Eric Alston: How Blockchain will Re-shape Institutions and Information Sharing 

On this edition of  The Inc. Tank, Eric Alston discusses blockchain’s potential abilities and limitations to resolve information asymmetries in policy and governance, and to create and settle contracts

 [powerpress]

(FULL TRANSCRIPT)

Intro: Welcome to The Inc. Tank, a podcast where thought leaders discuss radically changing markets. Hear from the front lines of disrupted industries as we talk to entrepreneurs, policy makers, and researchers about technologies that could challenge existing revenue models and unlock fierce competition in the marketplace.

Christina: Hello, I’m Christina Elson and on this edition of The Inc. Tank we’ll have a wide ranging conversation on blockchain’s potential abilities and limitations to resolve information asymmetries in policy and governance, and create and settle contracts. We’ll also discuss the role of researchers in making blockchain technology more understandable to students and the general public.

Talking with me today is Eric Alston. He’s a Scholar in Residence at the Leeds School of Business, and Director of the Hernando de Soto Capital Markets Program at University of Colorado in Boulder.  Eric is interested in institutional and organizational analysis and he also studies blockchain’s application across a range of industries.

Christina: So Eric, thanks so much for joining me today on The Inc. Tank. Let’s start off with just your research interest. Tell me a little bit about your research interest and what you do at CU Boulder.

Eric: Okay. So my research is broadly clustered under the rubric of institutional analysis. What that means is a focus on the specific rules in play in a given context, and how that can tell us a lot about observed outcomes in practice. And so two applications of that, that I specifically focus on are, constitutional rule sets around the world as well as the emergence of property rights along frontiers.

Christina: That’s right. Got it.

Eric: And so, both of those are just specific examples of where rules matter fundamentally for understanding outcomes in practice. And I believe pretty firmly in the importance of making one’s research applicable. So I actually advise peace negotiations as well as active constitutional reform processes around the world using insights from the rigorous study of the rules associated with social outcomes of interest, especially economic ones.

Christina: Okay. So when we talk about rules, are we talking about contracts or arrangements that people come up with in order to fundamentally agree to a particular outcome that they both would like to have?

Eric: Definitely. But it’s not only the specific terms of the contract that people agree to, but also the larger legal and institutional context in which they are agreeing to that contract. In countries with weak judiciaries or lacking rule of law, the nature of contracts differ fundamentally, precisely because of those differences in institutional context. So there’s both a focus on the specific terms of contracts that individuals might agree to, but also the reason that those terms are chosen is often a function of the larger legal, and political context in which they are present.

Christina: Going to the idea of managing relationships, contracts or arrangements that people make between each other, whether it’s a peace treaty or a financial transaction or a purchase that someone’s made from someone else, what are some of the outcomes that blockchain is going to create in terms of the governance systems, how those are going to need to change in order to make sure that both parties are getting what they originally intended or wanted out of these relationships?

Eric: For certain types of transactions, very little will need to change other than the faith of the participants in the underlying technology, which is to say, there will be a period in which initially there is reluctance because it’s a new technology. And if there’s a large amount of value associated with a particular transaction, people are naturally skeptical of new technologies. But the example I gave earlier, reconciling financial transactions between banks on either side of the Atlantic, those are precisely the type of transactions that I think smart contracts, contracts facilitated on the blockchain, will yield the most benefits immediately. That’s because the underlying nature of the contract in question, we will transfer this amount based on the requests of our customers to your customers in Europe, that’s not particularly uncertain to either party. It’s known that there’s a specific number of dollars that need to move from one financial institution to another. So that’s not one that has a high degree of interpretability.

Christina: What is an example of something that could potentially have a very high degree of interpretability and where blockchain could, you know, potentially help but it’s not necessarily going to resolve, you know, 100% of that?

Eric: Well, let’s imagine that in another life, I’m a graphic artist. And The Inc. Tank needs a new logo for, you know, just to update, get a fresh look and you want a new logo, you write a contract with me and you say, “By this time, you will submit, you know, three high quality logo options to us at The Inc. Tank for us to choose our final new logo. ” What does high quality mean?

Christina: Yeah, that’s a good question.

Eric: I go in to paint and I just slop down three different, you know, Inc. Tanks or I use well-known fonts and say, “Hey, look at these three different fonts that I wrote the Inc. Tank in,” and you say that’s not high quality. And I say, “Oh, these are the highest quality fonts out there. You know, I spent a lot of time choosing exactly the fonts that would best represent The Inc. Tank.” And chances are you’d say, “No, we actually don’t want to pay you the $10,000 that we agreed to, because you didn’t provide any real quality graphic design according to the terms of the contract.”

And this is a stylized example but it emphasizes the fact that many contracts surround intangible or interpretable outputs from the person or the customer on the receiving end of that particular transaction. So those are not processes that can easily be automated and encoded. Transferring money, transferring known quantities of a relatively uniform good, those are things that can be pretty easily automated and participants accordingly, can have a higher level of faith that when a given party says, “Yes, this person has satisfied the terms of the contract,” that payment can be made automatically. So it removes the need for intermediaries that are currently required in many contexts to execute on contracts.

Christina: Right. But the point that you’re making is that blockchain can only help so much with some of these more intangible arrangements that people make that have a lot of layers of complexity to them.

Eric: Absolutely, absolutely. One area of that that’s clearly the case is what’s called relational contracting. And so the value of a contractual relationship between two parties is sufficiently high that they don’t need to embed all of the details or in some cases, they couldn’t possibly embed all of the details associated with their contractual arrangement. Think many employment contracts. I don’t specify every last aspect of my day that when I’m engaged in work for the University of Colorado, the vast majority of the things I’m doing are not referred to specifically in our contract.

Christina: Yeah. Or you didn’t even know you’re gonna do them when you showed up that morning.

Eric: Yeah, exactly, exactly.

Christina: That’s my world.

Eric: And yeah. No, precisely. It’s the world I’m living in too. And so being able to automate that type of contractual arrangement, especially if there’s a dispute, the University says, “You know, your research output just isn’t up to snuff, Eric.” And I say, “No, it’s great.” That’s not something that can be automated as reliably. That being said, I do want to insert an important caveat here. There are areas where in blockchain applications, where they’re developing a market for trusted third party authorities. And so currently that’s the judicial system, provided I can’t reach a conclusion with the administration at the university in the hypothetical world where they’re not happy with some aspect of my job performance.

But there’s…increasingly you’re seeing a market for trusted third party, impartial third party enforcers that are not the government. One interesting example of this is a platform called OpenBazaar, which wants to be kind of a version of eBay that doesn’t rely on centralized enforcement of claims, which eBay currently does. So imagine a marketplace where you and a seller agree upon a third party that when both parties have said, “Yes, I’ve successfully received my payment. Yes, I’ve successfully received my good,” that party then moves the payment out of escrow to the actual seller.

Christina: Right. Yeah. So this brings up an interesting point that you have made related to, you know, institutional analysis that gets to the idea of needing sort of what you’ve worked for to a subnational units where, you know, things can’t work at all…not everything can work at the level of the individual and we don’t want everything working at the most complex level there is. So we need to think about the role of these units of whatever to help facilitate the decision making process.

Eric: And so I think you’re talking in the sort of governance and political context with respect to a subnational unit that could be the city, that could be a county, that could be the state. And our particular system is designed with the ability of less populous states to in some senses check the unfettered ability of the most populous states to pass policies. And this often operates to the chagrin of New York City and California but it’s specifically designed to prevent a tyranny of the majority from emerging in which simply the majority opinion carries the day at odds with what we consider to be the well-established rights of everyone, including minority groups.

Christina: Right. So this gets into a slightly different area that you have looked at through your work. And of course, this is a particularly, you know, pressing, interesting issue considering that we’re going into another election cycle here, and a lot of it is around these ideas that you’re talking about. So, there is a lot of talk about blockchain in voting and governance, you know, making decisions, policy decisions. So maybe we could talk for a few minutes about what you’ve been seeing there and how some of the way that we make decisions as a country or governed could be impacted by blockchain.

Eric: I think it’s potentially quite transformative, especially vis-a-vis the underlying reasons that we have representative government in the first place, which is to say, if we were a nation of only 100 people, it would be relatively low cost to establish everyone’s opinion on any given political issue of the day. Any particular proposed piece of legislation, you could relatively easily find out everybody’s position on that. But in a nation of hundreds of millions, it’s actually almost functionally impossible to do so or has been for a very long time. There’s two problems with that which we’re getting the relevant information to every constituent, prior to the digital age, the costs of doing so were effectively insurmountable.

But also running reliable elections, if on every particular piece of legislation or every decision the government makes, it required the affirmative or negative input of every citizen, that would also be prohibitively costly but probably fundamentally unreliable based on existing technologies up until this point. But with the advent of the digital age, we suddenly have a low count cost means of getting information to every constituent in effectively the same format at the same time. That’s never before been possible until recent decades. But with the advent of blockchain, we have an ability for people to reliably signal their opinion about a particular legislative matter of the day. And so what you’ve seen are, initially, I’m only aware of a couple very limited pilot projects with this. So I haven’t seen it really deployed at scale.

But you’ve got some politicians that say, “If a sufficient number of my constituents use this app to say, to express their preference on any given legislative issue, if a majority of my constituents say, ‘No I’m not in favor of that,’ I will vote in exactly that direction.” So it actually reduces the level of what many people see as undesirable discretion on the part of political agents who are supposedly representing the desires of their constituents. But prior to a reliable means and signaling those desires, those constituents’ desires to the politician, it always was a matter of faith and backed up by the knowledge that if that politician acted sufficiently at odds with the desires of their constituents, that they would be punished in the next election.

Christina: Right. Yeah. So what I hear you saying is that they’re not just at the level of elected representatives, but really, you know, this could work for the person running a trade organization. It could work for, you know, the person that is running a political organization really of any kind or sort of a policy or decision making organization that represents a group, the collective will or desires of a group. And in a sense, it sounds like blockchain can possibly provide more vetted information than people are getting today from Facebook. Is that where we’re going?

Eric: Oh, absolutely. I mean, it could work for both information transmissions to constituents, but I think even more importantly, the transmission of constituents’ preferences regarding a particular policy issue, whether it’s in a private organization or in the government. And so that’s what’s potentially so transformative is that inability in the past, due to simply the transaction costs associated with polling everybody about every issue in a reliable and contemporaneous way, those constraints are no longer in place, given the reliability and immutability of blockchain processes.

Christina: So this is something that could help create a better balance. And perhaps we have right now between this what’s really evoking fear on both the left and the right, which is this very difficult balance between, we want to have very inclusive voting rights but we also worry about, you know, the tyranny of the majority and the things that stem from groupthink, and all the problems that we see with populism in that sense. So…

Eric: So…

Christina: Go ahead.

Eric: So I don’t see it as necessarily reducing the risks of populism simply because that’s a function of the design of the political system. So the reason that every state gets, you know, a number of votes in the Electoral College that don’t necessarily represent their proportion of population in the United States, or the reason that, you know, Wyoming and Montana get equal representation in the senate as compared to much more populous states. Those are designed features intentionally put in place to reduce the risks of just unfettered populism, the tyranny of the majority. And so those don’t go away with the ability of constituents in a particular district to better signal their preferences to their representative politician.

It’s more that, if those safeguards are still in place and you think they do reduce the tyranny of the majority, then those will remain in place until they are changed by what would require a constitutional amendment. But it’s not that blockchain itself will change the underlying nature of the political system, it just allows for better expression of constituents’ preferences. Some people use that to argue to say, “We should just be a pure democracy,” but as we will know, a pure democracy can lead to all of the dangers of populism that we’ve been describing.

Christina: Yeah, that’s a great point. And thank you for stating that so clearly. So let me ask you, you know, researchers I think have a really important role of theorizing things that can happen, given certain conditions and potentially in doing so help, you know, business and everybody else avoid a lot of time and trouble in making sort of bad decisions. I was recently on a tour in Chicago and the tour guide gave us a story about how they had to reverse the flow of the river to drain into the Mississippi, and of course what started happening is that the lake started to drain as well. You know, so there’s unintended consequence and you’re just like, “Okay.” Anyways so, you know, is there something that you could tell me about in terms of how you see researchers, you know, helping do this, create the theories and create the conditions around potential choices that could be made and in practical applications of blockchain?

Eric: I mean, I think I see a fundamental role for specialists aka researchers in this area is making accessible what is a new and complex technology. And speaking clearly through, you know, through well founded research ideally published in a peer reviewed journal, is to really emphasize that blockchain is potentially transformative to a lot of industries but that doesn’t mean it’s a panacea for everything. And so I go to a lot of, you know, conferences or blockchain related events where I hear claims that just seem to outstrip my understanding of what the technology is currently capable of. Where I’ve heard, you know, somebody saying we should tokenize the oceans because putting them on to a blockchain in a tokenized form will enable us to eliminate pollution. I have no idea how that is possible.

Christina: Right. A lot of enthusiasm.

Eric: And so it’s an area where there’s a high level of interest, some of which is incredibly speculative, some of which is simply ill-informed. And so within that context, I see the role of researchers as speaking clearly to what blockchain is well suited to facilitating but also what it isn’t currently well suited to facilitating, which is a lot of the things, including those highly interpretable contracts that we were discussing earlier.

Christina: Yeah, that’s a great point. And, you know, as someone who, you know, also is in higher education, I wonder from your perspective, what kind of advice or what do you tell students that you work with? You know, I feel that University of Maryland is very important for students, no matter what field they’re pursuing to think about these technologies and how they’re going to impact the world of work that they are going to be entering. But what are some of the things you’re seeing and what are some of the things that you talk to students about?

Eric: Well, a lot of students’ interest stems unsurprisingly, from the blockchain that support major cryptocurrencies, like Bitcoin and Ether. And frankly, most students are not aware beyond the fact that blockchain has something to do with cryptocurrencies. They’re not aware of what it does, what the role of blockchain is, in facilitating changes to the underlying ledger supporting Bitcoin and Ether. And in particular, they’re also not familiar with the ways in which those blockchain is different from one another, or the blockchains supporting other sort of, you know, less known cryptocurrencies.

So, you get a lot of highly speculative student investors that think they’re informed. And it usually just takes me a few questions with them to establish both to me and to them that they aren’t that informed about the way that these new asset classes actually differ from one another. And for students in the business school, usually that’s enough for them to realize, “Hey, I’m not as informed of an investor as I thought I was.” And that’s one of the things that is frankly hammered into students, especially finance students is, “You’ve got to do your due diligence associated with a particular investment regardless of the nature of the underlying asset class.” And so I see an important role in terms of facing students in this area, is just convincing them that this is a complex technology that takes time to understand but it is also the backbone of why people are making incredibly valuable bets on investing in these cryptocurrencies in the first place.

Christina: Yeah, yeah, that’s a great point. There’s just even on that level of being very financially literate coming out of business school. This is really now part of that literacy.

Eric: Exactly.

Christina: So Eric, fill in this blank for me. In 20 years, our world will be fundamentally changed from blockchain…

Eric: In 20 years our world will be fundamentally changed from blockchain in terms of automated processes that support the myriad interactions that we engage in, most of which are ultimately economic. But the number of intermediaries that currently exist to provide trust and insurance to small atomistic participants in all of these economic activities, many of those will go away, which means everyone will be better off. That’s not to say that these intermediaries aren’t currently providing valuable functions, it’s just that the types of transactions that blockchain will facilitate at much lower cost and higher reliability and transparency, means that the cost, the barriers, the obstacles that we face to our day-to-day transactions will be much lower, which to me, means more of those interactions and transactions will occur, which means greater prosperity for all if you believe in the benefits of mutually voluntary exchange.

Christina: That’s a great way to end this. I think that’s such an important point. Well-functioning markets are really based on mutual and voluntary exchange and ultimately blockchain is a tool that is going to hopefully help us support the transparency of those market systems. Thank you so much for your insights. And I look forward to learning more about your research as you…you have a forthcoming book from Cambridge University Press. Could you tell us about that?

Eric: Yeah, it’s called, “Institutional and Organizational Analysis.” And I actually just got the official copies from Cambridge a couple days ago, so I’m staring at them on my desk. And it’s basically kind of an approachable summary for advanced undergraduates and entering grad students about the importance of institutional analysis in understanding outcomes of interest across societies. And so it starts by, you know, the sort of fundamental building blocks of modern economies, property rights, and transaction costs, and what understanding those concepts…why understanding those concepts helps us understand observed economic outcomes in practice.

But it goes through an analysis of political systems and how a specific focus on the rule sets that create those political systems, again, tells us a lot about observed variation in practice. And finally concludes by taking on one of the bigger questions out there, which is why are some nations so developed while other nations are struggling to catch up. And we again argue that a focus on these fundamental rule sets that vary between societies can tell us a lot about understanding that variation.

Christina: That sounds fascinating and I am going to encourage anybody who is looking at working globally or even working in the U.S. to take a look at that book.

Eric: Awesome. Thank you so much.

Christina: Thanks, Eric. Thanks so much. We’ll talk to you soon. Okay.

Eric: Okay.

Christina: New technologies can cause fear because we don’t always know how they will impact society and our lives. Researchers can clearly outline and educate how these technologies can help us do things efficiently and with more transparency, and they also can help identify their limitations.

Thanks to Eric Alston for talking with me today. Until next time, this is Christina Elson in The Inc Tank.

Outro: Thanks for joining us today on The Inc. Tank, a podcast where thought leaders discuss radically changing markets. The Inc. Tank is brought to you by the Ed Snider Center for Enterprise & Markets located at the University of Maryland, and by the Kauffman Foundation.

This episode of The Inc. Tank would not be possible without:

Christina Elson, Host and Executive Producer
Stevi Calandra, Executive Producer
Jeff Stroud, Editing and Sound Design
Corinne Baker, Production Assistant
Jake Fechter, Production Assistant
Andrew Platt, Blockchain Consultant

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The Inc. Tank logo was designed by Kasia Burns

This podcast is brought to you by The Ed Snider Center for Enterprise & Markets and the Kauffman Foundation.