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Blockchain as a Force Multiplier in Smart Cities and Beyond

Arwen COO David Fragale SF ’15 has spent the last several years advising governments, financial institutions, Fortune 100 companies, and startups about blockchain technologies. As cofounder of Atonomi, Fragale helped launch an Ethereum-based platform that provides trusted interoperability for internet-of-things (IoT) devices. “We registered the identity and reputations of devices on an immutable blockchain ledger,” he says. “By working with device manufacturers and infrastructure stakeholders, we were helping to create a universal trust environment that enables interoperability of billions of devices for data and commerce.”

David Fragale SF ’15

Fragale’s initial focus was on smart-city environments, where potential benefits include coordinated vehicle and signal controls for traffic flow and emergency vehicle access. “In the near term, for example, data from sensors and control devices on a blockchain can optimize routes for ambulances and fire trucks responding to emergencies,” says Fragale. “Travel can be made faster and safer as software turns lights red to clear intersections along the route. Looking further into the future, we foresee automated systems that pull cars to the curb and clear the street for first responders.”

In the healthcare realm, Fragale envisions medical IoT devices such as pacemakers that would support more attentive care for people living far from hospitals. “We’d also have the ability to amass powerful data sets that could vastly improve predictive analytics,” he says. “IoT is a significant force multiplier in healthcare if—and this is a big if—we can provide the necessary security, privacy, and trust that people need in order to feel confident about opting in.”

Challenges inherent in physical components—electronic and human
Security is a hurdle for both software and hardware, explains Fragale. “The risk of hackers penetrating code is on everyone’s radar these days, but we also have to protect data-sharing devices. In theory, anything physical can be tampered with.” Blockchain can address this vulnerability with applications that detect—and allow distributed third-party auditors to detect—and deal with bad-device actors.

“Another fundamental challenge for IoT is human nature. You can’t abstract people out of the IoT ecosystem and expect it to function reliably,” Fragale says. “As a potential weak point in the chain, humans can be very lazy and inconsistent about downloading security patches and software upgrades. Assuming that we continue to play a role in connecting our devices to IoT, developers must create incentives that promote responsible behavior.”

The next generation of security
Fragale has recently taken on a new role as COO of Arwen, a blockchain-based company in Boston. Arwen is developing a secure trading protocol for the exchange of cryptocurrencies and digital assets. In 2018, more than $7T worth of cryptocurrency was traded while an estimated $1B was lost due to crypto exchange hacks. Arwen allows traders to swap crypto assets like bitcoin on these exchanges without ever transferring custody to the exchange. Instead of trusting a third party or central authority, such as an exchange, traders use the blockchain as an escrow agent to perform an “atomic swap” of cryptocurrencies. Fragale notes, “Arwen is the most secure way to trade crypto. You can trade on an exchange without ever having to trust that exchange. Even if the exchange is hacked during your trade, your coins are safe.”

Bridging the Gap Between Farming and Finance

When conceiving their new AI-powered agriculture financing venture Traive, cofounders Aline Oliveira Pezente SFMBA ’18 and Fabricio Pezente SFMBA ’18 were motivated by a startling fact. Global food demand will increase 70% in the next 30 years, with annual investments of at least $80 billion needed to keep up with the demand (according to a World Bank study). Much of the burden—and many of the opportunities for investment—lies with mid-range farming operations.

Aline Oliveira Pezente SFMBA ’18

Aline Pezente, who has spent her career in Latin America’s agriculture and commodities sectors, notes that small to medium-sized farms account for 70% of all commercial agriculture in Brazil and in the world. “Farmers in this category are particularly vulnerable to liquidity crises,” she says. “They are typically too big to qualify for significant government support, but too small for capital markets. Most traditional lenders view them as risky investments. Our goal is to bridge the gap between the borrowing needs of medium-sized farmers and the difficulties lenders face in collecting all the relevant data points necessary to risk assessments.”

Not one to one, but many to many

Fabricio Pezente SFMBA ’18

Lenders face two problems when considering these mid-range farmers, according to Traive CEO Fabricio Pezente. “This is a very complex sector,” he explains. “If you are not literate in how agriculture works, you will have no idea how to collect the data you need to assess credit worthiness. Then there’s the problem of connecting with these farmers. They’re widely scattered across Brazil, and it is very costly for banks to go out and find them.” Fabricio understands the lenders’ perspective well, having spent 15 years with Credit Suisse in Brazil before entering the MIT Sloan Fellows MBA program.

“Rather than tackling these challenges with one-to-one matching of farmer to lender, we’re utilizing artificial intelligence and machine learning algorithms to connect many to many,” says Fabricio. “Our platform uses AI tools to aggregate real-time agricultural data and to process the information for potential lenders. Because no lender wants to finance a single medium-sized farmer, we bundle investments across diverse sectors and scales— soybeans in Argentina, wheat in the U.S., coffee in Colombia, and corn in Brazil, for example.”

Technology that facilitates financing facilitates more technology
The main source of technology is the AI to process the credit risk assessment and generate the bundled portfolio of loans. The company is in the process of combining AI and a confluence of application programming interfaces (APIs) and microservices to create an autonomous platform that is equally accessible to financiers and farmers. “Because the execution of agreements and the transfer of funds are handled by blockchain solutions, our model reduces the friction and costs associated with traditional intermediaries,” says Fabricio. “And with continual updating of agricultural data and loan terms, the transactions are transparent for everyone involved.”

The other revolutionary aspect of Traive’s model, according to Aline, is how they approach the credit risk assessment to provide pre-planting financing. “Traditional agricultural bank lending in Brazil is based on what a farmer has performed in the past and not necessarily on their full potential. Under that model, the incentive for farmers is to cut costs before planting—cheaper seeds, less soil-friendly pesticides, and so on. None of which contribute to greater or more sustainable yields. With increased credit availability ahead of planting, farmers are more willing to invest in seeds, fertilizers, and other technologies that promote higher yields and more sustainable practices. It’s a fundamental catalyzer for the levels of production we need to achieve in the coming decades.”

Global Blockchain Hackathons

The spinoff effect of MIT research into blockchain technology is already influencing the development of new ventures. The Blockchain Challenge (TBC), cofounded by CTO Natalie Gil SF ’17 and CEO Silvana Lopez SF ’16, was inspired by both Gil’s independent research project under MIT Sloan Professor Simon Johnson during her year in the MIT Sloan Fellows MBA program and Lopez’ desire to go beyond the hype. Launched in 2018, TBC unites global interdisciplinary teams—entrepreneurs, programmers, psychologists, economists, and others—to build the “next cool thing” in blockchain.

Natalie Gil SF ’17

“My work with Simon led me to MIT’s D-Lab and the Digital Currency Initiative,” says Gil. “As I learned about technology development ecosystems in Latin American countries, I realized that the environment was well suited to the creation of innovative blockchain applications. The combination of new digital infrastructure, good local programming talent, and rising governmental interest in tech development make Latin American countries ripe for blockchain uses cases.”

 Forty-eight hours with programmers and potato farmers
TBC has set its sights on expanding access to shared resources and creating incentives that promote more inclusive financial systems. “So far, all our use cases tie back to some form of distributed ledger,” Gil explains. “The underlying technology is fairly consistent. It’s the integration of diverse data collectors and relevant network participants that defines the distinct challenges of each case.”

Gil points to the recent TBC Peruvian Potato Challenge—an event hosted by the World Potato Congress—as an example of how blockchain technology can effectively integrate community knowledge with pioneering digital tools. The 48-hour hackathon in the Andean Mountains at Cusco, Peru brought together  agricultural engineers, agronomists, economist, biologists, and other technical experts. “Many participants have a foot in both worlds—technically trained daughters and sons who inherited ancestral knowledge from their parents,” Gil says.

The Peruvian government backed the initiative, and IBM partnered with TBC to provide technical expertise in coding and blockchain. “Because potato farming represents 13% of Peru’s GDP—and the livelihood of more than 700,000 families—the capacity of blockchain to promote inclusion could be game changing,” says Gil. Participants ultimately zeroed in on a common issue to address: how to manage plant disease outbreaks and grow crops more efficiently. Potential solutions incorporated geo-localization, image-recognition technology, machine learning, and data analytics—all supported by a blockchain platform.”

Broader lessons about blockchain
Gil emphasizes that the challenge, along with TBC’s other use cases in transportation and finance, are still in the proof-of-concept phase. “As with all responsible deployments of new technologies, we believe it is essential for strategists and developers to be thoughtful about setting expectations and managing deployment. As we learn more from our fieldwork about the promise and pitfalls of blockchain, we need to establish guidelines and regulations that protect participants and ensure the widest possible benefit from the technology.”

 


 

Blockchain Hype: Irrational Exuberance Redux

MIT Sloan Professor Stuart Madnick is not necessarily predicting a repeat of the dot-com bubble. He is concerned, however, that the proliferation of blockchain hype obscures some serious weaknesses in the technology and makes entrepreneurs overeager to adopt it.

Madnick is only half joking when he says that the easiest ways to make money with a startup in the current climate is to put “blockchain” in the company name.

Stuart Madnick

Bloomberg.com reported on a version of this phenomenon in October 2017, noting that shares of the British investment enterprise On-line Plc surged 394% in direct response to the company’s new name “On-line Blockchain Plc.”

A wide range of financial losses
Madnick cautions business executives, investors, the financial press, and his students not to be blinded by the sparkle surrounding the technology. At latest count, Madnick and his research colleagues have gathered 72 cases of blockchain security breaches that occurred between 2011 and 2018.

“Some attacks resulted in relatively small losses in the range of $12,000, but others have cost companies as much as $600 million,” says Madnick. “In total, the publicly reported losses by cyberattack against blockchain systems during the last eight years exceed $1 billion. Our research reveals that such attacks happen much more often than is commonly appreciated. You can lose a lot of money, IP, network trust, and market confidence in a very short period of time.”

A taxonomy of vulnerabilities
Madnick and his team are currently developing a taxonomy of vulnerabilities, and he notes that certain analogies come to mind when he seeks to promote security consciousness among blockchain advocates and potential developers. “Splitting the atom is not easy and banks are made of atoms, but banks and bank vaults can get robbed. Blockchains can be hacked without actually having to ‘crack the chain.’ Blockchain may be tamper resistant, but it certainly isn’t tamperproof.”

One of the earliest cases from Madnick’s research involved a Bitcoin owner who printed his blockchain key on his t-shirt. Someone took a photo of him and used it to drain his account. “It never occurred to him that someone would do that—a classic case of leaving the key under the mat for the burglar to find,” says Madnick. “Much more common and subtle are flaws in the writing of algorithms, such as the Ethereum hack where an intruder discovered the programming mistake and used it to move the money into his account.”

Blockchain may be its own worst enemy
The things that make blockchain great also make it vulnerable, Madnick points out, especially when it comes to security.  “Blockchain’s distributed control is an important feature, meaning that there is no central authority. But it also means that there is no central ‘On’ or ‘Off’ switch. Thus, an attack is almost impossible to turn off even after you detect it, and this has happened.” One of the key notions Madnick and his team hope to dispel is that blockchain technology involves no elements of human control. And where humans are present, so is the possibility of human error. “That’s why I urge decision-makers to reflect carefully on the risks involved,” he adds, “well before jumping on the blockchain bandwagon.”

 

Cutting Through Blockchain Hype to Harvest Real Value

When it comes to miracle cures and silver bullets, we humans can be a susceptible lot. But if you are wary of falling in line behind the pied pipers of blockchain technology, you’re in good company. A growing contingent of researchers, business leaders, finance professionals, and tech experts are resisting the hype. At the same time, many who urge caution acknowledge the outsized potential of blockchain and are eager to determine how to exploit it for competitive and societal advantage.

Gary Gensler

“So much of life is about maintaining perspective,” says former Goldman Sachs partner, Wall Street regulator, and MIT Sloan senior lecturer Gary Gensler. “I think it’s essential to apply that mindset to blockchain technology. As often happens with potential breakthrough technologies, the rush to adopt it may be outpacing broad knowledge of its limitations.”

Assessing your use case
If blockchain technology isn’t applicable to all aspects of finance and entrepreneurship, how best to identify where the technology will create or add value for an enterprise—or for society as a whole? “A blockchain is an innovative database tool that facilitates novel approaches to money and the use of available computing power through a shared ledger system,” he says. “If your data lends itself to a ledger structure, then take a look at whether blockchain technology could enhance its utility or value.”

Gensler focuses on two key features that distinguish blockchains from traditional ledger systems. “The technology enables append-only logs, and it requires multi-party consensus about what the next block of data should be. Before you ever get to the currency side of things,” he says, “you can make an initial assessment of your use case with a handful of questions related to those two characteristics.”

The simple economics of blockchain
In Gensler’s mind, the assessment starts with a simple set of questions that tie back to the essential nature of the technology:

  • Which transactions and data need recording?
  • Which multiple stakeholders require write-and-read access to your ledger?
  • Which verification and networking costs can you reduce by using blockchain technology?

In relation to this last question, Gensler cites the work of MIT Sloan Associate Professor Christian Catalini and University of Toronto Professor Joshua Gans. The two researchers recently updated a working paper for the National Bureau of Economic Research (NBER) about the economics of blockchain technology.

In “Some Simple Economics of the Blockchain,” Catalini and Gans explain that the cost of verification relates to the ability to cheaply verify the attributes of a transaction. “If we can reduce the amount of infrastructure needed to ensure a consensus of facts, we can conceivably lower the threshold for creation and participation in such networks—monetary or otherwise,” Gensler says.

The second cost consideration highlighted in the NBER paper is networking. Catalini and Gans note that “a blockchain allows a decentralized network of economic agents to agree, at regular intervals, about the true state of shared data. This shared data can support multiple types of online transactions and corresponding payments, exchanges of IP, information, or other types of digital assets.” In digital marketplaces, benefits could flow from increased competition, reduced privacy risks and barriers to entry, and the diminished market power of a platform operator resulting from the joint investment in shared infrastructure by network participants.

The future is a hybrid
Given the buzz around blockchain technology and its potential to decentralize economic activities, many organizations fear that other companies will figure out the technology first and gain a competitive advantage. Gensler urges all organizations to proceed with caution. “I don’t see a massive wave of decentralization sweeping across the global economy any time soon. Instead, I think you’ll see nodes of decentralization where entrepreneurs are able to solve collective action challenges—i.e., how to incentivize network participants with tokens or other means—and deliver a broad public benefit. I also foresee nodes of existing centralization that continue to provide broad public benefits. Finally,” Gensler says, “I think we’ll see a number of hybrids develop, such as the Australian Stock Exchange, that allow a limited number of participants into the network and achieve verification efficiency gains using blockchain technology.”

 

Blockchain Beyond Cryptocurrency—Promises and Pitfalls

At the 2019 World Economic Forum in Davos, the Global Blockchain Business Council announced that 40% of investors believe that blockchain could be the most important innovation since the invention of the internet. Shortly thereafter, the editors of Sloan Management Review (SMR) asked its panel of experts to answer a related question: In the next five years, will blockchain have a transformative effect on finance in emerging markets?

Simon Johnson

Of the 25 experts surveyed by SMR, nearly 60% disagreed or strongly disagreed with this premise when their responses were weighted for the level of confidence in their opinions. A mere 27% of the panel agreed or strongly agreed. Panelist and MIT Sloan Professor Erik Brynjolfsson said, “So far, at least, the use cases have been driven more by hype and outright scams than practical benefit.” Fellow panelist MIT Sloan Professor Scott Stern noted that “while there are important potential use cases … in the absence of a separate fundamental innovation, this will be an incremental rather than transformative advance.”

At MIT Sloan and across the Institute, skepticism is more often the beginning—rather than the end—of conversations and explorations. In fact, blockchain is inspiring a surge of research and invention in the MIT community these days, including by faculty members and MIT Sloan Fellows alumni. In the articles that follow, we hope to set aside the mystique surrounding blockchain and discuss some of the principles and pathways that could lead to productive uses of the technology beyond cryptocurrency. In future articles, we will circle back to focus on blockchain developments in the realm of monetary exchange.

Jump-Starting America Proposes to Lift All Boats, Not Just the Yachts

The American economy looks relatively sound on the outside, but the reality is quite different, say Simon Johnson, Faculty Director of the MIT Sloan Fellows Program, and coauthor and MIT Economics Professor Jonathan Gruberin a new book due in April: Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream.

In this somewhat radical and highly anticipated prescription for the U.S. economy, Johnson and Grubernote that job opportunities and economic growth are increasingly concentrated in a few crowded coastal enclaves. Corporations and investors are disproportionately developing technologies that benefit the wealthiest Americans who live in the most prosperous areas of the country. The result of these developments is the destruction of middle class jobs in middle America. To turn this tide, they say, we must look to the lessons of the original American success story and embark on a plan that will create the industries of the future—and the jobs that go with them.

Impact on the economy of the “Big War”

Johnson and Gruber look back at the middle of the 20thcentury when massive public investment generated breakthroughs in science and technology that helped win World War II, innovations that then propelled the most successful economy the world has ever seen. Private enterprise built on these breakthroughs to create new industries such as radar, jet engines, digital computers, mobile telecommunications, life-saving medicines, and the internet. And those breakthroughs became the catalyst for broader economic growth that generated millions of good jobs. As Johnson and Gruber say, “We lifted almost all boats, not just the yachts.”

Jonathan Gruber and Simon Johnson tell the story of this first American growth engine and provide the blueprint for a second. They believe that their visionary, pragmatic, and possibly controversial plan will lead to job growth and a burgeoning economy in regions across the country that have been left behind.Jump-Starting America is the untold story of how America once created a legendary—and enormously successful—economic model and, most important, how it could be done again.

 

Digital solutions for Africa: The 2018 MIT Sloan Africa Innovate Conference convenes at the MIT Media Lab April 7

Africa. In many ways it has a long way to travel to compete as a peer in the contemporary global marketplace. But from another perspective, the population is highly motivated to find solutions to crippling problems and incentivized to reinvent those systems that are barriers to progress. The MIT Sloan Africa Innovate Conference is an annual touchstone for just how far Africa has come and where it goes next.

Ismail Ahmed, WorldRemit founder & CEO, one of the keynote speakers at the 2018
MIT Africa Innovate Conference.

“Digitization for Inclusive Growth” is the theme of the 2018 conference, which is organized by the MIT Africa Business Club and takes place at the MIT Media Lab on April 7. Workshops and panels will evaluate the lessons of the last decade of technological advancement and explore how to leverage digitization to ensure that Africa’s progress is as inclusive as possible.

The conference will feature a Solveathon led by the MIT Solve Center. Teams of entrepreneurs will develop and pitch solutions related to coastal communities, healthcare, education, and the future of work. In addition, panels will delve into the most intractable challenges that countries on the African continent still face—challenges that require strategic innovation on a grand scale. Those panels will include investigations into:

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More than one way to be multinational

Global expansion is a core goal of many major corporations, but some are beginning to rewrite the multinational rules of the road. With 300 locations around the world, General Electric (GE) is one such pathfinder, recently rethinking which functions should be regionalized and which should remain local.

Global Operations Executive Leader, Oleg Bodiul, SF ’13 took on the vast transformation role as part of a GE leadership team tasked with creating a global shared-services organization that would centralize many of the company’s key functions, including accounting, finance, and commercial operations.

Among the top 100 firms in the world, GE is a digital-industrial player providing software-defined machines and solutions for markets ranging from aviation, power generation, and oil and gas to renewables, healthcare, and financial services. “Historically, functions like accounting and order management were performed in hundreds of locations around the globe. The objective was to centralize, where possible, into a few locations to leverage scale and deliver better outcomes for our customers, employees, and shareholders.”

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Smart phones are outwitting poverty

Alexander Graham Bell would be astonished at the power of today’s smart phones. Yes, the app that makes it possible to find a Starbucks along an unfamiliar highway can feel like a miracle, but the true revolutionary power of the telephone is felt most in developing countries. In Kenya, for example, the mobile phone has, to some extent, stabilized the economy for many citizens and transformed quality of life.

Nearly all Kenyan households own at least one mobile phone—not state-of-the-art smart phones, but phones “smart” enough to accommodate at least one M-Pesa account. Available to any customer of Safaricom, Kenya’s mobile network leader, M-Pesa is a money transfer service that allows a daughter at one corner of the country to send money safely and securely to her mother in a village seven hours away. Previously, she would have entrusted an envelope of cash to a bus driver heading to her mother’s village (at considerable risk) or relied on a money transfer that took days—and a daunting amount of red tape—to process.

Of course, to withdraw funds through an M-Pesa account you must have access to an agent who can disperse the cash. Happily, in response to the popularity of M-Pesa, the network across Kenya has mushroomed to 150,000 agents. Working with Innovations for Poverty Action, Associate Professor of Applied Economics Tavneet Suri, a native Kenyan, and her colleague William Jack have been tracking incomes in regions where new agents have opened for business. They compared the financial health of those regions with that of regions where agents are not as accessible.

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