Interview with Daron Acemoglu – on AI and crypto

 Interview with Daron Acemoglu – Frank Pagano

"What exponential technologies will change our world, in your opinion, by 2030 – between Blockchain, AI, Spatial Computing, Quantum?

"Difficult to say. All of these are highly hyped. Which technologies will flourish and find impactful applications remains to be seen. I don’t believe that blockchain has the potential to have pervasive effects except in a few narrow applications. AI is a different story. Even though much of what is written and said about AI is an exaggeration, there is no doubt that AI is advancing rapidly, and it is being rolled out in many sectors. Just on that basis, I expect it will impact many sectors of the economy, including social media, communication and human resource management. Whether it can penetrate other activities, such as finance, law, education and healthcare remain to be seen. More importantly, even if it does become widely used in sectors such as education and healthcare, there is a big difference between good use and bad use. For example, rolling out ChatGPT to millions of students and encouraging them to learn from the chatbot rather than their teachers is easy. Making sure that they learn the right material and learn effectively is much harder.

...

"Do you think the financial and banking system will accept at some point crypto, or even just bitcoin? What’s your take on the future of the financial system, which should be open for all, and where financial fees should become a commodity, namely equal to zero?

"I hope not. Right now, cryptocurrencies are valuable for three simple reasons: they permit illicit activities; there is some premium because if one of them becomes widely accepted, the company in charge of it would become fabulously wealthy; and there is a bubble component to many cryptocurrencies, with gullible investors sometimes being encouraged to pay excessive valuations for some currencies. None of those sources of valuation are socially beneficial. My view is that cryptocurrencies could be useful in some very narrow circumstances, but they should be very heavily regulated."

Venture capital and crypto academics join forces to build a lab

 The venture capital firm Andreessen Horowitz (also known as "a16z") has recruited a star-studded list of academic researchers to brainstorm about blockchain computer science and economics:

Announcing a16z crypto research

"There is an opportunity for an industrial research lab to help bridge the worlds of academic theory with industry practice, and to help shape crypto and web3 as a formal area of study by bringing together the very best research talent from the various disciplines that are relevant to the space. 

"Today, we’re excited to announce the creation of a16z crypto research, a new kind of multidisciplinary lab that will work closely with our portfolio and others toward solving the important problems in the space, and toward advancing the science and technology of the next generation of the internet. 

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And here is the leadership and founding team:

"Tim Roughgarden 

"For twenty years, as a researcher and computer science professor at Stanford and Columbia, Tim has led the development of Algorithmic Game Theory, a field that brings together ideas from Computer Science and Economics to solve real-world computing problems. He wrote the definitive textbooks and courses on the field. 

"In recent years, Tim has increasingly focused on research problems in web3. That is no surprise, given how fundamental questions about incentives are in the space. For example, prompted by discussions with Vitalik Buterin and other members of the Ethereum community, Tim published the first formal analysis of the (initially polarizing) fee mechanism that was proposed in EIP-1559. The report helped the community get comfortable with the proposal, and it was subsequently deployed to the Ethereum mainnet in August of last year.

"Besides Tim’s brilliance as a researcher, he’s also a great teacher. The YouTube lectures for his crypto and blockchain course at Columbia, for example, are one of the best and most popular introductions to the space.

"Getting to know Tim over the course of over a year has left us with no doubt that he’s the perfect person to lead a16z crypto research full time. We’re thrilled to announce that Tim has joined us as Head of Research.

"Dan Boneh

"Dan is a professor of computer science and electrical engineering at Stanford University, where he leads the Applied Cryptography, the Stanford Center for Blockchain Research (CBR), and the Computer Security Lab. He is one of the most distinguished cryptographers and computer security researchers in the world, wrote the definitive textbook on applied cryptography, and is also a renowned educator and entrepreneur.

"In recent years, Dan’s work has focused on cryptographic tools for blockchain applications. He co-developed the concept of a verifiable delay function (VDF), and has designed several other cryptographic constructions (like BLS signatures) that have since been widely adopted in web3. His cryptography MOOC, which is free and open to the public, is a popular way to get started with cryptography. 

"For the past four years, Dan has worked closely with us and our portfolio as a Research Advisor. With the creation of a16z crypto research, we’re excited to promote Dan to Senior Research Advisor. His work with us will be integral to setting the direction for the team, while continuing to provide support for founders in our portfolio.

##

"Both Dan and Tim have made countless contributions to their fields, but great researchers never work alone.

"The founding team

"Under Tim’s leadership, we’re bringing onboard a multidisciplinary, all-star founding team of Research Partners. Each member is a leader in their field, has made outstanding research contributions to web3, and has worked toward deploying those contributions in the real world.

"Joseph Bonneau wrote the (text)book on cryptocurrency technologies, and he’s also published work on social networking privacy, cryptographic protocols, side-channel attacks, software obfuscation, and reverse engineering. He has taught cryptocurrency courses at the University of Melbourne, NYU, Stanford, and Princeton, and received a PhD in computer science from the University of Cambridge and BS/MS degrees from Stanford.

"Benedikt Bünz is the Chief Scientist of Espresso Systems and is finishing up his PhD in Dan Boneh’s applied cryptography group at Stanford. His research is focused on the science of blockchains using tools from applied cryptography, game theory, and consensus, and has already had a huge impact in the industry. His work includes Bulletproofs, one of the most widely used zero-knowledge proofs today; and verifiable delay functions, which are a fundamental component of ‘green’ blockchain consensus. 

"Scott Duke Kominers is the MBA Class of 1960 Associate Professor of Business Administration in the Entrepreneurial Management Unit at Harvard Business School and a Faculty Affiliate of the Harvard Department of Economics. He’s one of the best market design scholars in the world, and also advises a number of companies on real-world marketplace and incentive design, such as building reputation-based systems. He holds a PhD in Business Economics from Harvard.

"Valeria Nikolaenko joins from Novi at Meta, where she was a research scientist and cryptographer for the Diem blockchain, started by Facebook in 2019 as Libra. She specializes in modern cryptography, computer and web security, post-quantum cryptography, and is one of the world’s experts in proof-of-stake blockchain design. She has worked extensively on Schnorr signatures — including half-aggregation, threshold deterministic signing, and study of cryptographic libraries — and long-range attacks on proof-of-stake blockchains. She received a PhD in Computer Science from Stanford University, advised by Dan Boneh."

Non-fungible tokens (NFTs), in Harvard Business Review, by Kaczynski and Kominers

 Can a new form of property rights created by blockchains also create valuable new kinds of markets? Or even communities?  

How NFTs Create Value, by Steve Kaczynski and Scott Duke Kominers, Harvard Business Review November 10, 2021

Summary.   How much could a cluster of pixels possibly be worth? More pointedly, why is it worth anything at all? The explosion of NFTs and their accompanying marketplaces have left many baffled, incredulous, and deeply skeptical. But while NFTs may be fetching eye-popping, eyebrow-raising valuations, there is a logic to how — and when — they create value. By creating a system of verifiable digital ownership NFTs fundamentally changed the market for digital assets, creating the possibility for new types of transactions. Amidst a flood of new ventures, however, it can be hard to tell which are creating value and which are just riding the hype. The companies that have been most successful on this new frontier have a few things in common: They make meaningful use of the NFT technology itself, leverage a community of users, generate confidence that they can continue executing on the project to maintain ongoing community engagement, offer accessible “on-ramps” for new users, and are able to weather crypto market swings.

...

"Many emerging NFT applications, meanwhile, are seeking to more explicitly blend online NFT ownership with offline use cases. A few restaurants, for example, have started using NFTs for reservations. And the ticketing industry has a major opportunity here: By issuing tickets as NFTs, venues can give a variety of benefits to purchasers, creating more of an incentive to buy, as well as providing the venues an opportunity to collect royalties on secondary sales.

"Other companies are exploring how NFTs could be used in establishing and recording people’s identity and reputation online. MIT recently started offering blockchain-based digital diplomas, which are effectively non-transferable NFTs. Meanwhile, both established players like Facebook (now Meta) and new ventures like POAP and koodos are providing ways for individuals to create and share NFTs around activities, affinities, and interests."

Blockchain job, with Sven Seuken, at Worldcoin

 Sven Seuken, a practical market designer for whom I have great respect, writes to ask that I advertise a job for a market designer.  Here is his email.

"I was wondering if you could advertise a market designer job on your blog. About six months ago, I have joined the Blockchain start-up Worldcoin (https://worldcoin.org/) and am now their Head of Economics and Chief Economist. We already have a team of six economists and computer scientists. But we are currently greatly expanding our team, looking for market designers, crypto economists, experimental economists, statisticians, etc., who are interested in developing practical incentive mechanisms that scale to more than a billion participants of the Worldcoin network. I believe that this is a fantastic opportunity for anyone interested in applying market design in practice. The positions are available on the junior and senior level, and they are available full-time or part-time. Anyone interested can contact me directly, or even better, directly apply here: https://worldcoin.org/job/4111358004

 Thank you very much!

Best,

Sven

 Prof. Dr. Sven Seuken

Head of Computation and Economics Research Group

University of Zurich

 Web: https://www.ifi.uzh.ch/en/ce/people/seuken.html

 Associated Faculty at the ETH AI Center

Co-Director of the Zurich Center for Market Design

Head of Economics and Chief Economist at Worldcoin"

Blockchain economics, by Catalini and Gans; and Halaburda, Haeringer, Gans and Gandal

Some Simple Economics of the Blockchain
By Christian Catalini and Joshua S. Gans
Communications of the ACM, July 2020, Vol. 63 No. 7, Pages 80-90

"we rely on economic theory to explain how two key costs affected by blockchain technology—the cost of verification of state, and the cost of networking—change the types of transactions that can be supported in the economy. These costs have implications for the design and efficiency of digital platforms, and open opportunities for new approaches to data ownership, privacy, and licensing; monetization of digital content; auctions and reputation systems."
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The Microeconomics of Cryptocurrencies
Hanna Halaburda, Guillaume Haeringer, Joshua S. Gans, Neil Gandal
NBER Working Paper No. 27477  July 2020

Abstract: Since its launch in 2009 much has been written about Bitcoin, cryptocurrencies and blockchains. While the discussions initially took place mostly on blogs and other popular media, we now are witnessing the emergence of a growing body of rigorous academic research on these topics. By the nature of the phenomenon analyzed, this research spans many academic disciplines including macroeconomics, law and economics and computer science. This survey focuses on the microeconomics of cryptocurrencies themselves. What drives their supply, demand, trading price and competition amongst them. This literature has been emerging over the past decade and the purpose of this paper is to summarize its main findings so as to establish a base upon which future research can be conducted.

Blockchain and legal but repugnant markets--a guest post by Stephanie Hurder

Below is a guest post, by Stephanie Hurder — a Harvard Economics Ph.D. (who I've blogged about before, here, and here) and a founder of blockchain economics startup Prysm Group (that I’ve blogged about here). She discusses how blockchain may impact repugnant markets.

As Al has written about for years, repugnance -- the distaste for certain kinds of transactions -- can be a serious constraint on markets.   Repugnance can stem from numerous sources, such as a fear of coercion or of a slippery slope.  And while the constraints created by repugnance sometimes end up incorporated in to law, they do not need to be legal to have significant impact.  Businesses may voluntarily choose not to provide services that some set of consumers might find repugnant, in order to maintain their brand reputation and prevent a loss of those customers.

Firms that engage in legal, adult activities -- such as pornography and the sale of sex toys -- have significant issues accessing financial services due to the constraints imposed by repugnance.  Most commercial banks include “morality clauses” forbidding service of businesses engaging in adult activities, for reputational reasons.   Newer payment services that would like to serve “repugnant” industries are constrained by these more conservative organizations, with whom they must do business in order to effectively process payments and offer services.

Stripe, the payments processor, has publicly discussed this phenomenon on their blog.  Stripe was approached by OMGYes, a website that provides actionable, research-backed information on sex.  They write:

The business approached us and we were eager to work with them, but after a month of deliberations, our financial partners did not agree. Instead, because the website has explicit tutorials, it still falls under the umbrella of unsupportable businesses. While we were not able to persuade our financial partners this time around, we will continue to holistically look at and advocate for businesses that sell adult products and services.

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By now, almost all industries are exploring how to leverage the economic benefits of blockchain, especially those arising from blockchain’s ease of verification and decentralization.  One type of use case with significant potential is using blockchain to provide services to markets constrained by repugnance. 

Cryptocurrencies such as Bitcoin are a potential payments solution for industries not served by traditional financial service providers.  However, a payment system by itself is not enough -- the anonymity of some cryptocurrencies can increase the probability that genuinely coercive or even illegal activities will take place.  Effective platforms serving repugnance markets will need to combine the decentralized benefits of blockchain and cryptocurrencies with more traditional levers of market design, such as reputation.

An example of a company doing exactly this is intimate.io.  intimate.io is an Ethereum-based platform for individuals engaged in the adult industry.  It provides secure, decentralized transfer of payments for adult services.  It also includes pseudonymous reputation and user information (such as age verification and relevant health information) to help service providers vet customers and vice versa.  Two-party escrow provides financial incentives for users to behave cooperatively.  

intimate.io CEO, Leah Callon-Butler, writes:

Blockchain is a technology crying out for a use-case and intimate.io brings together several different blockchain-based technologies, to demonstrate unprecedented real-world utility through application to an industry that is sorely in need of emancipation from centralised bodies who have assumed the role of moral arbiter for too long.

While platforms like intimate.io open the possibility for market participants to work around roadblocks imposed by repugnance, they face many of  the same market design and data management challenges as other industries.  How will sensitive information (such as health data) be verified and provided to the market, while preserving privacy?  How will the platform ensure that users banned for poor behavior do not create new identities?  Innovative solutions to these issues can inform market design more broadly.

It will also be interesting to see how the “traditional” financial system reacts to blockchain platforms like intimate.io.  Luke Coffman at Harvard has shown that introducing an intermediary in a business transaction can lessen the punishments for “immoral” behavior that consumers give to companies.  How many steps of separation -- and of what kind -- will be required between traditional banks and platforms like intimate.io so that markets constrained by repugnance can finally be served?

Blockchains, smart contracts, and incomplete contracts (and Prysm Group, a startup consulting firm on all that)

There's a lot of talk lately about smart contracts, i.e. contracts written in executable code, but less talk about how all contracts are incomplete (and therefore subject to renegotiation, dispute resolution and issues of residual control), a subject for which Oliver Hart won a recent Nobel.

So I was glad to see this article in Forbes:

Nobel Prize Winner Joins Blockchain Startup To Fix Smart Contracts
by Michael del Castillo

"Long before blockchain was cool, Nobel Prize-winning economist Oliver Hart was into contracts. As far back as 1976, the doctor of economics from Princeton University had been exploring how corporations use contracts to interact, and what happens when things go wrong."

The article is sparked by the fact that Oliver and Preston McAfee, who recently retired from being Chief Economist at Microsoft, have become advisors to a startup consulting company called Prysm Group, which aims to advise blockchain companies about contracts, incentives, and economics generally.

Here's the press release:

Prysm Group Adds Nobel Prize-Winning Economist And Former Microsoft Chief Economist To Board Of Senior Advisors

"Prysm Group provides blockchain organizations with counsel in the complex economic fields of contract theory, market design, game theory, and social choice."

The founders of Prysm Group are two economists who I met when they were graduate students at Harvard, Cathy Barrera and Stephanie Hurder (who I've blogged about before, here, and here).

Eric Budish on (expensive) blockchain technology

The Economic Limits of the Blockchain
by Eric Budish
May 3, 2018

Abstract: The amount of computational power devoted to blockchains such as Bitcoin’s must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners,who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system’s vulnerability to a“majority attack”, namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, “flow”, payments to miners for running the blockchain must be large relative to the one-off, “stock”, benefits of attacking it. The constraint is softer (i.e., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. Overall the results place potentially serious economic constraints on the applicability of the Nakamoto (2008) blockchain innovation. The anonymous, decentralized trust enabled by the blockchain, while ingenious, is expensive.