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For any person in the world, the goods & services accessible by them are determined by the extent of their trade network.
A larger trade network increases capacity for specialization, resulting in new goods & services and making existing goods & services better and cheaper.
The size of a person's trade network depends on the total friction of their individual circumstances. Economists refer to this friction as "aggregate transaction costs". They use a much wider definition of "transaction cost" than, for example, a gas fee.
Any kind of added friction cost whatsoever reduces the size of a person's trade network, and that reduces the quality, affordability, and variety of their available goods & services.
Costs of all kinds play a role in determining the extent of a person's trade network:
Does the person live in a city or on a farm? Is their city separated from neighboring cities by a mountain range or a flat highway? What regulations or taxes exist to restrict or enable commerce? Are there any wars, famine, natural disasters, or other circumstances? Does their country have good physical infrastructure? All types of costs and friction play a role.
How does a person's trade network move information? Do they rely on wagon loads of clay tablets hauled by oxen to move information, as was done in some ancient civilizations? Do they use morse code telegraph lines? Or, do they have digital information transfer, ie. the internet? Is the same information transfer technology available everywhere in their trade network?
How does their trade network move goods? Do they haul wagons of wheat on dirt-packed roads? Or, do they have a modern network of vehicles and highways, of ships and shipping lanes?
What loss of goods occurs during transit? To disasters? To theft? Perishable? What technologies and systems work to prevent these losses? Political systems? Security cameras and national ID databases? Is the level of risk similar throughout the trade network, or are some parts safer than others?
How does a person's trade network move money? Do they pass around IOUs by messengers on horseback? Do they pass around digital IOUs in a rigid banking federation based on privilege and relationships (web2 finance)? Or, do they have a global internet financial system that's an open access level playing field and lets you "hand cash" to anyone in the world (web3)?
Jason asks, "How does web3 improve economic output?"
The answer is that economic output depends on the quality, affordability, and variety of goods & services available to each person, and this depends on that person's unique vantage point into the global trade network, and that depends on each person's trade network's aggregate transaction costs, and these transactions costs are greatly reduced by web3.
Web3
- reduces information transfer transaction costs (secure open data for prices, markets, etc)
- reduces money transfer transaction costs (bearer ownership, instant settlement, etc)
- decentralization reduces risk which further reduces transaction costs. Example: erc20 transfer on BSC vs Eth L1, both are the same token transfer, but the one on Eth has much lower risk because BSC is centralized. That lower risk is a type of transaction cost reduction.
- public chains are global and open-access, so these beneficial reductions in transaction costs can apply to everyone in the world's unique vantage point into the global trade network. Web3 helps everyone, not just people in wealthy countries.
Every major benefit of web3 tends to reduce transaction costs: ERC standards, public composability, trustless bridging among L2s, censorship resistance, strong property rights, open innovation, etc.
In short, web3 increases economic output by reducing friction costs that limit the extent of the global trade network and therefore growing the quality, affordability, and variety of goods & services available to everyone in the world.
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