Economics of the Blockchain, Cryptocurrencies and Crypto Tokens
My most recent research stream focuses on the marketplaces enabled by crypto tokens and blockchain technology. Although the technology is still nascent (Bitcoin's current market cap is $70B), early implementations provide a unique opportunity to study the economics of these novel, distributed networks of exchange and production.
In 2014, we conducted a major field experiment at MIT where we randomized 4,494 participants into multiple conditions in conjunction with the distribution of $500K in Bitcoin on campus. The study presented unique security, regulatory and technical challenges, but also allowed us to generate causal evidence on key questions about the use of new technology and digital privacy choices that cannot be answered with observational data.
WHEN EARLY ADOPTERS DON'T ADOPT
With Catherine Tucker
In the paper, we exploit the randomized timing of our distribution to study a core, but untested question in diffusion theory: Does the sequence of adoption among user types - natural early adopters versus not - have an impact on the ultimate potential of a technology? Whereas S-curves are one of the most robust findings about innovation diffusion in the social sciences, multiple theories have been proposed to explain them. Our results highlight a previously undocumented negative spillover from early adopters to others that emerges when the "natural" order of adoption is subverted: When natural early adopters (NEAs) are randomly delayed relative to their peers, they are twice as likely to abandon the technology. The effect is social in nature, and possibly tied to the utility NEAs derive from early, exclusive access, and to their role as technology gatekeepers within their communities. Abandonment by NEAs has also striking repercussions on others, and leads to 45% less active use of the technology within dorms where an above the median share of NEAs was randomly delayed. The findings have implications for how firms introduce new products into the market, and shows that there might be additional reasons - beyond logistical or technical constraints - for limiting the initial availability of a new product to natural early adopters.
The paper was awarded a NET Institute Grant and featured on the cover of Science.
INITIAL COIN OFFERINGS AND THE VALUE OF CRYPTO TOKENS
With Joshua Gans
This paper explores how entrepreneurs can use initial coin offerings — whereby they issue crypto tokens and commit to accept only those tokens as payment for future use of a digital platform — to fund venture start-up costs. We show that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, which, in turn, reveals consumer value without the entrepreneurs having to know, ex ante, consumer willingness to pay. We find that venture returns are independent of any committed growth in the supply of tokens over time, but that initial funds raised are maximized by setting that growth to zero to encourage saving by early participants. Furthermore, by revealing key aspects of consumer demand, crypto tokens may increase entrepreneurial returns beyond what can be achieved through traditional equity financing. A lack of commitment in monetary policy can, however, undermine saving and, thus, the cost of using tokens to fund start-up costs is potential inflexibility in future capital raising. Crypto tokens can also facilitate coordination among stakeholders within digital ecosystems when network effects are present.
THE DIGITAL PRIVACY PARADOX: SMALL MONEY, SMALL COSTS, SMALL TALK
With Susan Athey and Catherine Tucker
As an increasingly large share of economic and social activity is digitized, and as devices, platforms and governments collect more information about our preferences and behavior, it has become apparent that effectively protecting our digital privacy is often too costly or impractical. The decentralized networks of exchange that can be built using blockchain technology have the potential to challenge not only the revenue models of traditional intermediaries, but also their control over the underlying data and digital assets. This can increase competition and the degree of privacy users enjoy when transacting in these new marketplaces. At the same time, for these privacy-enhancing technologies to diffuse, consumers need to care about privacy to begin with. In the paper, we study this in the context of the selection of a digital wallet, and find that whereas consumers say they care about privacy, they are willing to relinquish private data quite easily in exchange for convenience, small incentives or reassuring but irrelevant information. Furthermore, key safeguards from the 1974 Privacy Act such as `Notice and Choice' are unlikely to be effective, as providing more information about privacy trade-offs does not reduce the tendency of consumers to go against their own stated preferences about privacy. Because of this discrepancy between stated and revealed preferences, policymakers may either question the reliability of the first, or worry that current approaches do not allow consumers to make informed choices. Online, when attention is scarce, small changes in navigation have large effects on choices, and consumers may need to be protected from their willingness to share data in exchange for small incentives.
SOME SIMPLE ECONOMICS OF THE BLOCKCHAIN
With Joshua Gans
We rely on economic theory to discuss how blockchain technology will shape the rate and direction of innovation. We identify two key costs affected by the technology: 1) the cost of verification; and 2) the cost of networking. The first cost relates to the ability to cheaply verify the attributes of a transaction. The second one to the ability to bootstrap and operate a marketplace without the need for a traditional intermediary: When combined with a native token (as in Bitcoin and Ethereum), a blockchain allows a decentralized network of economic agents to agree, at regular intervals, about the true state of shared data. This shared data can represent exchanges of currency, intellectual property, equity, information or other types of contracts and digital assets - making blockchain a general purpose technology that can be used to trade scarce, digital property rights and create novel types of digital platforms. The resulting marketplaces are characterized by increased competition, lower barriers to entry and innovation, lower privacy and censorship risk, and allow participants within the same ecosystem to make investments to support and operate shared infrastructure without assigning market power to a platform operator. They also challenge the existing revenue models and accumulated knowledge and resources of incumbents, and open opportunities for new approaches to startup fundraising, the provision of public goods and software protocols, data ownership and licensing, auctions and reputation systems.
TECHNOLOGICAL OPPORTUNITY, BUBBLES AND INNOVATION:
THE DYNAMICS OF INITIAL COIN OFFERINGS
With Jordan Boslego and Kevin Zhang
Using unique data on over 1,000 crypto tokens, we provide the first, comprehensive exploration of the phenomenon of Initial Coin Offerings (ICOs). ICOs are increasingly used by entrepreneurs, open source teams, and established players in the blockchain space to raise capital, attract developers to an ecosystem, crowdsource key resources, and encourage usage by early adopters. After exploring the economics of token sales and blockchain technology, we present novel data on the characteristics of different tokens, the teams behind them, their evolution and performance. Our findings highlight that contrary to common belief, while many ICOs are launched by teams across the globe, a disproportionate share of capital still flows to traditional entrepreneurial hubs. Investors, instead, are more geographically dispersed. By focusing on founders and their skills, the codebases they maintain, and information contained in their white papers, we further separate high potential projects from lower quality ones.
Disclosure Rules and Declared Essential PatenTS
With Rudi Bekkers, Arianna Martinelli, Cesare Righi and Tim Simcoe
In the paper, we develop a simple model of the standardization process to illustrate the link between disclosure rules and patent-holder incentives, and test its predictions using novel data from the top standard setting organizations. Subtle differences in policies influence which patents are disclosed and their licensing commitments. Using a difference-in-differences approach, we show that disclosed patents receive up to 20% more citations than matched controls, but are also more likely to be litigated. Our findings illustrate the trade-offs standard setting organizations face in crafting an effective intellectual policy to encourage agreement between competing third-parties.
HOW BLOCKCHAIN APPLICATIONS WILL MOVE BEYOND FINANCE
To understand the transformation that’s being brought about by blockchain technology, it’s useful to start with its largest implementation to date: bitcoin. In the fall of 2014 my colleague Catherine Tucker and I conducted a large-scale experiment at MIT, in which 4,494 undergraduate students were offered access to bitcoin. The vast majority of students ended up hoarding the cryptocurrency, in the expectation that it would increase in value. Initially distributed to the students at $350 per bitcoin, the digital currency is now worth more than $1,100 per bitcoin, suggesting that many of the students realized that one of bitcoin’s first use cases would be speculation.
HOW BLOCKCHAIN TECHNOLOGY WILL IMPACT THE DIGITAL ECONOMY
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. [...] A similar transformation is about to happen as blockchain technology and cryptocurrencies mature and mainstream applications emerge.
THE BLOCKCHAIN HYPE
After eluding close inspection by most business leaders outside of the tech and financial sectors, blockchain technology has recently taken center stage in the conversation about management’s digital makeover. Indeed, many believe the impact of blockchain on the ways organizations function and produce value may be greater than the technologies that have grabbed most of our recent attention — data and analytics, the cloud, even artificial intelligence
THE FIRM AS A NEXUS OF SMART CONTRACTS?
Through his seminal work on transaction costs, Nobel laureate Ronald Coase highlighted key frictions that prevent organizations from relying exclusively on market transaction to achieve their goals. Uncertainty, asymmetric information and the risk of moral hazard, by undermining the ability to write complete and effective contracts, force organizations to internalize operations and depend on more complex forms of governance in order to effectively create and capture value. At one extreme, Jensen and Meckling define firms as little more than a nexus of contracts between the many stakeholders that gravitate in their ecosystems. As platforms are increasingly becoming the fastest growing organizational form – connecting ideas, talent and capital on a global scale – a new technology promises to accelerate the digital transformation started by the internet...