The Economics of Digital Cryptocurrencies and the Blockchain with Christian Catalini

Speaker 1:                           Welcome to Economic Frontiers from MIT's initiative on the digital economy. Today, our guest is Christian Catalini from MIT Sloan School of Management. We're going to be talking about the economics of the blockchain and digital currencies more broadly. This is a really fascinating conversation. Before we get started, I'd like to ask you a favor. If you enjoy this show, please leave us your review on iTunes. Thank you. Now, getting onto the show.

Interviewer:                       All right. Welcome to the show, Christian, really excited to have you here. Let's get started. Our first topic of conversation is going to be the economics of Bitcoin and the blockchain. Maybe first, you can tell us how you got interested in this topic as a researcher.

Christian C.:                        Thanks for having me here. The story started very much when I joined Sloan. I had been looking at this space for some time, and in particular Bitcoin. As many juniors on the job market, you have to keep focusing on your job market paper, and not divert to other topics, so I left that in the back burner. Then at some point, I reached out to two of our students, one undergraduate and one MBA, who were interested in essentially giving everybody at MIT $100 in Bitcoin and jump starting an ecosystem here on campus around cryptocurrency.

                                                I was fascinated by their idea. I convinced them to turn it into a research study. They had already pretty much raised the capital from a group of our alumni. When Catherine Tucker and I got involved, the idea was really to first make it safe so that the moment where we were starting to drop half a million dollars on campus, we wouldn't be crazy, but also to learn something from it from a research perspective.

Interviewer:                       Got it. What were you hoping to learn initially?

Christian C.:                        I think we were fascinated by the possibility to observe, for the first time, a contrafactural diffusion curve. Often when technology diffuses in society, it does so endogenously, right? Early adopters will adopt first. Then, over time, as the costs decrease, you see more and more people adopting. Here, we had a setting where there was still a lot of uncertainty around the role of the technology. Use cases were very limited. There was a lot of enthusiasm, but I think it was really unclear which direction the technology could go.

                                                MIT was a particularly interesting setting for this, because there's a lot of raw talent in our undergraduates. I think people were excited beyond Bitcoin as the currency and were thinking about Bitcoin as the application stack. As an operating system for a new set of applications that could increase access to banking in developing countries, improve financial services, and really revolutionize how we think about currencies.

Interviewer:                       Got it. While Bitcoin was just an interesting new technology, in some sense you had a broader economic question in mind here. More than just do people use the Bitcoin or not. What did you find?

Christian C.:                        Yeah. I think the students were actually really interested in getting people to adopt Bitcoin and turning MIT into the first economy that was running on a cryptocurrency. From an economic perspective, there were a set of questions that we had in mind around, of course, the role of network effects and the adoption of new technology, how privacy concerns interact with that. Bitcoin is a really interesting technology when it comes to financial transaction privacy. The broader level, I think we were interested in what kind of role do early adopters play in further diffusion? Do they generate positive spill overs as it's often assumed in literature or can they actually deter innovation and diffusion from taking place when they are not on board?

                                                We had a broad set of questions on diffusion and adoption, but also on how privacy challenges are a conception of financial transaction in a world that's becoming more and more digital.

Interviewer:                       Got it. What did you find? First of all, actually, this is something that's interesting. How does one define an early adopter anyway? We all have this vague conception that some people are really into technology and they are going to get the fancy new gadget first. I've never actually seen that operationalized in economics.

Christian C.:                        Absolutely. I think as economists, we decided to go for reveal preferences. When many start-ups launch a new product, they usually open up some sort of mailing list or wait list for people that want to adopt the technology first. That's essentially what we did. We gave students five days to register. Then, we used the speed at which they sign up for the distribution as a proxy for their early adopter status. Of course, we need to check that they weren't just more in need for cash. We used survey measure to corroborate that these are people that usually adopt [inaudible 00:05:10] technology more early that are extensively using apps like Venmo and the like. We find that actually the reveal preference approach is pretty robust in terms of spotting the early adopters.

Interviewer:                       Okay. How did these early adopters use the Bitcoin? What was the interesting variation between the different early adopters?

Christian C.:                        Yeah. As I was mentioning before, what we could observe here for the first time was a contrafactual diffusion curve. What I mean by that is we had settings where your typical early adopters were forced to wait. We convinced the students that were part of the Bitcoin club to delay the distribution to 50% of the sample by simply two weeks. That variation would give us a chance to observe what happens when people that really wanted it first that were your typical technology gatekeepers don't get the technology first. We used that delay to estimate what happens later to diffusion and adoption.

                                                In terms of results, first of all, surprisingly, most of the students still to date are holding on to their Bitcoin. This is not really something we expected. It's interesting that in the sign up survey when students were mentioning the reasons for using Bitcoin, the top answer was actually as an investment vehicle. We spent a lot of time convincing them that Bitcoin is a very volatile asset. At the end, they were right. When we distributed Bitcoin, we distributed at about $350. Today, it's circling around $800. The ones that are holding are actually making a very profitable gain on it.

                                                Activity on the other side, was really low. I think to economists, that's not surprising, because on a campus like MIT, you can use all sort of digital payment systems, from credit cards, debit cards, Apple Pay. Our students are clear early adopters of Venmo and the like. Some people cashed out, of course. About 11% cashed out in the first two weeks. They told us, "This is not for me". Most people cashed out later when the price was above the original distribution price.

                                                I think what's interesting is that when we delayed early adopters, they were way more likely to cash out. This was really surprising to us, because by all accounts, these were the people that you would have expected to hold on to the currency, maybe convince their friends to use it. That delay really affected them. After we rule out a number of alternative explanation like pure effects and learning, the one that seems the most plausible to us at this point is they do get consumption value and utility from being first to adopt. Early adopters do care about that exclusivity period that they usually get when they are able to sign up in line for the new iPhone or wake up at midnight to order it online. When you take that away, that takes out the fun. For some of these probably being by-passed as early adopters and maybe being challenged in the role as gatekeepers for new technologies within their peers in environments where this is heavily socialized, like in dorms, that really mattered.

                                                I think one of the contributions of our paper is to highlight that we tend to think of early adopters as generating positive network effects. They clearly do, right? They bring other people on board when the technology is obscure.

Interviewer:                       By the way, do you measure that? If so, how? That they bring others on board.

Christian C.:                        We didn't measure it directly in this setting, right? What we see is that when an above the median share of the early adopter is delayed, you can measure this either at the dorm level or within a social cluster, after weeks, what we see is that other people start dropping out of Bitcoin too. This adoption is much faster in environments where the early adopters are not holding on. The opposite story is essentially one where you can imagine we did everything right.

                                                We seeded the technology to early adopters first. When you look 500 days into the experiment, those dorms, those social clusters, are about 45% more active than the others.

Interviewer:                       Just a clarification, how do you define activity? Just the fac that they chose to receive the Bitcoins into a wallet? Or are they actually doing something with it?

Christian C.:                        Right. First of all, we get transaction data from the wallet intermediaries. We track it on the blockchain. We use machine learning to do all of that. Also, the 45% figure that I just mentioned is based on a really conservative estimate. For that one, we explicitly looked at people that kept adding money to their Bitcoin holdings. These are people that, not only are maybe actively using it, but are also increasing their assets in Bitcoin. I think what's interesting is, again, many people are holding it possibly as a speculation device. Also that people seem to be looking at these early adopters for advice and reference in these environments.

Interviewer:                       Got it. Just turning back to these slower adopters. You mechanically delay the adoption of people who would otherwise have chose to adopt earlier. This resulted in them being less excited about that technology. I think that's actually a really interesting finding, because I think a baseline model for early adopters might just say that the people that adopt early get more utility from the technology itself. Here you're just showing that a lot of it is due to the fact that it makes them cool or fashionable. It's more like a social benefit rather than an actual benefit in terms of the consumption sense.

Christian C.:                        Yeah. I think you're absolutely right. In fact, you can think of it as a traditional trade-off. These people occupy roles in their peer group that are clearly valuable. I think part of their reputation is based on the fact that they do introduce new technology to their peers and are successful at doing that. Of course, access comes with a cost. I think some of these may have higher consumption value from, like you mentioned, being the first ones. That's very much consistent with what you see also in crowd funding, where often people are willing to pay months in advance for a gadget that won't be out for another year. When those early adopters have been by-passed and the product has been delivered to somebody else first, they also get pretty angry.

Interviewer:                       Interesting. Does this actually have implications for business strategy or firm strategy in any way? That there's this additional motivation for the early adopters.

Christian C.:                        Yeah. I think the way we usually think about the introduction of a new product is that often there are technical considerations for why you want to limit access. When you look at very successful roll outs like Gmail or other ones, often what happened is that scarcity served two purposes. The first one was like you couldn't give access to that many gigabytes of emails to everybody at the same time. The second one was creating this elite status of Gmail invites, which were selling on Ebay for $150.

                                                I think what our paper highlights is two things. The first one is that there may be value in that exclusivity period. Even if you think about a monopoly is trying to optimize the distribution across [inaudible 00:12:41] consumers, you may want to introduce this inefficiency in the distribution, because of the benefits that you get from that. The second one is also that when you think about technology diffusion curves, often in the management literature, we tend to go to the MBA class and teach that you can manage the technology diffusion process. That you can strategically accelerate it. I think our paper shows that it's [inaudible 00:13:07] and the early literature in economics is right. It often backfires to try to accelerate that diffusion process. There's a natural order. The best way to maybe diffuse a new product ... If you really want to be practical about this would be to know your early adopters.

                                                Often these people show up at your door first. It's easy to identify them. They sign up first. They show up at your store on launch date. In other cases, if you think about our government trying to introduce a new beneficial technology into society, they may not do so. What could be worthwhile in those cases is trying to identify these people before you see the technology. Because what our results showed is that if you really want to benefit from the positive network effects of these individuals, you may have to give them access first.

Interviewer:                       Got it. Yeah. That's super fascinating. I want to move on now to a related work that you've done about the blockchain. As a preface, there's a nexus of related technologies that are involved in making a digital cryptocurrency work. A lot of people have focused on Bitcoin. Why did you focus on the blockchain instead? Actually, before you get to that, can you just define what the role of the blockchain is in this ecosystem?

Christian C.:                        Yeah. First of all, let me clarify that I think whatever term we chose, it won't be able to capture the complexity of this space. I think there has been a lot of IPE. Our purpose with Joshua Gants and writing this piece was really to separate basic economics from IPE. The reason why we landed on blockchain is because it has become one of the terms that encompasses a lot of technologies that are broadcasted in this space. Some other people use the more politically correct term of distributed ledger technology. I think at it's core, it's really about cryptocurrencies. Blockchain has become a useful term for talking about cryptocurrencies, but the two are really linked. I think what we are trying to highlight in the paper is that you cannot have a real blockchain without a cryptocurrency in the back end.

Interviewer:                       What is the role of the cryptocurrency? Or can you explain to the audience what a cryptocurrency is and what the distributed ledger is. Maybe using an example.

Christian C.:                        Yeah. Let me start with the blockchain. Then, we'll build up to the other components. I mean the cryptography is fascinating here. I think for economists interested in this space, appreciating some of the underlying complexities is actually really useful. A blockchain, like the name says, is essentially a chain of blocks. Where it gets interesting to economists like me is that those blocks can contain all sort of transactions. I'd like you to think of transactions in the most general way possible. Every time you authenticate yourself online, you buy something, you exchange goods and services, you are essentially engaging in a transaction. You can track digital goods, physical goods, exchanges of IP rights. This becomes a very interesting structure. That's why we call it a general purpose technology for recording, settling, and actually having a perfect audit trail of what has happened.

                                                Now, in the paper, we talk about two costs that I think are going to be affected by this suite of technologies. The reason why we like to think about cost is because, again, to separate some of the IPE around this idea of blockchain, we revolutionize everything. I think we first need to think about in terms of really simple economics. What is changing?

Interviewer:                       Can I just interject a little bit? So far, you've described to me a system that records transactions. That, to me, doesn't seem very novel. We've had databases for a very long time. That doesn't, in and of itself, doesn't seem to differentiate this technology from the others. What does?

Christian C.:                        Yeah. That's a really good point. In fact, in the paper, we talk about two costs. The first one is this idea of the cost of verification. I can expand on it more if you like. The second one is the cost of networking. When you think about a blockchain, per se, it's just a distributed database. Where it gets really interesting is when you use a cryptocurrency to boot strap and create incentive for its keeping.

                                                How do you update a distributed ledger in a totally de-centralized way? The reason Bitcoin is so interesting is because for the first time in history, people could exchange value on a global scale at practically zero transaction costs. I mean, there's some caveats to that, but without the need of trusted intermediaries. That's really the combination of both the ability to verify transaction attributes in a distributed and de-centralized way, but also to run a network that can reach consensus about what goes into that ledger and what should not go into that ledger in a totally de-centralized way.

Interviewer:                       Okay. You've emphasized this de-centralized nature of this. I understand how it works in terms of Bitcoin and the fact that people want to transact currencies, sorry a digital currency with each other. In the paper, you actually discuss a lot of other applications. Where does the distributive aspect of this come in?

Christian C.:                        I think there's a long-standing literature in economics around networks and platforms. When you think about it, platforms serve many purposes, but often they match demand and supply, so their marketplaces. They often come with a reputation system. They do provide some market design later on top of that, so that the two sides can clear as effectively and as efficiently as possible. At the end of it, when you think about what a cryptocurrency really is, it's a currency. It's something that can track information and value in a secure way.

                                                Reputation systems are essentially currencies. A lot of the market design mechanism that we've been using to matching demand and supply are essentially flavors of currencies that are used in different marketplaces.

Interviewer:                       I'm going to push back on that a little bit. I don't actually think that a reputation is a currency. At least, the classical definition of a reputation in economics is that it's not actually something that can be traded away necessarily. Let's say I'm known to be a smart person. I can't trade that to you. That reputation, right? Can you clarify on that?

Christian C.:                        Yeah. The trading aspect is not necessarily what I was focused on when I mentioned the word "currency", right? In society, there's currencies that we trade and exchange in marketplaces. There's also types of currencies that are not tradable, but still serve a purpose for signaling in labor markets, in academia. A lot of the exchanges within academia are based on currencies that are not explicit. When you think about that, what makes markets work are different types of currencies. Sometimes they can be monetized. Sometimes they are not converted into US dollars, but they still serve this interim purpose of transferring information about value in different ways.

Interviewer:                       Got it. Yeah. To me, that would seem just like a credible signal or information that is useful to parties that are transacting.

Christian C.:                        Yeah.

Interviewer:                       Maybe that's an alternative way of phrasing it.

Christian C.:                        Absolutely. What makes the distributed ledger useful is that you can record anything of value. Anything that it's meaningful for that marketplace to exist. In some cases, it could be the reputation of a certain seller. In other cases, it could be information about the prominence of the goods, their quality, how they went through the supply chain, which parties have signed off on different steps, the credentials of the parties involves. Think about the degrees, right? Of people on our labor market. When we talk about currency,, we are thinking the broadest sense possible.

Interviewer:                       Okay. Let's move to how one might actually apply this. You mentioned an example that I think is pretty well suited towards this, which is the credentials relate to a degree. We've had degrees for a very long time. People use them in order to find jobs, in order to establish a reputation. On the internet currently, one way to verify that you have a degree is you give a university email and that's how a lot of websites actually figure this out. How would a blockchain-based solution to degrees improve on this situation?

Christian C.:                        Yeah. Thinking on the fly on that, I think different ways. One level is that as you lower the cost of verification, you can verify in situations that you wouldn't have verified before. You could imagine you not only want to verify the degree, but the sub-parts of it in terms of courses, classes taken, achievements through the course. If you think about a student going through their undergraduate experience, there's a lot more information that gets lost in that transcript.

                                                Furthermore, there's been fraud. There's been cases where degrees weren't verified in the proper way, often at very high levels of government too, in different countries. I think there would be value in a platform from where we can track credentials in a much more reliable way. Where I think it gets interesting on the extensive margin, is that suddenly the unit is not so much the old degree, but it's the components. Every data point in that degree could be verifiable and could care additional information to the marketplace.

Interviewer:                       In practice, would it mean that the university is recording all of this information so the university has an account. The individual student has an account. Then, how would a third party access this information?

Christian C.:                        One way would be to, you have to think through the privacy implications of it. Blockchain has also different degrees of privacy depending on how it's implemented. Something that would be useful, it's not just one institution being on such a blockchain, so multiple ones. Then, you would have a federated system, where you're essentially tracking attributes about identity that are meaningful. Then, people could use them in different settings. You can imagine. They may be for credit or for some other instances. Or institution that want to compete maybe online, maybe with universities in providing degrees that are valuable could record it in the same way. They could use the outcomes of the individuals tracked also this way to show progress.

                                                I think once you re-think about the marketplace as an ecosystem, that currency has value throughout these ecosystem in different ways. I think the hard part is really thinking about those extensive market applications. What can you do once you have this?

Interviewer:                       Okay. One thing that we haven't mentioned yet, but you do mention in the paper is the concept of smart contracts. One example that you give that is particularly interesting is the example of an auction. Can you walk us through that?

Christian C.:                        Yeah. When we talk about auctions, it's more to make a broader example of what happens when you intersect the currency with programming. I think we've seen, with recent events, that smart contracts are hard to pull off properly. We haven't learned how to translate legal code into softer.

Interviewer:                       Just for the listeners, what is this recent event?

Christian C.:                        Ethereum, which is one of the cryptocurrencies, essentially created what is very much a digital venture capital fund to fund cryptocurrency projects. Ethereum uses a full touring programming language on top of it, which is much more sophisticated relative to Bitcoin. Bitcoin allows only for very simple types of scripts. As a consequence, in the effort to experiment with this technology and build new things, I think the developer community behind it ignored this always poses challenges, right? There's always unintended consequences when the systems become complex. One hacker essentially was able to exploit a bug in the system, run essentially everything through a loop, and funneled money out of this VC fund, which created a major chaos, because of course there's all consensus systems and how the code base is updated. There was a long debate on how to fix this problem once it had happened.

                                                I think it goes to show that smart contracts are extremely powerful, but they are also complex. We need to think about once we start automating parts of our society this way, do we really understand what these contracts are doing?

Interviewer:                       Okay. Got it. All right. Going back to the simpler example of the auction.

Christian C.:                        Yes. I think the auction, the example we use in the paper, is the recreate second price auction, which is a classic case where you may not want to disclose your real willingness to pay, because you're worried about expropriation. Of course, all the usual caveats of auctions running multiple times would apply, but what's interesting here is that you can design a cryptocurrency in a way that bid is never revealed to the seller. You end up paying the second price, which is economically optimal, but you're not revealing your true willingness to pay, because essentially you're using some clever cryptography to work around that.

Interviewer:                       Okay. Just to clarify that for the listeners. Suppose that me and Christian are bidding on an ad slot for Google. Christian is willing to pay $100. I'm willing to pay $50. If we both bid out true valuation, the way that the second price auction would work is Christian would win and he would have to pay $50. In the classical way the system works, Google, who's auctioning this off would actually see the $100 bid. Potentially, there could be a smart contract that does this instead of Google, and that smart contract will only tell Google how much to pay and to who to pay, but they would never know that Christian was actually willing to pay $100. Is that correct?

Christian C.:                        Yes. To give you a different example of the intersection between cryptocurrencies and economics, there's a reason why one of the early use cases of Bitcoin was online gambling. One of the issues with online gambling is that it's really hard for anybody online to verify that you're playing against a fair house. If you're tracking some of these transaction on a public ledger, with some added clever cryptography on top of it, the house can cryptographically prove that they are not cheating. You suddenly have a marketplace where you didn't have it before. Another example could be once you connect an internet of [inaudible 00:28:11] device to a cryptocurrency. Let's assume that the device is secure, so it cannot be tampered with. Suddenly, you could sell information coming out of that device. Maybe it's a sensor tracking pollution or radiation or whatever you're interested in into marketplaces.

                                                I think what's fascinating to economists is that suddenly we can price things at a level that we couldn't before. Maybe we can work into solving market failures or other issues where pricing externalities has been extremely challenging. I find that quite fascinating.

Interviewer:                       Interesting. This internet of things example, do you really think that people would be willing to pay enough money to justify the device? For example, let's say we have a camera sitting here outside of the Sloan building. Would anyone be willing to pay for its data?

Christian C.:                        I think that's an open question, right? Going back to the pollution example, maybe you would have to subsidize that at the beginning to get the sensors out. That would be a way to boot strap such a network. Then, maybe you could sell the data stream coming out of it. I think where it gets really interesting is that you can really price any resource, electricity, bandwidth, information, IP rights at a much more find-grained level. What is extremely hard in this space is really imagining those extensive margin applications. It says if we are thinking about the internet in its early phases and would have predicted maybe YouTube or even Snapchat or some of these other applications that we built on top of it.

Interviewer:                       Yeah. That's one of the joys of doing research in the digital technology is that new things are always coming up. It's fun to think about them for the first time. One thing I wanted to ask you about regarding the smart contracts is they are presumably written in a programming language. All programming languages, to my knowledge, have bugs. Zero knowledge attacks, for example. Does that mean that no such contracts will really be tamper-proof? If a theorem is written in Java for example, and there are well known exploits that have occurred throughout the history of Java. When you find one, does that mean you'll be able to just extract all the money from such a system?

Christian C.:                        I mean, a lot of our financial system already relies on a lot of computer science, right? When you think about modern banking and finance relies on cryptography and encryption. We know that some of those algorithms are not as robust as we believe they are. At least some of the oldest ones. This is a more general problem. As we digitize more of our society, as we expose more of our transactions and information to a digital environment, these are challenges that we'll be facing with AI and some of these other technologies anyway.

                                                First of all, there's clever cryptography researchers working on these issues and trying to prove that a system is robust. Or at least they are trying to simulate and stress test it before it's implemented. Also, I think this opens up a number of interesting questions around data privacy. Who can control certain assets and transactions. Also, what are we exposing to this systems that are still experimental?

Interviewer:                       Yeah. I mean, just thinking about this myself, one of the differences within the current system that we have and a Bitcoin-like system is one of the problems with Bitcoin paradoxically is that it is a standard. If you find the flaw in the standard, then you can destroy a lot of value all at once. Whereas, otherwise if you are thinking about an attack on a particular bank or some other particular institution, they typically all have different systems. It's unlikely that one exploit is going to get the entire system down.

Christian C.:                        I would push back a little bit on that, because in a sense, yes, Bitcoin is a protocol. We need to remember that that protocol is developed and extended by people. In a sense, if something like that were to happen, you could imagine the network reaching consensus on a different trajectory. Even the attack on Ethereum, I think was managed in different ways and ended up in a fork. Some people disagreed with the fix. Some people wanted to try to fix and recover the funds, which is interesting. At the same time, there's always individuals behind this. Senders are only senders insofar people adopt them and use them. I think, as a general note of caution, you hear a lot of IPE around smart contracts entering our lives. I think they should be entering in a very slow way, because software does exactly what we tell it to do. Often, that's not what we want.

Interviewer:                       Yeah. It's hard to program, as I'm sure you know as someone that does quite a bit of it. One aspect of this technology that we haven't talked about yet is it's usefulness, not for like a broad network, but for a narrow network. Let's say financial institutions that are in close cooperation that could potentially use such a system. Can you talk about that?

Christian C.:                        Yes. In fact, you hear a lot of discussion around what people call usually private blockchains or permission blockchains in contract to Bitcoin, which is permissionless. When we worked on the paper, the way we were thinking about it, on one extreme, we have something which is essentially just the distributed database. You have a bunch of organizations coming around and agreeing on what the standard should be for Bank of America settling a transaction with some other bank. Are those innovative? Not so much, right? In a sense, we did have the technologies to build this for a long time. What's interesting is it's become a focusing device. You're seeing a lot of financial institutions coming around blockchain and distributed ledger technology as a way to standardize their processes and maybe realize that suddenly at T+3, so three days is not the most efficient thing for liquidity. There's frictions in the system that, in a digital environment, don't need to exist.

                                                It's helping in that direction, but on the other end, these private blockchains are really only taking advantage of one of the two costs that I mentioned. The cost of verification. They don't need proof of work, so they don't need the costly mining and energy wastefulness of cryptocurrencies like Bitcoin. At the same time, they are also vulnerable to [inaudible 00:35:00] by the entities involved. Or by the system being attacked. Recently, there's been a number of attacks on Swift. That's broadly used for banking transaction on a global scale. People were essentially able to funnel fake messages and move money around, mostly because the network is only as robust as each one of its nodes.

                                                What is actually more interesting, as you move away from this private blockchain into the more permissionless world, is that you can think of them as open innovation protocols. In the sense that when you're launching a new cryptocurrency where everybody can build on their periphery and build applications on top of it, we are asking for consent. What you're doing is you're creating an innovation ecosystem that can flourish. With Bitcoin, what I think we were seeing is that of course, it's not compliant. It has all sort of issues with anti-money laundering and customer regulation. Because it wasn't designed to comply with the current financial system. At the same time, for anybody that wants to build on top of Bitcoin, they don't need permission. They can start tomorrow a service that uses the Bitcoin blockchain maybe to time stamp things or to record certain transactions without having to go through an intermediary.

                                                As you look into the future, I think there's a lot of potential into this. Both in terms of the provision of public goods. You could imagine private-public collaborations. Or even when you look at software, opensource communities usually have to rely on signaling, right? Courier signaling for people contributing to it. Maybe large firms doing big investments because they can appropriate through complimentary assets. Think about IBM donating to some of these projects and then appropriating on the consulting side. Here, you have a system where whole community can come around and use the crypto token to fund the initiative. This is where this becomes really similar to crowdfunding, because when you're launching a new cryptocurrency, maybe with a different market design choice, maybe you want more privacy, maybe you want less privacy, maybe you want to be government compliant versus not, or you want to allow for contracts, or whatever your choice is, what you're saying is by issuing tokens, you are essentially funding your future development. Because those tokens and the returns on arbitrarial speculation can then go to fund the developers that build that ecosystem.

Interviewer:                       That makes a lot of sense, but I think it's perhaps a little bit misleading, unless I'm misunderstanding things. Because most opensource projects are not cryptocurrency related. Why does it matter that if your opensource project happens to be cryptocurrency related that you can boot strap it in this way? If we are designing a new text editor, why does this funding channel matter, I guess?

Christian C.:                        I guess the text editor wouldn't be the most obvious example, but think about a platform for developing text editor-like applications, where maybe you want many plug-ins for different languages or scripts. Suddenly, let's say you have a script that cleans all of your data automatically or uses machine learning to extract features out of those data. You can imagine a marketplace run by an underlying cryptocurrency where you are paying for using that feature directly with the token, where the developers get compensated, and the people that have built the platform that allows that kind of text editor to run in the first place also are in returns, because maybe they had some tokens to start with.

                                                Here's a practical example. People often think of Bitcoin as the fully anonymous cryptocurrency. Turns out, Bitcoin is [inaudible 00:38:46]. You're like a writer writing a book under a pseudonym. That has issues, right? Because essentially, if you think about even in corporate environments, if you want to settle transactions between firms, the last thing you want is for your competitors to be able to track some of your moves or your suppliers or stuff like that. The need of privacy is a big one, even for legitimate uses. In October, there was a launch of the new cryptocurrency called Z-cash. The whole assumption behind the founders of Z-cash was that essentially we needed a cryptocurrency that offered different degrees of privacy and potentially much higher privacy than even Bitcoin. The way that group came together, even across academic contributions to it, is to build a business around the crypto token.

                                                They have what is called the Founder's Reward, which means that part of their cryptocurrency mining will go automatically to people developing it and improving the ecosystem. I mean, this will take time to unfold. Even equity crowdfunding in its [inaudible 00:39:51] phase and is slowly moving up the chain from angels to VC. Eventually, you could definitely imagine cryptocurrencies being used to fund public goods, to fund valuable ecosystems, and sort of general purpose technologies per se.

Interviewer:                       Got it. I mean, this is all very fascinating, but I think a lot of the details regarding how this may work are still very much to be determined. Also, whether the economics makes sense, right? In some sense, if the parameters of this problem are exactly right, then you can imagine that this cryptocurrency embedded in an opensource project will generate enough revenue so that the initial developers would get paid and they would be willing to contribute. Certainly, at this point, before we have known successes, it seems like it's still a very risky proposition. It's a lot of speculation.

Christian C.:                        Absolutely. In fact, going back to Z-cash, I think it was within days of the currency launching, somebody cloned it and forked it and said, "Here's Z-cash, but without the Founder Reward." Right? If you want to adopt this other version of the cryptocurrency, you won't have to pay X% to the developers. That really poses the challenge on that developer group to they are worth the Founder Reward.

                                                I think in general, yes, all of this is extremely preliminary. There's a lot of experimentation. It's important to remind ourself of, even Bitcoin, which is declared dead multiple times and now is still around a $12 billion market cap. It's starting to serve a purpose. We've seen countries where currencies has been devalued. Or in the case of India, where bank notes are being removed. Suddenly, people start thinking about these assets as an alternative to [inaudible 00:41:45] money. Going forward, I think even central banks will have to think hard about who are they competing against and what does it mean that there's this store of value that's totally digital that cannot be censored and that can be transferred with a few bits.

Interviewer:                       Got it. It's great that you mentioned central banks. One really interesting topic is how governments might use cryptocurrencies. Do you have any thoughts about that?

Christian C.:                        Yeah. It's a fascinating area and I'm not a marco economist, so this is not my field. When I think about what a central bank could do, there's clear implications when you go back to the cost of verification for how we implement taxation, for how you do things like quantitative easing, and all sort of incentives within the economy. How you essentially get funds and incentives through the economy. What's fascinating is that you can start rethinking the old banking system from the ground up with modern technology. What would it mean if the central bank could give every citizen a central bank digital wallet? Essentially would suddenly be banked right away at very low costs. Then, you have the whole ecosystem of start-ups and new players may be competing for payment services for paying your bills, for all the things that we do with bank accounts. That puts a huge challenge in terms of are we going to do lending, right? Because banks of course need that liquidity to lend it out.

                                                You can start rethinking the system from the ground up where maybe citizens can all digital currency from the central bank, which is more secure. Maybe with a slight negative interest rate. You'll have to work the economics out. Then, suddenly, you can provide services at a lower cost. You increase competition in the banking sector. A sector that's heavily regulated. That maybe hasn't been known for a lot of innovation in the last 20 years.

Interviewer:                       Yeah. That is really interesting. I mean, I would imagine actually that we would see bank lobbying very heavily against this. I mean, if the government could truly execute a low cost banking system, that would be devastating for banks.

Christian C.:                        To roll back, I think banks serve a really important purpose in the economy. We need to think hard about how do we keep that function in a world where they are not just custodial. I think the challenge will be, of course, regulation, but we have seen it played before, at least in industries that weren't that sensitive. We think about Uber, AirBnB, there's some back and forth. What's more fascinating is to think about places outside of the US. This may not make sense in the US, but as you start thinking about through the world, there may be economies where this makes a lot of sense.

                                                It also becomes interesting to think about right now, the cash, particular the US dollar or maybe the Euro on some countries, is the default currency when you don't trust your local government. Once the serious country moves to a cryptocurrency based, digital currency where maybe they have some monetary levers or whatever they need to make it work, what does it mean that someone in any part of the world can access that and move out and vote with their wallet against their local [inaudible 00:45:04] currency? I think that will be a topic of a longer discussion.

Interviewer:                       Got it. Well, this has been really fascinating. Thanks so much for joining us.

Christian C.:                        No, thanks for having me. Really enjoyed it.