the Rent-Seeking Lemma, which holds significant importance under the rational utility maximization axiom. While modeling the representative agent in the economy as a "rational utility maximizer" has its limitations—since this axiom is inherently incomplete—it consistently reflects real-world human behavior. Regardless of an individual’s goals, a lack of spendable money constrains their ability to achieve them. A pertinent example is the competition to attract a more desirable partner than one’s rivals, where relative—not absolute—purchasing power determines success and, consequently, influences overall welfare.
The Rent-Seeking Lemma, aligned with these principles, can be formally stated as follows: Due to the uneven distribution of honesty, whenever opportunities to gain wealth without significant costs or consequences exist, a subset of individuals—those who are relatively less ethical—will inevitably exploit such opportunities.
Opportunistic behavior, as highlighted in the Rent-Seeking Lemma, frequently results in agency costs. This phenomenon was rigorously examined by Jensen and Meckling (1976) in their seminal work, Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure, one of the most frequently cited papers in corporate finance. Although not explicitly derived from an axiomatic framework, this paper implicitly relies on the behavioral assumptions formalized in their 1994 work, The Nature of Man. Both works are grounded in the foundational axiom of mathematical economics and game theory: rational utility maximization.
Jensen and Meckling emphasize in The Nature of Man that individuals act in their self-interest, driven by bounded rationality and opportunism. This perspective aligns with the Rent-Seeking Lemma and is fully reflected in their 1976 paper, where agency costs stem from conflicts between principals (owners) and agents (managers). These costs arise when agents prioritize their interests—such as extracting non-pecuniary benefits or pursuing suboptimal investments—over those of the principals. The resulting misalignment leads to a loss of firm value, manifesting as monitoring, bonding, and residual costs. Together, these constitute agency costs and offer a comprehensive framework for understanding the divergence between ownership and control in firms.
Another example of opportunistic behavior described by the Rent-Seeking Lemma is the extraction of unearned wealth through rent-seeking activities, a concept explored by Gordon Tullock (1967) in The Welfare Costs of Tariffs, Monopolies, and Theft. Rent-seeking behavior, particularly among those wielding political or regulatory power, involves diverting resources for personal gain without contributing to productivity, often resulting in inefficiencies and welfare losses.
This notion aligns with Vladimir Lenin’s depiction of "economic parasites"—individuals who consume goods and services produced by others without contributing to their production. Economists like Gordon Tullock, Anne Krueger, and others have similarly defined rent-seeking as the pursuit of wealth through manipulative or monopolistic practices rather than productive contributions. This illustrates how opportunistic behavior can lead to significant societal and economic costs.
Karl Marx also discussed the concept of unearned wealth extraction in Das Kapital (1867), paralleling ideas of economic rents and agency costs in modern economics. However, his analysis was primarily theoretical. As an intellectual, Marx based his claims on abstract theory rather than empirical experience, having never managed a business himself. In contrast, Lenin’s insights were drawn from his direct experience in seizing and governing one of the world's wealthiest countries, grounding his ideas in the practical realities of running an economy. For instance, Marx's claims about unearned wealth extraction by less-informed capitalists from better-informed employees do not hold in practice; it is often the better-informed employees who extract wealth from less-informed owners, aligning with the principles of agency theory. Unlike some of Marx's theoretical assertions, Lenin’s observations regarding wealth extraction by non-productive “economic parasites” as a form of inefficiency and market failure—akin to robbery or theft—resonate more accurately with real-world economic dynamics. This alignment stems from Lenin’s engagement with the concrete challenges of managing an economy, rather than abstract theorizing.
Consider the practicality of Lenin's dictum: "From each according to his ability, to each according to his contribution." This idea parallels the economic principle of equating marginal revenue (from each according to ability) with marginal cost (to each according to contribution). Such alignment can lead to an outcome that maximizes efficiency and serves the interests of the governing power by enhancing the economy's productive capacity. It is not surprising, then, that Lenin's viewpoint resonates with the concept of rent-seeking, as described in public choice theory—a framework developed by Gordon Tullock and James Buchanan, for which Buchanan was awarded the Nobel Prize in 1986. Public choice theory illustrates how rent-seeking behavior generates inefficiencies, often necessitating interventions such as breaking up monopolies.
Rent-Seeking Lemma: The Role of Agency Costs and Economic Rents
It is well-documented that any form of parasitic infestation—whether locusts in a field, termites in structures, or rodents consuming grain in a warehouse—directly reduces economic efficiency by causing a loss of production without benefiting the producer. In economic terms, the consumption of goods and services by "economic parasites" results from involuntary exchanges, such as robbery, theft, extortion, or kidnapping, illustrating the universal applicability of the Rent-Seeking Lemma. These activities are considered crimes under any legal system because "unearned wealth extraction" by such "economic parasites"—whether thieves, robbers, or kidnappers—inevitably diminishes economic efficiency, both theoretically and practically.
Similarly, whenever "economic parasites" impose agency costs or extract economic rents, the outcome is referred to as a "market failure" in mathematical economics. These failures reduce both real-world economic efficiency and theoretical Pareto efficiency because unearned wealth extraction allows individuals to consume goods and services without contributing to productive output, thereby undermining incentives for value creation.
A striking example of this inefficiency is the disparity in real per capita GDP between Haiti and the Dominican Republic2, despite both nations sharing the same island and having otherwise similar conditions. In Haiti, widespread lawlessness disrupts the "unfettered trade" condition, a key assumption in the Arrow-Debreu model of economic equilibrium. The unearned wealth accumulated by thieves and robbers allows them to consume goods and services without contributing to their production, eroding the incentives for others to produce. When value creators face a constant threat of unearned wealth extraction, their motivation is severely undermined.
These dynamics of unearned wealth extraction—whether through agency costs, economic rents, or criminal activities like theft or fraud (often facilitated by asymmetric information)—are real-world manifestations of the Rent-Seeking Lemma in mathematical economics and invariably lead to inefficiencies. Such extraction disrupts both theoretical Pareto efficiency and practical economic outcomes. For instance, in Haiti, citizens consume far fewer goods and services, including essentials like food and healthcare, than their neighbors in the Dominican Republic. Any form of unearned wealth extraction by economic parasites, whether through criminal activities, corporate executives falsifying financial statements (e.g., Theranos), the sale of a "lemon," or corrupt politicians accepting bribes, constitutes a "market failure" under the Rent-Seeking Lemma.
The Practical Utility of Mathematical Economics
The practical utility of mathematical economics becomes evident when contrasted with alternative, non-formalized approaches. Models such as the Arrow-Debreu framework rely on key axiomatic assumptions—known as perfect market conditions—including diminishing marginal utility, rational decision-making, and the universal availability of goods and services for trade using money. When these conditions are satisfied, Pareto-efficient outcomes are not merely theoretical but observable in practice. In mathematical economics, the First Welfare Theorem derives these outcomes directly from perfect market conditions. Due to the tautological nature of formal systems, Pareto efficiency is guaranteed both in theory and in reality, provided none of the axiomatic conditions are violated.
However, the real world often deviates from these assumptions. Behavioral economics has documented numerous instances where human behavior contradicts the rationality aspect of the utility-maximizing axiom, such as cognitive biases, loss aversion, and irrational exuberance. These deviations introduce inefficiencies and prevent markets from achieving Pareto efficiency. Thus, while the Arrow-Debreu framework provides a valuable benchmark, real-world outcomes may fail to align with Pareto efficiency when these ideal conditions are not perfectly met. This illustrates the practical value of formal systems: they offer a precise framework for diagnosing market failures.
However, most violations of “perfect market conditions”—such as rationality or willingness to substitute—do not exhibit enough cross-sectional variation across different economies to explain the differences in observed per capita GDP. In reality, the market failures that could account for the drastic disparities in both the levels and growth rates of real GDP per capita across countries stem from violations of just two axioms: unfettered and symmetrically informed exchange.
The Rent-Seeking Lemma identifies counterparty risk as a core issue. If trade counterparts refrain from theft, fraud, or exploiting asymmetric information, mutual benefit is ensured both theoretically (ex-ante) and in practice (ex-post). To guarantee this mutual benefit, potential market failures, such as being sold a "lemon" car, must be eliminated. The strength of mathematical economics lies in its ability to identify inefficiencies and propose solutions. By addressing asymmetric information and preventing involuntary exchanges, economic efficiency can be enhanced both in theory and practice.
Real-world inefficiencies often stem from involuntary exchanges, as seen in monopolistic practices—whether by private entities like AT&T (before its breakup) or public organizations like the Department of Motor Vehicles, both known for poor service and high costs. When dealing with monopolies, including government entities, the efficiency of any exchange (such as paying taxes) can vary. However, this topic falls outside our current focus, and we acknowledge the exclusion of inefficiencies from involuntary exchanges—a topic separately explored in a related "black" paper.
In this "white" paper, we focus solely on market failures arising from asymmetric information—such as the Bernie Madoff scandal—rather than those caused by involuntary exchanges. In this context, there is no dispute about what we refer to as the First Welfare Corollary of the Rent-Seeking Lemma, owing to its inherently trivial and self-evident nature: any unfettered exchange is mutually beneficial to the parties involved, barring acts of God, such as accidentally dropping eggs on the way home from the store, and provided that both counterparties possess equal knowledge about the goods and services being exchanged. This excludes trade that is not truly beneficial ex-post, due to either acts of God or fraud, such as being sold a "lemon" car.
The only disagreement lies in how to address fraud under asymmetric information, as debates revolve around whether government intervention is justified. On one extreme, a lack of government leads to inefficiency due to chaos, as seen in Haiti; on the other, excessive government leads to a loss of collective welfare, as observed in North Korea. The optimal point lies somewhere in the middle. For example, the "lemon" car problem was resolved through a combination of government intervention and market mechanisms—namely, Carfax reports. However, Carfax only works because the government mandates the reporting of accidents. Without universal reporting of accidents mandated and enforced by the government, Carfax would be largely ineffective. This example illustrates the interplay between government action and market solutions in addressing market failures. However, in this paper, we propose a purely market-based solution that requires no government intervention, thus rendering debates over the extent of government involvement superfluous.
Before proposing any solution, whether free-market or otherwise, it is essential to first accurately identify the specific market failure. The question we pose is: what other sources of unearned wealth extraction exist, as outlined by the Rent-Seeking Lemma, aside from those through involuntary exchanges (e.g., regulations enacted by rent-seekers, such as prohibiting the sale of raw milk while allowing the sale of raw oysters and eggs freely)? The First Welfare Corollary asserts that in any fully voluntary, unfettered transaction where both parties are symmetrically informed, extracting unearned wealth is impossible. This shifts the focus to identifying where inefficiencies are most likely to occur in the economy. Which industries are most prone to asymmetric information between buyers and sellers? The financial industry stands out as a prominent area where fraud can potentially occur, exploiting asymmetric information to extract unearned wealth, as described by the Rent-Seeking Lemma of mathematical economics and its First Welfare Corollary.
The Economic Function and Use Value of the Financial Industry
We begin by posing a seemingly straightforward question: What is the use value of the financial industry? When considering the entire financial system—encompassing investment and commercial banks, brokers, clearinghouses, exchanges, mutual funds, hedge funds, and other entities—what role does it play in the economy? This question is particularly significant given that the financial sector primarily offers intangible services rather than producing physical goods. Historically, printing or minting money was an essential physical process, but today, money exists largely as digital entries. According to the U.S. Federal Reserve Bank, approximately 90% of the medium of exchange resides as electronic balances in checking, savings, and brokerage accounts within the M2 money supply, which includes currency, checking deposits, savings deposits, and other near-money assets. This raises a crucial question: beyond simply tracking these digital balances, what is the economic utility of the financial sector? What is its use value to society as a whole?
The importance of this inquiry cannot be overstated. The collapse of the Soviet Union, which lacked a developed financial sector due to its perceived "non-productive" nature, strongly indicates that the financial industry indeed serves a vital function. But what exactly is that function? History offers a clear and self-evident answer, validated by real-world evidence. Banks were originally established to facilitate the use of representative money—currency that signified fractional ownership of tangible assets, like gold stored in bank vaults. Representative money—whether paper notes or account balances—could be exchanged for base currency, typically gold or silver coins.
However, because the amount of representative money far exceeded the available base currency in most banks, this system inevitably led to bank runs. When banks were unable to meet demands to convert their issued representative money into gold or silver coins, they were forced to shut down. In theory, the establishment of the U.S. central bank in 1913 aimed to centralize monetary policy and provide financial stability. In practice, however, it facilitated the planned expansion of the M2 money supply relative to the gold reserves into which it was convertible at a fixed exchange rate. Whether this expansion was an intentional move by the central bank's architects remains uncertain. Nevertheless, excessive lending and speculative investments significantly increased the M2 money supply compared to the gold reserves held by commercial banks.
The bank runs that followed, whether initially triggered by the 1929 stock market crash or other factors, made it evident that commercial banks could not collectively meet demands for gold conversion. This crisis led to President Roosevelt's 1933 suspension of gold convertibility and the confiscation of gold from domestic citizens, marking a shift toward a fiat currency system. Today, fiat money derives its value from government backing and public trust, with the money supply managed by central banks to meet the needs of the economy.
Friedman and Schwartz (1963), in A Monetary History of the United States, 1867–1960, argue that the Federal Reserve's failure to act as a lender of last resort during bank runs exacerbated the Great Depression and that proper central bank policy could have prevented it. However, this theory assumes the crisis was preventable. The underlying assumption that a fractional reserve system can remain stable—though theoretically plausible—conflicts with the Gambler's Ruin3 theorem. Nassim Nicholas Taleb's concept of fragility, outlined in Antifragile (2012), further demonstrates how measures to prevent individual failures can increase systemic risk. According to the Rent-Seeking Lemma, the existence of central banks incentivizes individual banks to take on more leverage, relying on central bank bailouts if necessary. While this may reduce the likelihood of individual bank runs, it makes the entire banking system "super-fragile" and more susceptible to systemic failure.
The Gamblers' Ruin principle states that a gambler with finite wealth playing a fair game will inevitably lose everything due to random fluctuations. Similarly, a financial system with inherent vulnerabilities is statistically destined to face crises over time. In fractional reserve banking systems, certain risks are unavoidable. Although regulation and oversight can mitigate some risks, the system's fragility makes eventual failure statistically inevitable, consistent with the Gamblers' Ruin principle. Thus, while the creation of a central bank was intended to enhance system stability, it has, in practice, resulted in an inherently unstable system prone to eventual collapse, despite careful management.
After President Nixon took the U.S. off the gold standard in 1971, the fragility associated with traditional bank runs was significantly reduced, though not entirely eliminated. Today, while no bank-issued currency (e.g., the U.S. dollar or the euro) is backed by a physical commodity, the financial industry continues to fulfill its primary role in the economy: recording and facilitating the trading of fractional ownership certificates, or shares, of underlying assets—whether they represent corporations, commodities, or digital assets like Bitcoin. This system enables individuals to buy and sell shares, commodities, and digital assets through various instruments, such as exchange-traded funds (ETFs).
Although the financial industry provides essential services like lending, borrowing, liquidity provision, and price discovery, simply listing these activities does not capture its true use value for end users. Rather than merely cataloging the industry’s activities, we must focus on its collective utility—the use value of these functions for all economic participants. Beyond concerns about market failures and unearned wealth extraction due to information asymmetry, as outlined in the Rent-Seeking Lemma and its First Welfare Corollary, the key question becomes: How does the financial sector contribute to real GDP growth and enhance Pareto efficiency? How does it drive tangible improvements in real-world productivity?
This, as we will demonstrate, is the financial industry’s true utility—its real use value.
Capital Allocation: The Core Function of Finance
The true value of the financial industry lies in its ability to enhance productivity and achieve Pareto efficiency through optimal capital allocation. This is the primary mechanism by which the financial sector influences the real economy—by improving labor productivity. The sector facilitates this process by recording and trading fractional asset ownership, including shares in companies that contribute significantly to real GDP. The remaining portion of GDP is generated by privately held businesses, further underscoring the financial sector's crucial role in ensuring efficient capital allocation. Since the financial industry does not produce tangible goods, its primary use value is its capacity to boost labor productivity through effective capital allocation.
Achieving this efficiency requires addressing agency costs, which are intrinsically tied to ownership structures. According to agency theory and the Rent-Seeking Lemma, owner-principals are the only economic actors whose incentives reliably align with maximizing producer surplus (or business income), thereby promoting Pareto efficiency in a free market—assuming no other market failures. Under the Rent-Seeking Lemma, owner-principals are those who ensure maximum labor productivity through this alignment of incentives. This principle helps explain why historical restrictions on direct ownership of the means of production, as attempted in various Marxist implementations, often resulted in inefficient production and economic decline.
Given that the Rent-Seeking Lemma holds universally, agency costs inevitably arise when owner-principals delegate management to agents whose incentives may diverge from those of the owners. This misalignment becomes particularly problematic in cases of dispersed beneficial ownership, where no single individual holds a stake large enough to effectively influence managerial decisions. Therefore, minimizing agency costs and other inefficiencies related to intermediaries is crucial for preserving economic efficiency.
Accurate price discovery, as seen in liquid, publicly traded U.S. stocks (e.g., the S&P 500), is essential for effective capital allocation. It helps identify potential issues within companies, including fraudulent behavior by intermediaries. Detecting fraud by CEOs and other managers is vital for controlling agency costs and maintaining market efficiency. For example, abnormally low price-to-earnings (P/E) ratios can indicate potential managerial misconduct or other problems, prompting corrective actions in an efficient market, such as shareholder activism or hostile takeovers.
These market-driven interventions can eliminate incompetent managers and improve operational efficiency. Moreover, accurate pricing is necessary to align CEO compensation with the company’s stock performance through stock options and other incentive mechanisms. According to Jensen and Meckling (1976), these mechanisms help synchronize executive incentives with those of shareholders. Thus, the financial sector's primary objectives are to allocate capital efficiently, minimize unearned wealth extraction through fraud, and enhance labor productivity by reducing agency costs, ultimately promoting Pareto efficiency.
How Much Is Effective Capital Allocation Worth?
This leads to a critical question: What do the significant profits of the financial sector—accounting for about a third of all corporate profits4—actually reflect? Are they the result of improved Pareto efficiency through effective capital allocation, or do they primarily stem from unearned wealth extraction by exploiting superior information, as Akerlof proposed in The Market for "Lemons"? While a definitive answer remains elusive, the widespread presence of asymmetric information and the sheer scale of these profits suggest that a substantial portion may be extracted rather than earned.
The Robinhood "meme stock" incident serves as a pertinent example of this dynamic. During the frenzy, the platform restricted retail investors—whose retail orders are often referred to in the industry as "dumb order flow"—from purchasing GameStop stock. CEO Vlad Tenev’s congressional testimony cited compliance with DTCC margin requirements as the reason for these restrictions. However, some critics have questioned the motivations behind this action, suggesting it was primarily intended to benefit hedge funds shorting GameStop by reducing upward pressure on the stock price, thus assisting them in covering their short positions more cheaply. This incident illustrates how the financial sector can be perceived as exploiting information asymmetry to favor certain market participants, raising concerns about its role in extracting unearned wealth.
More importantly, this incident exposes a deeper systemic issue. Under current DTCC rules, client funds are commingled with the broker's capital, creating counterparty risk. According to the Gambler's Ruin theorem, even an entirely honest broker—not involved in malfeasance (e.g., MF Global)—could nonetheless fail unexpectedly simply due to leverage, as demonstrated by the collapses of Bear Stearns and Lehman Brothers. In reality, investors do not directly own company shares; instead, they hold them through their brokers and a long list of additional intermediaries, introducing multiple layers of counterparty risk tied to broker stability, which necessitates SIPC insurance for mitigation.
Counterparty risk extends beyond asset safety with brokers, as highlighted by the Rent-Seeking Lemma. Outside the stock market, rent-seeking behavior also permeates the commercial banking industry. Existing technologies, such as crowdfunding, show that direct lending and borrowing between individuals are feasible since fundamental exchanges involve goods and services. A commercial bank's true value lies in its ability to assess which borrowers are most likely to repay loans, thereby optimizing capital allocation. However, according to the Rent-Seeking Lemma, as well as public choice and agency theory, the practice of increasing the spendable M2 money supply through loan issuance and reducing it through loan repayment is more likely a systemic flaw—or "bug"—introduced by rent-seekers within the financial industry, rather than a desirable feature.
These "economic parasites" aim to obtain unearned wealth, undermining the integrity of the financial system without providing tangible benefits. This behavior contributes to inefficiency and renders the M2 money supply an unreliable unit of account. Fractional reserve banking, in this view, represents a systemic flaw intentionally introduced by rent-seekers seeking to extract unearned wealth, rather than a beneficial aspect of any monetary system. This perspective aligns with the Rent-Seeking Lemma in mathematical economics, highlighting how certain financial practices can lead to market inefficiencies and threaten economic stability.
Disintermediation and Market Failures: Eliminating Intermediaries to Reduce Inefficiencies
Before continuing, let’s briefly recap our discussion thus far. The foundational axiom in both mathematical economics and game theory is the "rational utility-maximizing agent." While this axiom is inherently incomplete—as all axioms are, according to Gödel—it remains consistent. When combined with variations in the honesty of economic actors, it leads to a key principle in agency and public choice theory: the Rent-Seeking Lemma. This lemma asserts that when opportunities for personal gain arise with minimal cost or consequence, a subset of individuals will inevitably exploit them. This pattern is evident in numerous cases of corporate misconduct, despite the available evidence that fraudulent executives, such as those at Theranos, Enron, and MF Global, are rarely prosecuted5. The Russian proverb, "No matter how much you feed a wolf, it will still look toward the forest," aptly captures the real-world accuracy of the Rent-Seeking Lemma, reflecting how individuals often revert to self-serving tendencies despite efforts to regulate them6.
This principle aligns with another saying, often attributed—though not historically verified—to Joseph Stalin: "Every problem has a surname, first name, and patronymic. No person—no problem." This sentiment echoes the concept of disintermediation in finance, where removing unnecessary intermediaries reduces costs and mitigates agency costs and economic rents—both recognized sources of inefficiency and market failures under the Rent-Seeking Lemma and its First Welfare Corollary. By eliminating intermediaries, the potential for inefficiency decreases, as these actors often engage in unearned wealth extraction or pursue self-serving incentives.
TNT-Bank: A Case for Disintermediation
TNT-Bank provides a compelling example of disintermediation within the financial system. Its business model reduces fraud by eliminating counterparty risk, a significant source of inefficiency and loss in financial markets. By removing intermediaries and promoting symmetrical information and free trade, TNT-Bank aims to minimize inefficiencies typically associated with agency costs, economic rents, and fraud.
TNT-Bank’s innovative software streamlines the tracking, recording, and trading of fractional asset ownership. Clients can focus solely on capital allocation while the software manages all other functions, ensuring operations free from counterparty risk through fully symmetrical information in each transaction. TNT-Bank facilitates direct borrowing and lending between individuals and institutions via legally binding smart contracts, bypassing traditional banks. This decentralized approach allows clients to concentrate on capital allocation, even if they prefer not to manage borrowing or lending activities.
The Benefits of TNT-Bank's Model
The advantages of TNT-Bank's platform are significant. By eliminating potentially corrupt intermediaries, it reduces counterparty risk and prevents bank failures. Smart contracts ensure the seamless exchange of fractional asset ownership for money, simplifying financial transactions. Collectively, these features contribute to a marked improvement in Pareto efficiency for economies adopting the TNT-Bank model. By addressing the inefficiencies and risks associated with traditional intermediaries, TNT-Bank fosters a secure and transparent environment for capital allocation.
Furthermore, TNT-Bank aligns with the evolving demands of the modern financial ecosystem, where transparency, security, and efficiency are paramount. It surpasses slower, more costly proof-of-work systems by offering faster and more efficient transactions. Additionally, by ensuring full compliance with Anti-Money Laundering (AML) regulations, TNT-Bank minimizes the need for law enforcement intervention in illegal activities such as ransomware. In an increasingly complex and interconnected financial landscape, operating without counterparty risk or interference from self-serving intermediaries is crucial for systemic resilience. TNT-Bank’s decentralized model meets these challenges, bolstering the financial sector’s overall stability.
By transforming the traditional financial model—often plagued by inefficiencies and exploitation—TNT-Bank enables direct, peer-to-peer transactions backed by symmetrical information. This innovation results in more efficient capital allocation, reduced unearned wealth extraction, and a more equitable and productive economy. As a pioneering force, TNT-Bank is steering the financial industry toward a future characterized by efficiency, security, and fairness.
TNT-Bank Efficiency Example: Managing Asymmetric Information
While TNT-Bank's software cannot entirely eliminate asymmetric information in investing, it can significantly reduce related inefficiencies. Effective capital allocation is inherently complex and cannot be fully disintermediated, as demonstrated by the rarity of exceptionally successful allocators like Warren Buffett and Peter Lynch. Moreover, the challenge of being rewarded for conducting the fundamental research necessary for accurate capital allocation stems from the fact that all investors—both passive and active—collectively own the entire stock market. As John Bogle outlines in The Little Book of Common Sense Investing, passive investors who own the market through index funds, such as those offered by Vanguard, are practically guaranteed to outperform active investors due to the costs associated with active management and research.
Bogle’s argument is not only logically sound but also reflects an accounting identity, as William F. Sharpe emphasizes in The Arithmetic of Active Management (1991). Investing in the stock market is a zero-sum game; every stock trade has a counterparty, and if that counterparty is better informed, as suggested by the First Welfare Corollary, you are likely to lose money (Akerlof, 1970). This dynamic makes it nearly impossible to profit when trading against more informed investors, such as Ken Griffin, Jim Simons, or Warren Buffett—much like an average tennis player attempting to beat John McEnroe in his prime. As a result, passive index funds now account for over half of all invested capital. Despite the appearance of "free" retail trading—particularly on platforms like Robinhood—it is "free" in the same way that cheese in a mousetrap is free. Hedge funds purchase this "dumb retail order flow" to exploit less-informed investors.
This raises a critical question: How much does it truly cost to stay fully informed about various businesses? More importantly, how can those who uncover crucial information—such as management malfeasance or fraud—be fairly compensated for their research? Exposing such information levels the playing field by creating symmetry between managing agents and principals, but it involves significant risk and expense. Therefore, addressing these market inefficiencies requires proper compensation for those who take on this critical task.
Not all investment-related tasks, however, have the same value. Predicting sales figures early, for example, is less vital for Pareto efficiency since actual sales data will eventually be released, adjusting prices accordingly—unless the data is manipulated, as seen in the Enron scandal. The real value lies in identifying market failures stemming from management misconduct or accounting fraud. In this context, short selling plays a more crucial role than merely buying stocks. While profits from short selling benefit investors, its true importance lies in preserving the Pareto efficiency of the real economy.
A useful metaphor is paying a scout millions to identify the best golfer before a tournament. A more effective approach would be to let all players compete and simply choose the winner. This reflects how free markets operate. A scout like Buffett seeks strong performers by investing long in stocks. However, the role of the short-seller is akin to a judge ensuring fairness and exposing cheaters, which is essential for mitigating agency costs. The short-seller serves as a market check, signaling malfeasance to ensure that those who "win the tournament" do so legitimately.
For newer companies—those in early investment stages, such as crowdfunded ventures or those backed by "angel" investors or venture capitalists—the role of a skilled capital allocator is crucial. However, for established companies, where recurring profits largely determine value (e.g., S&P 500 stocks), compensating whistleblowers may be a more cost-effective method of improving market efficiency. Historically, flawed attempts to incentivize informants, such as those under Stalin's regime, caused more harm than good. Modern systems, however, can reward whistleblowers for exposing fraud without the oppressive consequences of past practices. TNT-Bank categorically refuses to license its software to entities that might revive such distortions.
Another way to increase compensation for informed investors conducting fundamental research is to eliminate frontrunners—those who exploit timely information to trade ahead of legitimate investors. High-frequency trading (HFT) algorithms often detect block orders and trade ahead of those conducting fundamental research. TNT-Bank addresses this by organizing structured crossing sessions, similar to the closing auction at the NYSE but held periodically. This structure makes front-running impossible, allowing capital allocators like Buffett to retain more of their gains while improving overall market efficiency. This is just one of the ways in which TNT-Bank can reduce costs and eradicate rent-seeking behavior to enhance market performance.
While TNT-Bank can optimize already liquid markets like those in the U.S., its potential impact on less developed financial markets is even greater. In regions such as the former Soviet Union, Africa, and Latin America—where corruption has historically hindered financial development—inefficiencies are rampant. TNT-Bank's ability to elevate financial efficiency in these areas could lead to significant improvements in quality of life. This will be explored further in an upcoming "black paper" on mathematical economics, detailing how TNT-Bank's approach can address systemic inefficiencies in economies with underdeveloped financial infrastructures.
Conclusion
The Robinhood scandal underscores a persistent issue: counterparty risk. Investors don’t directly own their shares; they rely on brokers like Robinhood to hold them. But what happens if those brokers face financial trouble? While investors managed to recover assets after Lehman Brothers' collapse—unless they were over-leveraged—the scenario reveals a critical flaw: fractional ownership today inherently carries counterparty risk. Brokers, often operating with leverage, are constantly at risk of default.
So, why continue to expose yourself to these risks? It’s time to consider a safer alternative for storing and trading fractional ownership of assets—one that is completely free from counterparty risk: TNT-Bank. With TNT-Bank, ownership of any asset is secure and trustless, thanks to its fully permissionless platform. Like Bitcoin, TNT-Bank eliminates the need to trust intermediaries or central authorities. Your assets are truly yours, with no strings attached.
But don’t just take our word for it. See for yourself why TNT stands for True NO Trust, both in theory and practice. Access the TNT white paper now at https://www.tntcoin.green-coin.org/—simply click the red TNT button just below the green money button on the website.
The TNT white paper goes beyond marketing promises. It highlights how software bugs and vulnerabilities plague current decentralized finance (DeFi) systems, primarily due to the fundamental security issues present in all existing DeFi implementations. TNT-Bank has solved this problem at its core: asymmetric information during payment processing. Our patent-pending consensus mechanism, based on batch processing payments, tackles this issue head-on.
As you’ll discover upon reading the white paper, current security vulnerabilities, inefficiencies, and slowness in DeFi arise from a cognitive bias identified by Daniel Kahneman (2011) in Thinking, Fast and Slow: theory-induced blindness. According to Kahneman, this blindness stems from a tacit, implicit false assumption embedded within an axiom, from which a flawed, blindness-inducing theory is then accurately deduced using existing rules of inference. We refer to such a false axiom as dogma. Over time, this blindness evolves into dogma-induced blindness, impeding literacy (DIBIL)—the root cause of nearly all security challenges in decentralized finance. TNT-Bank breaks through these barriers, offering a new model built on transparency, speed, and resilience.
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1https://www.sciencedirect.com/topics/social-sciences/economic-school-of-thought
2https://www.cia.gov/the-world-factbook/field/real-gdp-per-capita/country-comparison/
3https://www.columbia.edu/~ks20/FE-Notes/4700-07-Notes-GR.pdf
4https://conversableeconomist.com/2022/09/13/financial-services-share-of-profits/
5https://knowledge.wharton.upenn.edu/podcast/knowledge-at-wharton-podcast/why-wrongdoing-executives-are-rarely-prosecuted/
6https://www.nbcnews.com/business/markets/10-ceos-who-went-boardroom-cell-block-flna783944