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In Algorithms We Trust

MIT Sloan Senior Lecturer Michael Casey

“When I confessed on air that I only began to understand the true nature of money after researching cryptocurrencies, it instantly became a headline,” says Wall Street Journal currency reporter and MIT Sloan Senior Lecturer Michael Casey. He made the remark during a 2016 interview with host Laura Shin for the Forbes unChained podcast. “I’m sure some people were shocked and others amused, but I think anyone who listens to the full podcast will appreciate where I was coming from.”

During the interview, Casey reflected on the wholly irrational habit we have of thinking about money as a real thing. “What we conceptualize as a dollar, a euro, a renminbi is actually a complex—and invented—social system for tracking our debts to one another,” he says. One consequence of this epiphany for Casey was that it transformed him from a blockchain skeptic into a blockchain advocate.

A lesson from the history of money
In The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order, Casey and coauthor Paul Vigna note that, for most of its history, currency has been issued by emperors, monarchs, dictators, and democratically elected governments. Those rulers have consistently stamped their images and symbols of authority on bills and coins, reminding citizens of the deep societal connection between money and centralized control.

“The value of a dollar has grown up around a common and quite reliable societal consensus about what underpins it and how much you can redeem with it,” says Casey. “It’s a story we tell that has no intrinsic truth, just a shared understanding. But to function smoothly, our system also requires the authority of governmental entities and the services of trusted intermediaries such as banks. We could not have built our civilization without them.”

But breakdowns such as the 2008 global financial crisis demonstrate how vulnerable our existing model is when trust begins to erode. The crisis also opened people’s minds to innovation. Many became convinced that traditional currency systems, which dominate current global economic activity, should no longer be relied upon as the sole viable option for how we represent and organize the exchange of goods and services.

A new symbol of shared truth
Most of us were raised to view our omnipresent financial institutions as trustworthy keepers of shared truths about our debts and payments. We’ve also accepted, albeit grudgingly at times, the fees that banks and other intermediaries charge for maintaining accurate ledgers of our transactions. Few believed we could create an efficient, viable alternative. That made us dangerously dependent upon the specialized keepers of trusted transactions—bond and securities brokers, insurance agents, financial lawyers, payment processors, and credit card companies.

The advent of cryptocurrency, however, has introduced the prospect of a dramatic shift in the existing balance of power. As Casey and Vigna explain in The Age of Cryptocurrency:

The simple genius of this technology is that it cuts away the middleman yet maintains an infrastructure that allows strangers to deal with each other. It does this by taking the all-important role of ledger-keeping away from centralized financial institutions and handing it to a network of autonomous computers, creating a decentralized system of trust that operates outside the control of any one institution.

Possibilities abound
“Thinking of bitcoin and other cryptocurrencies as alternatives to the dollar is the least interesting—and least useful—possibility for blockchain technology,” Casey says. “Many of the countless token systems out there are actually smart contracts that exist for the purpose of running blockchains. Those blockchains function as incentive systems that run in a decentralized fashion around a particular objective.”

One example Casey cites is Basic Attention Token (BAT), a blockchain-based digital advertising ecosystem that is built on top of Ethereum. “The BAT utility token works as a governance system for the media world,” explains Casey. “In the BAT ecosystem, publishers earn BATs from advertisers based on the amount of attention users give to the ads. Publishers then spend their BATs to publish more content on the platform. Users, in turn, receive some BATs for viewing ads, and they can use those tokens to purchase premium content or services on the platform. That direct exchange of value among the primary participants eliminates the costs associated with intermediaries in traditional media ecosystems.”

Casey also sees enormous potential in cryptocurrency to move value between native currencies without the expense and friction of intermediaries. “The World Bank estimates that 1.7 billion adults worldwide don’t have access to bank accounts,” he says. “That means that when family members earning money abroad want to transfer some portion of it back home, they must pay exorbitant fees. Developers now are exploring the use of blockchain technology to move funds across the world phone-to-phone—with Facebook’s Libra project being the latest to dive into this financial inclusion push. These ideas threaten to disrupt the existing financial-institution architecture, but that may be a small price to pay for onboarding billions of hitherto excluded people into the global digital economy.”

Making the World More Liquid

Silvana Lopez, SF ’16

“The hype—and occasional hysteria—surrounding cryptocurrency has tended to muddy the waters around blockchain technology,” says, CEO and cofounder of The Blockchain Challenge (TBC). “What sometimes gets lost in the murkiness is the immense potential of cryptocurrency-type applications to transform fundamental economic activities among financially underserved populations.”

When Lopez and TBC cofounder and CTO Natalie Gil, SF ’17, launched their blockchain-based startup in 2018, the possibility of helping stagnant microeconomies become more fluid was an important part of their vision.  “I’m far more excited about how cryptocurrencies can improve the lives of farmers and villagers in developing countries than whether bitcoin will replace traditional monetary systems,” Lopez says.

Where cryptocurrencies and developing economies meet
By convening global interdisciplinary teams—entrepreneurs, programmers, psychologists, economists, and others—TBC is helping to create the “next cool thing” in blockchain while simultaneously enlivening small-scale, regional economic activities. “Cryptocurrency technology can be very useful in promoting sustainable development,” says Lopez. “A tokenized local digital credit system, for example, is more than just a medium for purchasing and saving. It’s also a public window into the economic activity of a community.”

Such windows, Lopez explains, serve to decentralize and democratize access to information that is the basis for fair exchanges of goods and services in market-based economies. “With local blockchain solutions, you give all players—institutional, self-employed, formal and informal sector workers—transparent access to the same supply-chain data, historical pricing trends, crop yields, and so on. Any information that’s relevant to an economic ecosystem can be gathered, verified, secured, and shared with confidence.”

Lopez cites the Peruvian fishing industry as an example of how transparency can empower economic actors in low-income communities. “Most commercial fishermen in Peru are artisans. They don’t necessarily understand how blockchain stores, validates, protects, and tokenizes every activity in the chain from production to consumption. What they do understand is how to use that information to protect their livelihoods by tracking fishing stocks, ensuring regulatory compliance, and getting fair prices for their daily catches. If fishermen find more solutions that help them achieve that, they definitely will adopt them.”

A boost to collective bargaining and liquidity
One of the community-based blockchain projects that TBC collaborated with is Quipu, a local digital market that enables trade through a mutual credit system using a local currency. Quipu features a mobile app that captures real-time transaction data such as the type of goods and services offered and sold, their geolocations, prices, and available supplies. “In the global economy, many low-income communities have suffered from asymmetrical access to this type of information,” explains Lopez. “By decentralizing trading information so that everyone has access to it, individuals responsible for collective bargaining agreements with large external purchasers can negotiate better deals.”

Although Lopez is quick to point out that cryptocurrency technology isn’t the solution to every category of economic activity, she believes it will be transformative in developing countries. “Blockchain and tokenization in small markets change incentive structures and prioritize local producers and consumers in the value chain. Community wealth is enhanced by increased liquidity and transparency. The technology, when deployed with those objectives in mind, can serve as a disruptive tool to build economic justice in low-income regions around the world.”

Humanizing Business Transactions

Jennifer Hongbo Jiang, SF ’17

Like many of her colleagues in the realm of global banking, BlockTEST cofounder Jennifer Hongbo Jiang, SF ’17, was initially skeptical of cryptocurrency initiatives. “I have to confess that within 20 seconds of first hearing about bitcoin, I was sure it was a scam,” Jiang says. A decade’s worth of executive experience at financial giants JP Morgan, Merrill Lynch, and Citigroup had disposed Jiang to be wary of monetary vehicles that appeared impossible to value.

While Jiang never expected to give bitcoin a second thought, the blockchain-based currency came across her radar again when she was preparing a talk on cryptographic technology. “I decided to read the white paper, and I was blown away,” she says. “I realized that it was a genius of an invention. I became obsessed with the technology—though not yet convinced of the value of its potential applications.”

The fun part of blockchain
Not long after her partial conversion, Jiang spent an afternoon with the head of cryptocurrency initiatives at the Central Bank of China. “I was impressed by the level of China’s interest in cryptocurrency. The conversation propelled me on to additional research. When I was accepted into the MIT Sloan Fellows program, I chose a thesis topic that allowed me to dive deep into the consensus mechanism of distributed ledger technologies such as bitcoin.”That experience not only changed my opinion, it changed my entire career path.”

From Jiang’s perspective, the fundamental question that the bitcoin platform solved was how to use technology as a means of establishing trust in a trustless community. “Existing monetary systems incorporate some degree of trustlessness,” she says. “When you walk into a store with dollars in your pocket, it doesn’t matter if you and the cashier are complete strangers. You both trust that the value of paper money is what the government and society say it is. But that trust is founded on those third-party intermediaries.”

For Jiang, the fun part of the bitcoin platform is the condensation of all the system’s digital trust mechanisms into a single element—the bitcoin token. “The value represented in a bitcoin has proven to be an effective incentive for people to behave well and comply with the immutable requirements of the platform,” she says. “The threshold for entry into the system is achievable for a wide swath of the world’s population. That’s what makes cryptocurrencies inclusive and empowering for people who have not been invited to participate in the existing global financial structure. The long-term effect could be to restructure business transactions to look much more like human transactions.”

Defining boundaries for experimentation
Looking to the near future for cryptocurrencies, Jiang is concerned about the lack of clarity from the U.S. Securities and Exchange Commission and U.S. Commodity Futures Trading Commission as well as the lack of coordination with other global regulatory bodies. “I have no doubt that the emerging group of tokens and cryptocurrencies (including recent offerings from JPM Coin and Facebook’s Libra) will inexorably lead to a new theater of virtual marketplaces,” notes Jiang. “We’re struggling, however, to overlay existing regulatory frameworks onto new technology that is useful precisely because of its fluidity. Innovators are reluctant to experiment here because they don’t want to take the risk of getting out ahead of regulations, only to have their efforts nullified by new—and potentially punitive—laws.”

The current state of affairs is driving blockchain developers and entrepreneurs to seek more invention-friendly environments outside the U.S., according to Jiang. “Singapore, for example, has established a national strategy for creating a sandbox environment that attempts to strike a balance of freedom, transparency, privacy protection, and fraud prevention. The National Bank of Canada and the Bank of England also are spearheading initiatives. The global race is on, and the first country that implements a workable cryptocurrency best-practice framework will have a distinct advantage in the global financial system.”

Transferring Power to People Through Tokenization

When she was an MIT Sloan Fellow, World Bank Technology and Innovation Officer, earned a memorable nickname from MIT Senior Scientist Andrew Lippman. “We were discussing Facebook. My point was that if Facebook can make tons of money selling my data, why can’t I make money off myself? I just want Facebook to pay me a basket full tokens for my info. In response, he dubbed me a homo-economist, which I gladly accepted as a compliment.”

Prema Shrikrishna, SF ’17

In her work at the World Bank’s Technology and Innovation Lab, Shrikrishna is a sustainable business champion and blockchain technology enthusiast. “When you look at the endemic inefficiencies in our current global economic structure, many of the problems can be traced back to imbalances of power,” she says. “People with money have power, and they use their power to get more money. If we fail to act, the imbalances will worsen.”

Notional currencies to the rescue
Shrikrishna readily acknowledges that many technical and regulatory challenges lie ahead, but she believes that we’re much closer to a societal comfort level with cryptocurrencies than people think. “Yes, crypto tokens are an abstract notion, but corporate accounting is based on notional numbers,” says Shrikrishna. “Valuations of global giants such as Apple are certainly notional. It’s a simple matter of transferring that same mindset to currency.”

Crypto tokens, in Shrikrishna’s view, are a notional means of exchange that can be designed for many different types of transactions. “By supplementing existing international currencies with tokenized systems, we might create more localized, digital notions of currencies that are built from the ground up to better serve local and regional economic needs,” she says. “With that approach, we can deploy crypto token systems as counterweights to some of the imbalances of power in our current systems.”

Paving the road to adoption
In addition to their work on the technical requirements of various blockchain-based token systems, Shrikrishna and her colleagues at the World Bank are carefully examining technology-adoption models. “We know that we have to work from both the top down and the bottom up. At the country level, we know that providing guidance on government regulations, supporting the development of digital infrastructure, and performing readiness assessments will speed the creation of genuine benefits for inhabitants.”

At the individual level, Shrikrishna’s team is looking at strategies for motivating people to engage with the new technology. “We understand that widespread adoption by individuals will require significant educational investments,” she says. “We want to make the most of those investments, and we’re learning a lot from game theory about what motivates people to engage. If we get this right, we can give greater agency to people who have historically been on the downside of the global economic power imbalance.”



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.”

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.”


Seeking Evidence For and Against Blockchain Applications

Simon Johnson

“One of my favorite things about MIT is the enthusiasm people have here for talking through new ideas in an informal, friendly, and direct manner,” says MIT Sloan Professor Simon Johnson, faculty chair of the MIT Sloan Fellows MBA program. “We have many such discussions and research projects underway at the Institute related to blockchain. It’s all very exciting and confusing at the moment, but we’ll gain clarity over time about which aspects of the technology deliver distinct value and utility and which fall into the category of wishful thinking. If you can show us something real that you or someone else is doing with blockchain technology, we want you to join the conversation.”

In Johnson’s view, the overarching potential of blockchain is to shift the balance of power in financial, commercial, and social ecosystems away from established intermediaries toward something new and, as yet, only partially defined. “The vision of widespread decentralization is at one end of the spectrum,” he says. “The emergence of a new set of intermediaries with nontraditional business models is also in the mix. And we already see many dominant intermediaries in the marketplace morphing their policies and practices to incorporate this new technology. I expect that some companies will adapt successfully and others will fall behind.”

Predictions of blockchain’s dominance may be premature
As to the nature of prognostication outside the MIT community, Johnson notes that the Financial Times recently poked a bit of fun at business gurus who predicted that blockchain technology was well on its way to becoming an established norm. The January 10, 2019 piece “Occum’s blockchain shaver” tracked a significant rethink by a globally renowned consulting firm between 2015 and 2019. Following three and a half years of decidedly optimistic predictions, the January 2019 assessment struck a more cautionary tone:

“There is a clear sense that blockchain is a potential game-changer. However, there are also emerging doubts. A particular concern, given the amount of money and time spent, is that little of substance has been achieved. Of the many use cases, a large number are still at the idea stage, while others are in development but with no output. The bottom line is that despite billions of dollars of investment, and nearly as many headlines, evidence for a practical scalable use for blockchain is thin on the ground.”

A need to get into the weeds
“I think it’s helpful to remember that blockchain applications are still very much in an exploratory phase,” says Johnson. “We’re applying a lot of technical firepower to those efforts.” He notes, for example, that MIT’s Digital Currency Initiative (DCI) has dozens of MIT students and researchers working with a variety of companies and development agencies on projects designed to harness blockchain’s potential. DCI’s overriding mission is to empower individuals by making it as easy and fast to move value across the world as it is to move information.

Although it’s difficult to say at this point which aspects of blockchain will turn out to be interesting and consequential, Johnson is upbeat about the technology’s future. “We have robust investigations underway, and I’m confident that we will create value with blockchain applications across a variety of sectors.” Johnson’s latest book Jump-Starting America: How Breakthrough Science Can Revive Economic Growth and the American Dream, with coauthor and MIT Economics Professor Jonathan Gruber, examines the lessons of the post World-War II American success story and lays out a plan that will create the industries of the future—and the jobs that go with them.


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.