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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.”

Bad News for Autocrats

MIT Sloan Professor Simon Johnson, Faculty chair of the MIT Sloan Fellows MBA program

MIT Sloan Professor Simon Johnson, Faculty chair of the MIT Sloan Fellows MBA program, thinks researchers, technologists, academicians, and entrepreneurs are overlooking a crucial aspect of cryptocurrencies. Amidst thousands of ongoing discussions about the uses, abuses, and transformative effects of cryptocurrency technologies in commerce and finance, he notes that very few people are considering its likely effects on politics around the world—especially in societies under the control of autocratic regimes.

The topic is timely, Johnson believes, because authoritarianism is on the march worldwide. In an opinion piece for The Business Timeshe cites the most recent Economist democracy index, which indicates that half the countries around the globe were less democratic in 2017 than in 2016. More dire still is the assessment that only five percent of the world’s population lives in fully democratic states.

How cryptocurrencies can resuscitate democracies
One can easily imagine why an autocrat would not want people to have access to potentially untraceable, but secure, digital records. “For starters, with access to such records, a citizen could make payments or donations that bypass the banking system and its embedded surveillance,” writes Johnson. “Rules that restrict political organisation would become easier to defy.”

By way of example, Johnson describes a hypothetical system for collecting, storing, and sharing political grievances and protests that is structured like the user-controlled health-records platform MIT colleagues are developing. “There is potentially no limit to how ingenious people can become with regard to writing so-called smart contracts, which will trigger payments or other transactions (like sending protest messages) when particular events occur,” Johnson contends. “For activists around the world, the only constraint is their creativity.”

Revolutionary models for accessing capital
In a 2018 article for Consensus MagazineJohnson describes yet another paradigm-shifting aspect of cryptocurrencies in general and initial coin offerings (ICOs) in particular. A common feature among various ICOs is how potential investors are wooed by the promoters of these platforms. “While many will describe their tokens…as pre-sold, negotiable ‘products’ with a utility function that gives the holder access to the system’s services,” he writes, “so far the most disruptive aspect of this idea lies in how it changes the fundraising dynamic.”

According to Johnson, an ICO is fairly straightforward in that sense. The developer of a useful technology seeks to prefund it in a manner that shares the resulting value with early users and those willing to provide risk capital. Given that access to capital is a key constraint for such ventures in our economy, “ICOs offer a more direct route for both tapping and deploying funds, for matching founders with investors. That turns out to be quite revolutionary, although also controversial.”

Although many citizens around the world may feel discouraged by recent trends in politics and economics, Johnson believes the momentum may be changing thanks, in part, to the rise of cryptocurrencies. “I would not be surprised if the pendulum begins to shift back in favor of those who would prefer more open systems and a greater degree of productive political and economic competition.”

Simon 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.

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.”

 

 

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.”

 

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.