Blockchain & Money: Session 11: Blockchain Economics by M.I.T. Sloan School of Management with Professor Gary Gensler

Session 11 Study Questions:
- How do decentralized blockchain applications affect the cost of verification and the cost of networking? How do blockchain applications affect market power?
- What might the economics and organization of the Internet–with its protocol layers and applications–tell us about the future of blockchain technology?
- What lessons should be drawn from crypto skeptics–Krugman, Stiglitz, Roubini, Gates, Buffett, Dimon, & others–about the economic potential for blockchain technology? What is an answer to the oft stated query: ‘what problem do cryptocurrencies solve?’

Session 11 Readings:
- ‘Why Bitcoin is and isn’t the Internet’, Ito.
- ‘Some Simple Economics of the Blockchain’, Catalini and Glans.
- ‘Transaction Cost and Tethers: Why I’m a Crypto Sceptic’, Krugman.
- ‘Billionaire Bill Gates once got bitcoin for a birthday gift–Here’s what he did with it’, CNBC.
- ‘Dr. Doom’ Economist Nouriel Roubini Bearish on Everything Crypto’, Forbes.
- Additional: ‘Exploring the Cryptocurrency and Blockchain Ecosystem’, Roubini.
- Optional: ‘The Economic Limits of Bitcoin and the Blockchain’, Budish.
- ‘Valuing Bitcoin and Ethereum with Metcalf’s Law’, Clearblocks.
- ‘The Meaning of Decentralization’, Buterin.

Overview: Blockchain Economics; Blockchain vs. Internet; The Minimalists; Costs & Trade-offs; Conclusions.

Blockchain Economics
- Verification–Tracking, Settling & Enforcing Transactions and Contracts
  - Ability to lower costs to verify transactions, particularly digital assets.
- Direct Cost
- Privacy and Data Leakage Costs
- Censorship Risks
- Settlement–Timeliness and Certainty of Finality
- Costs of Trust
  - Code & Consensus Protocol vs. Trust in Central Intermediary
- Economic Rents due to Market Power
- Networking–Moving property rights across a network; Ability to lower costs to develop and operate a network
  - Tokens provide opportunity to Pre Fund Development
  - Tokens provide Incentive Mechanism During Operating Phase

Blockchain vs. Internet
- Both are open protocols.
- Both transport packets of data on distributed networks
  - Property Rights vs. Content!
    - (Bitcoin was just digital, property rights, that then becomes known as value. But remember, when Bitcoin (Blockchain) started, it wasn’t worth anything. (It was more of an idea.)
    - 2 pizzas for 10,000 bitcoin was the first transaction, and, as such, that first transaction set the market price.
- Both can have apps built upon protocol or cryptocurrency level.
- Both said to be Open Network Development
  - Though centralized through groups such as ICANN or Bitcoin Core Developers
- Interoperability
  - A Blockchain is akin to a Private Intranet vs the Internet.
- Incentives–Registrars & Registries vs Miners
- Origins in Relation to Governments–Coordinated vs. Limited Trust
- Significant Investment–Blockchain for earlier than Internet.

The Minimalists
- High Mining & Transaction Costs inherent to design.
- Many technical challenges
  - Scalability, Performance, Privacy, Security, Interoperability, & Governance.
- Tokens lack intrinsic value.
- Volatility of token prices–poor store of value.
- Limited adoption as a medium of exchange or unit of account.
- Not accepted for Taxes, or as legal tender– No ‘tether’
- Having multiple currencies counter to economic history & logic.
- Token monetary policy in code subject to consensus changes with no Central Bank.
- Blockchain Applications tend towards Centralization
  - Mining pools; Crypto exchanges; Software development; Holders & Alternative Consensus Protocols.
- If Private Key is lost or stolen, it is gone forever!
- Buterin’s Trilemma–Decentralization, Scalability, & Security. (Can’t have all 3??)
- Doubt claims of benefits of Token Economics.
- No ‘killer app’ or Production Use Enterprise App yet.
- Scams, Frauds, & Manipulation on Crypto Exchanges and with ICOs.
- Illicit Activities–Tax Avoidance, Drug Running, Money Laundering.

Conclusions:
- Blockchain Technology addresses Costs of
  - Verification
  - Networking
- Minimalist, though, highlight many economic and technical concerns
- There are valid trade-offs between blockchain technology and traditional databases.
- Over time, as many challenges are addressed, Blockchain Technology has a potential to be a greater catalyst for change.

Biblio:

Gary Gensler. 15.S12 Blockchain and Money. Fall 2018. Massachusetts Institute of Technology: MIT OpenCourseWare, https://ocw.mit.edu. License: Creative Commons BY-NC-SA.