Samenvatting
Samenvatting - Blockchain Technology and Cryptocurrencies
Complete summary of all lectures, articles and videos of the course "Blockchain Technology and Cryptocurrencies" of the master "Financial Economics"
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Week 1Video #1, week 1: How the blockchain will radically transform the economy |
Bettina Warburg
Economists have been exploring people's behavior for hundreds of years: how we make
decisions, how we act individually and in groups, how we exchange value. They've studied
the institutions that facilitate our trade,like legal systems, corporations, marketplaces. But
there is a new, technological institution that will fundamentally change how we exchange
value, and it's called the blockchain. I actually want you to remember that while blockchain
technology is relatively new, it's also a continuation of a very human story, and the story is
this. As humans, we find ways to lower uncertainty about one another so that we can
exchange value.
Now, one of the first people to really explore the idea of institutions as a tool in economics to
lower our uncertainties about one another and be able to do trade
was the Nobel economist Douglass North. He passed away at the end of 2015,
but North pioneered what's called "new institutional economics." And what he meant by
institutions were really just formal rules like a constitution, and informal constraints, like
bribery. These institutions are really the grease that allow our economic wheels to function,
and we can see this play out over the course of human history.
As our societies grew more complex and our trade routes grew more distant, we built up
more formal institutions, institutions like banks for currency, governments, corporations.
These institutions helped us manage our trade as the uncertainty and the complexity grew,
and our personal control was much lower. Eventually with the internet, we put these same
institutions online. We built platform marketplaces like Amazon, eBay, Alibaba, just faster
institutions that act as middlemen to facilitate human economic activity. As Douglass North
saw it, institutions are a tool to lower uncertainty so that we can connect and exchange all
kinds of value in society. And I believe we are now entering a further and radical evolution of
how we interact and trade, because for the first time,we can lower uncertainty not just with
political and economic institutions, like our banks, our corporations,our governments, but we
can do it with technology alone.
So what is the blockchain? Blockchain technology is a decentralized database that stores a
registry of assets and transactions across a peer-to-peer network. It's basically a public
registry of who owns what and who transacts what. The transactions are secured through
cryptography, and over time, that transaction history gets locked in blocks of data that are
then cryptographically linked together and secured. This creates an immutable, unforgeable
record of all of the transactions across this network. This record is replicated on every
computer that uses the network. It's not an app. It's not a company. I think it's closest in
description to something like Wikipedia. We can see everything on Wikipedia.
It's a composite view that's constantly changing and being updated. We can also track those
changes over time on Wikipedia, and we can create our own wikis, because at their core,
they're just a data infrastructure. On Wikipedia, it's an open platform that stores words and
images and the changes to that data over time. On the blockchain, you can think of it as an
open infrastructure that stores many kinds of assets. It stores the history of custodianship,
ownership and location. For assets like the digital currency Bitcoin, other digital assets like a
title of ownership of IP. It could be a certificate, a contract, real-world objects, even personal
,identifiable information. There are of course other technical details to the blockchain, but at
its core, that's how it works. It's this public registry that stores transactions in a network and
is replicated so that it's very secure and hard to tamper with. Which brings me to my point of
how blockchains lower uncertainty and how they therefore promise to transform our
economic systems in radical ways.
So uncertainty is kind of a big term in economics, but I want to go through three forms of it
that we face in almost all of our everyday transactions, where blockchains can play a role.
We face uncertainties like not knowing who we're dealing with, not having transparency into
a transaction, and not having recourse if things go wrong.
So let's take the first example, not knowing who we're dealing with. Say I want to buy a used
smartphone on eBay. The first thing I'm going to do is look up who I'm buying from. Are they
a power user? Do they have great reviews and ratings, or do they have no profile at all?
Reviews, ratings, checkmarks: these are the attestations about our identities that we cobble
together today and use to lower uncertainty about who we're dealing with. But the problem is
they're very fragmented. Think about how many profiles you have. Blockchains allow for us
to create an open, global platform on which to store any attestation about any individual from
any source. This allows us to create a user-controlled portable identity. More than a profile,
it means you can selectively reveal the different attributes about you that help facilitate trade
or interaction, for instance, that a government issued you an ID, or that you're over 21, by
revealing the cryptographic proof that these details exist and are signed off on. Having this
kind of portable identity around the physical world and the digital world means we can do all
kinds of human trade in a totally new way.
So I've talked about how blockchains could lower uncertainty in who we're dealing with. The
second uncertainty that we often face is just not having transparency into our interactions.
Say you're going to send me that smartphone by mail. I want some degree of transparency. I
want to know that the product I bought is the same one that arrives in the mail and that
there's some record for how it got to me. This is true not just for electronics like
smartphones, but for many kinds of goods and data, things like medicine, luxury goods, any
kind of data or product that we don't want tampered with. The problem in many companies,
especially those that produce something complicated like a smartphone, is they're managing
all of these different vendors across a horizontal supply chain. All of these people that go
into making a product, they don't have the same database. They don't use the same
infrastructure, and so it becomes really hard to transparently see a product evolve over time.
Using the blockchain, we can create a shared reality across non trusted entities. By this I
mean all of these nodes in the network do not need to know each other or trust each other,
because they each have the ability to monitor and validate the chain for themselves. So we
can create that using blockchains. We can create a decentralized database that has the
same efficiency of a monopoly without actually creating that central authority. So all of these
vendors, all sorts of companies, can interact using the same database without trusting one
another. It means for consumers, we can have a lot more transparency. As a real-world
object travels along, we can see its digital certificate or token move on the blockchain,
adding value as it goes. This is a whole new world in terms of our visibility.
So I've talked about how blockchains can lower our uncertainties about identity and how they
change what we mean about transparency in long distances and complex trades, like in a
supply chain. The last uncertainty that we often face is one of the most open-ended, and it's
reneging. What if you don't send me the smartphone? Can I get my money back?
Blockchains allow us to write code, binding contracts, between individuals and then
guarantee that those contracts will bear out without a third-party enforcer. So if we look at
,the smartphone example, you could think about escrow. You are financing that phone, but
you don't need to release the funds until you can verify that all the conditions have been met.
You got the phone. I think this is one of the most exciting ways that blockchains lower our
uncertainties because it means to some degree we can collapse institutions and their
enforcement.
I think what would probably floor Douglass North about this use of technology is the fact that
the very thing that makes it work, the very thing that keeps the blockchain secure and
verified, is our mutual distrust. So rather than all of our uncertainties slowing us down and
requiring institutions like banks, our governments, our corporations, we can actually harness
all of that collective uncertainty and use it to collaborate and exchange more and faster and
more openly.
Blockchains give us the technological capability of creating a record of human exchange, of
exchange of currency, of all kinds of digital and physical assets, even of our own personal
attributes, in a totally new way. So in some ways, they become a technological institution
that has a lot of the benefits of the traditional institutions we're used to using in society, but it
does this in a decentralized way. It does this by converting a lot of our uncertainties into
certainties. So I think we need to start preparing ourselves, because we are about to face a
world where distributed, autonomous institutions have quite a significant role.
Bruno Giussani: Thank you, Bettina. I think I understood that it's coming, it offers a lot of
potential, and it's complex. What is your estimate for the rate of adoption?
Bettina Warburg: I think that's a really good question. My lab is pretty much focused on going
the enterprise and government route first, because in reality, blockchain is a complex
technology. How many of you actually understand how the internet works? But you use it
every day, so I think we're sort of facing the same idea of technology should either be
invisible or beautiful, and blockchain is kind of neither of those things right now, so it's better
suited for either really early adopters who kind of get it and can tinker around or for finding
those best use cases like identity or asset tracking or smart contracts that can be used at
that level of an enterprise or government.
Article #1, week 1: Beyond the Bitcoin Bubble | Steven Johnson
SUMMARY: The text explores the concepts and implications of blockchain technology,
specifically through the lens of Ethereum, a decentralized platform that uses cryptographic
methods to create secure digital identities and transactions. It begins by explaining how
seemingly random words generated by a software tool called MetaMask form a "seed
phrase," a critical component in creating a private key used in cryptography. This private
key, after further transformations, becomes an address on the Ethereum blockchain. The
author highlights that while Ethereum, like Bitcoin, has its own currency (Ether), its scope
extends beyond just financial transactions, serving as a platform for a wide range of
decentralized applications.
Ethereum operates without central ownership or control, functioning more like a democracy
than a corporation. The platform’s decentralized nature allows users to participate in and
contribute to its governance, earning the right to influence its direction through active
involvement.
The author argues that dismissing the potential of blockchain technology as mere
speculative exuberance would be shortsighted. The history of the internet shows that
, seemingly minor technical decisions can have profound long-term consequences.
Blockchain technology, with its promise of a decentralized network of trust, could have a
similarly transformative impact on the internet, potentially restoring it to a more egalitarian
and decentralized state.
The text then contrasts this vision with the current state of the internet, which has become
dominated by powerful tech giants like Google, Facebook, and Amazon. These companies
have turned the internet into a centralized system that often exacerbates social issues like
misinformation, privacy erosion, and income inequality. Many early internet enthusiasts, who
once saw the web as a force for good, have become disillusioned as these problems have
emerged.
Critics propose solutions like increased mindfulness or regulation to address these issues,
but the author suggests that the real solution may lie in new technologies like blockchain.
The decentralized nature of blockchain platforms like Ethereum could challenge the
dominance of current tech giants and offer an alternative to the existing winner-take-all
model of capitalism.
However, the text also acknowledges that the blockchain space is currently marred by
speculative bubbles and opportunism, which could undermine its long-term potential.
Despite this, blockchain advocates argue that it offers a way to avoid the internet’s historical
cycle of decentralization followed by corporate control, a pattern described by Tim Wu in his
book "The Master Switch."
The author concludes by comparing the internet to a layered system, with the foundational
layer (internet one) being composed of open protocols developed in the 1970s and 1980s,
which enabled the creation of the web as we know it. These protocols are freely accessible
and have enabled enormous innovation and connectivity without centralized control.
The author argues that blockchain technology, if successful, could represent a return to
these foundational principles of openness and decentralization, potentially reshaping the
internet in a way that aligns more closely with its original ideals.
SUMMARY:
The text explores the hypothetical scenario of what might have happened if the military had
kept GPS out of the public domain, leading to a private company—referred to as
"GeoBook"—dominating the geolocation industry. This monopoly would have resulted in
concerns over privacy and control, as GeoBook could track billions of people, similar to how
Facebook now dominates social identity online. However, GPS was released as an open
protocol, which fostered widespread innovation and avoided such monopolistic issues.
The text contrasts the early internet, characterized by open protocols like GPS and email
("InternetOne"), with the later rise of closed, corporate-controlled platforms like Facebook
("InternetTwo"). The transition from an open to a closed internet is attributed to the failure of
early internet pioneers to establish open standards for critical aspects like identity,
community, and payments. As a result, the private sector stepped in to fill these gaps,
leading to centralized platforms like Facebook, which now controls the social identity of
billions.
The text argues that this shift wasn't inevitable, but rather a result of both financial incentives
and technical challenges. While the open protocols of InternetOne thrived in an era of limited
corporate interest, the rise of venture capital in the 2000s fueled the growth of closed
platforms, which kept their systems proprietary to maximize shareholder value. Despite the
technical challenges, the closed architectures were seen as necessary at the time to
manage the vast amounts of data generated by billions of users.
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