» » The Economics of Bitcoin & Virtual Currency

The Economics of Bitcoin & Virtual Currency

20 February 2018, Tuesday
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so good afternoon it's great to see everyone here today and I'm delighted to talk to you about the economics of virtual currency and Bitcoin and this topic has been just an incredibly fun and exciting topic to research and learn about it's emerged in in the public imagination over the last two or three years as a key piece of technology that might really change the way finance works for consumers for people in developing countries and for the way that financial institutions actually conduct their business so one of the things that's challenging about this technology is that there's so many details about it about how it works and just like in the early days of the internet if you went to a conference about the internet you would hear people talking about protocols and SMTP and FTP and how we get packets around and really none of the things that you would talk about and that kind of a technical environment would really be important for knowing whether you should start amazon.com or eBay or whether you should invent PayPal or whether pets.com would succeed or fail and so similarly for Bitcoin a lot of the details of how the technology works can really be separated from what the technology is and what it does and so what I want to talk about today is really what this technology is and what kinds of things it can empower and then we can all sort of use our collective imaginations to think about where it's going to go and just like having this conversation in 1993 or 1994 we could have very informed guesses based on economics and needs and shipping cost and warehouse cost and logistics and communication needs we could make some very interesting predictions probably none of us would have realized how exciting YouTube or Twitter or you know all these other things that people figured out to do later would be and so in a similar way we're not going to be able to fully forecast the best uses of this new technology so at its really fundamental level Bitcoin is something quite simple um it's a spreadsheet it's a big spreadsheet now you might think well wait Lotus 1-2-3 was invented and you know around the 1980s so what's new here and in fact really to think about the history of spreadsheets we need to go back before they were called spreadsheets um they were actually called Ledger's and so in the beginning of Commerce you know in primitive economies you might have learned in some class that people bartered you know an apple for an orange or you know what a dead deer for uh you know a hunting knife but in fact that is really not how commerce emerged for the most part even in fairly primitive societies use Ledger's going way way back in time so it's kind of complicated to actually have two things one in each hand and trade them for each other and so it's been very natural for human societies to use Ledger's to keep track of things so that I can contribute today and get something back tomorrow so really the origin of money itself is a ledger before there was money there were Ledger's that kept track of who had what and who had contributed so bitcoin is in its essence a big spreadsheet or a big public ledger and what it does is it keeps track of who has sent want to whom so it's going to say that you know person one two three sent one Bitcoin to person four five six okay that's what it does and that's pretty much all that it does so how can this be you know so innovative and you know so so exciting if that's all it does well if you imagine for a second that we just put up a big spreadsheet that kept track of trillions of dollars and we just posted it on the internet from a server what do you think would happen so I might hack that server and try to change the ledger in some way so if you're going to have a ledger that keeps track of things that are very very valuable it's very important that it's secure that's one thing and so what I won't tell you how that works today but I'll say that one of the big innovations in the invention of Bitcoin was a method to keep that ledger secure and the way that that's done is it there's actually not one computer that's holding that ledger because pretty much any one computer is hackable but rather copies of that ledger are kept all over the world and they all have to agree not all a majority has to agree on what the correct ledger is and so if anyone or if even 20 percent or 30 percent of those where hacked or changed or altered in some way that still wouldn't change the full public record so this distributed technology of course only really enabled by the internet to be able to distribute something so widely and easily is part of the security about how this works a second thing is that you know if we wanted to have a big ledger to keep track of things it would be natural to think about sort of having somebody in charge of keeping track of it and so you know you could have PayPal PayPal creates a big ledger if you have an account on PayPal and you send it to someone else on PayPal and you both carrying balances no money actually moves just PayPal makes a debit on one side and a credit on another side and nothing else has to happen but now you have PayPal a company that's keeping track of that ledger okay the thing about a Bitcoin is that it's an open source software protocol that allows people to make their own entries on the ledger in a decentralized fashion so if you own a Bitcoin that means sort of two things one is that you have the address for the Bitcoin and someone has sent it to you so there has to be an entry on a ledger saying you have it but that's not enough because you also need a security key or a password to authorize a movement of that Bitcoin to someone else if you don't have the passcode you can look out at that ledger and admire your beautiful Bitcoin sitting there but you can't do anything with it so you could say that you own it but it's not really meaningful that you own it because you can't move it if you have the password and you have an entry on the ledger that says it's yours then you have something a value that you can actually do something with and what can you do with it exactly one thing you can authorize a movement to someone else okay but hopefully that person is going to give you something back and that's what makes it useful okay so that's it big public spreadsheet with some passwords and some really cool ways to keep it from getting hacked alright so why is that important and sort of useful well first of all it's the first time that we have a purely digital asset where the whole definition of owning that asset is just the digital thing there is no corresponding physical asset and that's going to allow many things probably the the easiest thing is just that I can send something of value to you digitally it with the same kind of timeframe and user experience as sending an email that's something I can do globally I can do it without asking anybody's permission without requiring some other institution to do something for me I can just do it I could meet somebody on a chat room and have them email me a digital good or provide me a service and I could extend them back something of value and we could be done in ten minutes and never have to see each other again okay that's pretty powerful so what's going to happen is if you know this person wants to send a Bitcoin to someone else they're going to have a certain address they're going to enter their password they're going to authorize a movement of one Bitcoin say it doesn't have to be one to someone else and then ten minutes later that shows up is a new entry on the ledger okay and that's a instantaneous not quite instantaneous but very fast movement of an asset that in a way that's really not possible using other technologies so if you want to see how this looks from a user's perspective a user can use something called a wallet and a wallet is just a piece of software that looks out at that whole big ledger which is very very very long by now and looks at just the transactions that are important to you that are associated with your addresses and displays to you your balances it's just a very simple piece of software and it'll help you keep track of your passwords and things like that now as an economist I you know look at this it's very cool it's very neat but an important early question to ask is well why a Bitcoin did you just make up this idea of a Bitcoin either to be a ponzi scheme or something cool a gimmick you know that makes people excited about your new product like you know most people don't want to think about holding an asset whose value fluctuates you know if you want to hold an asset if you want to hold cash you want to hold cash in the currency that you're going to spend it in you don't want to walk around you know holding your own if you're going to spend dollars it's not convenient you have to keep track of the u.s. two euro exchange rate and similarly it's very inconvenient for you to hold say something called a Bitcoin when you're going to go ultimately pay things that are priced in dollars so can we just get rid of this whole Bitcoin thing and use this really cool spreadsheet but actually keep track of dollars okay so let's just put dollars on a spreadsheet well let's talk a minute about what that means so the guys who invented this security technology we're really really smart but unfortunately they did not figure out how I could be mad ollar bill onto your keyboard I can't go zoom and a dollar bill appears not possible so if I had a password and authorized an entry on that spreadsheet that said I gave you a dollar of course that would be an incomplete description of what happened because I didn't just give you a dollar I just made an entry on a spreadsheet I didn't actually physically give you a dollar maybe I promised to give you a dollar maybe somebody else promised to take a dollar out of my account and put it in your account all sorts of things might be true but the one thing that's not true is that I just sent you a dollar ok so this would not be a complete description of any system what could be a complete description of a system well if I instead of saying I'm going to send you a dollar that's just a message that I would have to honor instead I could actually send something like an IOU so if I if there's a dollar on the spreadsheet that belongs to me of course it's not really a dollar on the spreadsheets I can't pinpoint dollars to a virtual spreadsheet but I could have an IOU say an IOU from Bank of America so for that it's useful to sort of think about what happens when you have a Bank of America account you log into your online account you look at the website and you actually see it tells you you have money now where is that money not actually on your computer it's not even at Bank of America because they've lent out you know ninety five percent of it to someone else but so what is it that you're seeing when you see that you have a hundred dollars in Bank of America you're actually seeing just a promise Bank of America promises to give you a hundred dollars if you ask for it that's your relationship with Bank of America and so Bank of America could in principle agree that it's going to let you keep some of those dollars like you might have two or three different checking and savings accounts you could have another account which is exposed to a some sort of virtual currency system and when a message is sent on that ledger that can Bank of America promise to honor a contract to send that money to someone else okay so if I wanted to send money to someone in Chase I could make an entry on the spreadsheet using my password and if Bank of America and Chase had already agreed to plug into the system they could then respond to that by actually sending the money okay now this actually is very close to a system that we have today called Swift so if you want to send money say to Europe then you're going to send a message through something called Swift and that message is going to say that I'm sending someone else money and whose account it's supposed to go to but on the backend that's not at all what happens on the backend say Bank of America goes to a correspondent bank that correspondent Bank goes to another correspondent bank in Europe that correspondent bank got might go to another correspondent bank in another country and then eventually it's going to show up at the destination there's a whole sort of back-end system behind that and everybody has agreed though that if you send a swift message then everybody's going to honor that message okay so that's some that's a way so you could think about this sort of more advanced ledger technology as something that could be used as a replacement for Swift the Swift only works in certain countries and not everybody has agreed to follow it however if you were sending a digital asset like a Bitcoin you wouldn't need the whole correspondent banking system you could just immediately send the money and that helps understand what the what the kind of benefit is of having these digital currencies rather than physical currencies they don't they don't the the fiat currencies from national countries require this back end movement of money in a way that is not necessary if you're just moving a digital currency so I was very excited about this idea and then and I was going around giving these talks with sort of this these very slides about a year and a half ago and then I learned that a Stanford GSB alumni named Chris Larson had actually co-founded a company called ripple that had implemented a ledger just like this that ledger allowed you to keep not just its own native currency which it has called the XRP but also any other currency you wanted on the ledger and it allowed you to use it exactly as I've described and so today a number of financial institutions have done just what I described they've plugged into the ripple ledger and they've allowed people to put US dollar bank balances onto the ripple ledger and then you can use them to send money to anybody else in the world in any other currency and so then I joined the as an advisor for ripple labs and now I'm on the board of directors so it's a it's a technology that I'm really quite excited about as an economist the reason this was appealing to me is that the you know I don't want to have a bunch of consumers and a whole bunch of of stable developing countries holding something other than their local currency I would like them to think about the financial technology innovation here is one of being able to move money quickly but not of one where you're just holding some other currency on the other hand if you're sitting in Argentina or Venezuela or one of these very high inflation countries it's a completely different kettle of fish if you're a consumer in one of those countries you have very limited ability to save how do you save if you're a poor consumer in a developing country with high inflation um you could buy a gold necklace that's a popular way guys go to Miami and get a suitcase full of hundred dollar bills and come around and sell them to people and you buy them and stuff them under your mattress that presents some security risks for you and your family um if you're wealthy enough maybe you buy a physical asset like a car or tractor or a horse but if you don't have enough money to do that then any cash you have just gets inflated away very quickly you have very little incentive to save and very little ability to get out of poverty a technology innovation like this can allow people all over the world even who don't have bank accounts immediate access to international financial markets because all they need is sort of a mobile phone and instead of someone walking around with a suitcase full of hundred-dollar bills they can walk around with a with a with a phone and a little bit of cash and exchange the cash - for this digital asset which could then be converted into dollars or Euros or whatever else rather than stuffing hundred-dollar bills under your mattress and so this is one of the areas that's actually happening now and that's becoming very popular in these countries where the existing financial systems are quite poor this type of technology enables a connectivity of international financial markets in a way that's just really never been possible it's also going to make it very difficult for those countries to maintain capital controls so right now of course recognising this they don't let people leave that's why you have to smuggle the suitcase full $100 bills and pay a bribe at the airport so this is going to really change the economics the macro economies of those types of countries as it becomes impossible to really enforce capital controls in the area of digital assets that can be moved without needing to access the banking system so let me give an example of this type of international movement of money and how it would work today and I'll give it from the perspective of a US consumer even though in some sense we have less need for it than many other countries in the world so suppose I want to spit to send some money to Japan um if it's a small dollar amount I could actually be pretty much priced out of that transaction you know Western Union or something like that is going to charge me 20 to 30 bucks if I do a bank to bank account transfer that's going to cost me you know fifty to a hundred bucks and take a couple of days so there aren't actually great options for making small person-to-person international payments and this is one use case that people have started doing so if I wanted to send money to Japan what I could do is initiate a dollar transfer through a linked account to a Bitcoin service provider so in the u.s. the two of the very consumer friendly ones are circling coin base and so it's safe for example if you want to establish an account in Queen base I would link up my bank account so I've done this myself with my Bank of America account with coin base and I they send me you know 73 cents in in an ACH transaction and I confirm the dollar amount so we know that we're linked up our ACH is working and I send them my passport and they check out Who I am and I give them my credit card number if I want them to actually make funds available immediately so if I want to have a immediate need I've got to get some money to Japan what I can do is I can just log on to that quickly get on my account and say a point base you know I want a certain sum of money so I want you know 100 bucks give it to me and because they've already verified me they'll immediately make that available on my little online web account then I could then I can look for a quote for what is the exchange price between dollars and bitcoins right now so there's a few exchanges there's a watching a large number of exchanges but there's a few very big ones one of them is called bitstamp and that in on say the bitstamp exchange you can look out and see the order book some people want to buy bitcoins other people want to sell bitcoins and so you can see you know how much how many bitcoins would i get for my dollar and i can place an order and then within a few minutes i can exchange my dollars too for bitcoins and in the case of coinbase they'll help me do that transaction so a few minutes later then the bitcoins show up in my in my coin base account now all I need is my the Bitcoin address of my friend in Japan I tell coinbase send my bitcoins there um and boom those bitcoins are gone my friend in Japan has the thing of value at that point we can walk away we're done you know they have the thing of value now my friend in Japan if they want to get out of Bitcoin quickly could then immediately take those bitcoins on to an exchange that operates in the Bitcoin to yen a currency pair on that exchange that would make another currency exchange and get their yen out and go home okay so in the in a very short period of time we would have moved the thing of value there could be delays getting in and getting out like if I didn't have my coin base account set up or if there wasn't something like that in Japan they might have to wait a little bit to turn the Bitcoin to dollars but the point is very very quickly they have an asset there's a few things you have to worry about along the way like you don't want the exchange to go bust while you're in the middle of a transaction that would be bad you would lose your money but you're not going to be on that exchange very long at least unless you you want to be so you really have to trust these exchanges for a relatively short period of time you might also worried about fluctuations and the currency people say well Bitcoin used to be thousand dollars a Bitcoin and now it's three hundred dollars of Bitcoin doesn't that make it really bad for sending money to Japan I can say well no actually because it really doesn't change very much in the course of ten minutes and that's really all we needed to know we needed to know you know is it going to be stable while we process this transaction while we get in and out of Bitcoin and so this is my you know from an economics perspective I think of this is a payment rail this is a movement a way to move money and I got it from from here to Japan instantly and that was very powerful okay and but I didn't have to hold it it's not something that I need to hold or or use as money in my daily life for it to be useful it can be used for that too but it doesn't have to be okay so this is one really crucial use case another use case is of course just that you know you and I could use it with each other to split a check split a taxi on to move money between each other if now that all of us are starting to ditch our wallets and only carry our phones that would be very convenient there in the u.s. there are some other options like vinne mou allows you to do that in Australia and then in Europe actually just bank to bank transfers are instant and free why don't we have that good question that's a that's a question about competition and market power but we'll we'll get back to that so in principle you have other ways to do that but it's one nice way to do it so I'll mention right now I'm in the process of running an experiment with MIT undergraduates where we've given $100 worth of bitcoins to a majority of MIT undergraduates and so we're going to watch over time and see if when all of their friends have them if they find this a very useful thing to do but it turns out that a lot of them a majority of them were already using venmo which is this peer-to-peer cash app and so they already had some pretty good cashless ways to split checks as well so it'll be interesting to see whether you know Bitcoin they find superior or inferior to the mechanisms that they already had so let me say a few more words about use cases of this so as I mentioned you know this international transaction is a really big use case so this table just so sort of the the bank fees there's outgoing and incoming wire transfer fees if you want to move many money internationally so it's not just you know the unbanked that have to pay Western Union a lot of money in fact Western Union is cheaper than what your bank will offer you remittances of course is a huge market so the the formal remittance market is roughly six or seven hundred billion dollars the informal remittance market is you know north of a trillion and again the fees are being paid by some of the world's most vulnerable people people who are going off to work 70 or 80 hours a week and remit money home they might have emergencies maybe the folks on both ends are not that organized with budgeting and they may have unforeseen needs where they don't have any kind of buffer so there's it's fairly frequent that people are having to send these remittances and pay fees maybe more often than you would like and and they become a relatively onerous burden why are they expensive well they on the back end on it actually does take a fair bit of time to move money from one country to another so Western Union and other types of remittance companies will generally make the money available to the consumer on the other end but it actually takes them a couple of days to get their money that means they have to hold capital and they have to hedge their exchange rate risk during that time period which adds to the cost of the transaction if you were able to eliminate those time delays you would reduce the cost of operating these businesses so you know some of the the businesses that are being proposed and built right now are cryptocurrency based solutions where you might build a network of on-ramps that change local currency to Bitcoin move move it internationally during using Bitcoin and then cash out again so you can imagine a set of say new stands and in one country and a set of florists in another country they Bo they say hey you know let's start a remittance network you know maybe my brother moved to a some other country and he's got the florist and I've got the newsstands and so you know we're going to get together and we're going to send the money we don't have any capital though we just you know we're just kind of scraping by in our little businesses but we do have a lot of retail outlets so without any capital I can actually operate a remittance business because I can move the money in and I don't bear any risk from doing that and so I don't have to actually have a lot of capital nor do I have to have my agents hold a lot of capital and so we are seeing this kind of like informal entrepreneurial activity happening which can make a lot of countries better connected than they are today people are also using ripple for this and so there's a couple of remittance companies now that are that are looking into and improve Oh typing using ripple as a back-end where they are able to they don't even have to actually touch any virtual currency but they can just use ripple as a payment Network to move money instantly overseas so how does this affect society well there's lots of applications so we've talked about back in money movements like remittances also multinational firms so even very large firms end up paying tens or even hundreds of millions of dollars in fees as they move money back and forth around the world every time they move a little money they have to pay a fee if you're if you've got you know trillion dollars of transactions moving back and forth across your balance sheet over the year even a small percentage of that adds up to a lot and so corporate treasurers of major companies are very unhappy with the fees that they have to pay expecting what service are you providing me anyways like you're just moving my money from me to me but why am I getting taxed these large sums of money for this very minimal service and so you can they also use these very complex IT systems to keep track of their money internally recently Citibank lost 300 million dollars in Mexico you know you you you lose things um with these complex IT systems and if everything was on sort of a ledger say an internal ledger for the company that was public within the company and everybody could see where the assets we're moving you wouldn't lose the money and you also wouldn't have to pay the fees or pay the IT support costs so you know there's lots of ideas being explored in this direction from keeping track of development funds and government funds to to you know collections of firms that are all trying to to keep their books and in a novel way finally there's this idea of sort of programmable money so so getting back to the very beginning of the we said what was really novel and different about Bitcoin or any other kind of digital ledger based purely digital asset that was kept on a ledger and there are there many besides Bitcoin and ripples currency XRP what was special about those things is that you can actually operate them on on them as an individual without middlemen now you might think well I don't mind the middleman you know I kind of trust my banks like I'm not that worried about it but actually the middlemen slow things down as well and it's it's impossible to like write a computer program that's going to execute a complicated financial transaction between lots of different financial institutions they each have their own systems and their own delays but once the money is all digital you can actually write computer programs on top of it to automatically execute transactions and that's going to allow very new things to happen just a very simple example is multi-sig so I want two people to sign a cheque so I can write a computer program that says that you know here's this money in this Bitcoin account but only it can only be moved out if two people both put in their passwords so that could help protect you from being mugged or anything else for your digital assets because somebody else would have to put in their password to in order to get the money out it could also protect firms um one of the things that's getting built right now are actual platforms for programmable money so ripple labs has a platform called koteas there's another one called aetherium out there and both of them are trying to help people write what they call smart contracts or computer programs that distribute money so like the koteas platform would allow you to write a program and it'll make it easy for people to verify the program works that would say if these five things happen then this person gets paid if these other three things happen this other person gets paid so we could just for example you know you could think about some sort of complex financial derivative we could take and is an input the Bloomberg feed of stock prices and we could make very complex bets about well if this stock goes up in the stock goes down and this other thing happens and the National Weather Service says it's sunny today then this person gets paid and if these other things happen someone else gets paid so that's going to really reduce the barriers to entry for creating financial derivative products and it's going to allow more people to hedge more complicated situations where there's not enough people right now to make the market worthwhile to create the asset and have it verified there there are lots of other applications right now there's many startups of some of the smartest people in the world trying to figure out clever things to do once money becomes programmable and that's really where we all have to use our imaginations for you know what could I do if hundreds of people who didn't know each other all over the world could participate in a state contingent financial transaction that paid different people in different circumstances just wasn't possible before so we're really not sure what people are going to do with it so what is that going to do well we're going to see various types of changes in industry we might see D vertical ization of international transfers so again you know the flower stand and the newsstand can get together we don't need to have big financial institutions do this banks also may lose some of their business because we can use you know we can hold money in Bitcoin and we don't need to hold in our checking account and if we don't need to if we trust the computer algorithms and we don't need to trust an institution then I may be willing to hold my money lots of other places besides the zero interest checking account that I have at my bank and as banks start their services start to get unbundled that's been a frequent phenomenon with the internet is something that used to all go together now gets broken apart their business models may change and finally we're going to see just lots of new services so you know things like public recording of messages I can make an entry on the blockchain that verifies some fact or some piece of information and it sits in this secure public ledger forever for everyone to see and we can write contracts based on that we could provide low-friction escrow services you know when you buy a house there's a title agent you pay him a bunch of money and they hold on to your money and they only give the money to the seller when the title changes over to the buyer we only do that for expensive stuff but we could do it for much cheaper stuff so Airbnb actually expanded partly because they unlike previous sites that did the same service they kept the money in escrow and the person only get paid once you actually had your stay in the house escrowed the funds so you can you can imagine lots of other transactions smaller value transactions where you know I'm not sure I trust you enough I'm not going to just wire money to somebody in China to give Mandarin lessons before I go on my business trip because I might wire it never see the person again but we could put it in escrow and make that transaction possible in a way that wouldn't have been possible before or would have required a platform to mediate it and take a cut tracking flows of funds and generally I think the theme is that we've seen from uber to Airbnb to TaskRabbit and all the other great new Internet platforms out there information and contract ability making things easier and more frictionless and allowing people to transact with each other without such a level of trust has enabled huge markets to grow where no market existed before and digital money is going to allow that to happen in new services and applications as well as making existing ones more efficient so this is basically why I'm so excited about this technology not because I think you should speculate in Bitcoin and buy it at 300 and hope it goes to a thousand but because it fundamentally it's like the internet a new technology that allows things to happen that couldn't happen before and we have a whole range of some of the world's brightest entrepreneurs trying to figure out what to build on it the first wave of the may go bust but eventually I have a lot of faith that the way that we move money is going to catch up with the way that we move information today thanks very muchскачать dle 11.3
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