How blockchain technology will impact the digital economy–Christian Catalini

MIT Sloan Professor Christian Catalini

MIT Sloan Professor Christian Catalini

From University of Oxford Faculty of Law.

The Platform of the Future?

The survival of any organization depends on its ability to outperform competitors and marketplaces in attracting and rewarding talent, ideas and capital. As communication and transaction costs have drastically declined because of the internet, new platforms have emerged, delivering goods and services at a speed and efficiency previously unimaginable. These new digital players took advantage of the changes in the underlying technology to challenge established business models and rethink pre-existing value chains. The ones that succeeded did so because they achieved a level of efficiency that their brick and mortar counterparts had trouble replicating. Through online reputation and feedback systems, digital players were able to create global marketplaces where individuals, products and services could be matched more effectively than ever before. By providing curation and ensuring the safety of transactions, these new types of intermediaries were able to reap the returns of this first wave of digitization.

A similar transformation is about to happen as blockchain technology and cryptocurrencies mature and mainstream applications emerge. Under this new wave of technological change, intermediaries will still be able to add value to transactions, but thenature of intermediation will fundamentally change. Whereas some established players will be able to use this opportunity to further scale their operations, others will be challenged by new entrants proposing entirely new approaches to value creation and value capture.

Complementing Artificial Intelligence with Human Intelligence

Rising complexity and interdependency between organizations, combined with the increased specialization needed to advance the technological frontier, have made human abilities a key bottleneck in the generation, processing and diffusion of real time information. To counterbalance this trend, we developed better technology, governance, and contracts to simplify decision making, and ultimately allow organizations to scale across different markets.

On the technology side, artificial intelligence holds the promise to dramatically reduce the cost of prediction, leaving human judgment as the last barrier before full automation (Agrawal et al, 2016). Except, we already have the technology to harness, select and reward decision making at scale because of cryptocurrencies.

Whereas we had the ability to crowdsource ideas and solutions (eg, Innocentive, TopCoder), to source talent (eg, Upwork), services (eg, Uber, Lyft, AirBnb), and capital (eg, Kickstarter, AngelList) for some time, all these solutions rely on traditional platforms to aggregate the intentions of the crowd, source expertise and redistribute returns. Moreover, for these market to scale, often incentives and labor-intensive human judgment had to be brought back into the picture to ensure, for example, that professional investors had a reason to help the crowd sift through thousands of startups asking for funding. All these platforms, by building the reputation, payment and curation systems needed for exchanges to safely take place, were able to place themselves at the center of these new marketplaces. While information was freely flowing thanks to the internet, the flow of value was not.

A New Way to Scale a Global Platform

To understand the transformation brought by blockchain technology, it is useful to start from its largest implementation to date: Bitcoin. Although often criticized for its inability to match the performance of existing payments networks or the requirements of the financial system and governments, Bitcoin is extremely successful at solving the problem it was designed for: allowing a global network to securely transact and exchange value without the need of a costly intermediary. Through a clever mix of game theory and cryptography, the Bitcoin network is able to reach consensus about the true state of its distributed ledger at regular intervals. While the energy and computational waste associated with this approach is often criticized, it is exactly the sunk computational cost (proof-of-work) that secures the Bitcoin ledger from an attack. By throwing cheap hardware at the problem, Bitcoin replicates the financial system’s ability to transfer value without many of the tasks and costs typically involved in running and securing traditional transactions. Furthermore, it does so while minimizing the degree of trust parties have to place in each other when transacting, mimicking digitally many of the features – including the privacy ones – of cash.

Read the full post at University of Oxford Faculty of Law.

Christian Catalini is the Fred Kayne (1960) Career Development Professor of Entrepreneurship and Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management at the MIT Sloan School of Management.

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