Amherst Reads Transcript

Geoffrey Woglom: So this is Geoffrey Woglom, professor of Economics at Amherst College, and I am speaking with Alex Tapscott, who with his dad has written a new book called The Blockchain Revolution: How Technology Behind Bitcoin is Changing Money, Business and the World. So we’ve got a lot to get into, Alex. So let’s start with, to begin, what a blockchain is.

Alex Tapscott: Yeah, great. And I’m delighted to be here. This is… should be a very fun conversation. So we’ve been researching this subject now for the better part of three years, and have basically become convinced that blockchain technology as a whole represents nothing short of the second generation of the internet, and is likely to have as great, if not a greater impact, on the world of business and on society than the first generation did. So for forty-five years, we’ve had this internet as information. It’s been great for how we communicate, how we share information, how we collaborate online. But it actually has been limited in its ability in commerce, in transaction, through the simple reason that when you send information online, you’re not sending a unique piece of data, you’re sending a copy. That’s okay when you’re talking about e-mails, PDFs, websites, but not so much when you’re talking about assets that have value, like money or financial aspects like stocks or bonds. So it’s good as a printing press for information, not so great to have a printing press for money. And as a result, we rely on intermediaries still like banks, governments and big technology firms to sit in the middle, to create trust, and to perform all the business logic. With blockchain, we’re entering, we think, a second era of the internet, an internet of value. Simply put, blockchain is a vast global ledger, like a big spreadsheet, that doesn’t run on a single computer system like that of a bank or exchange, but rather runs on many if not all computer systems, and is not readable and accessible by a few, but is readable and accessible by all. Where not just information but anything of value from money to financial aspects to titles and deeds to property to intellectual property rights or even votes in an election can be moved and stored and managed in a way that’s both secure and private, and with trust established not by a third party, but rather through mass collaboration, cryptography, and a little bit of clever code. We call it “the trust protocol”, because trust is native to the technology, and we think it’s a big deal.

GW: You know what would help me a little bit is… we already have Paypal, so take me through a transaction on the blockchain and how it would be different from a transaction with Paypal.

AT: Yeah, sure. So Paypal is one small part of the overall financial services industry, it’s a payments functionality that we use through the internet. And generally speaking it works okay. Like many other forms of payment online and parts of our financial services industry, the front end – what you see – looks quite seamless, and quite fast and quite slick. But really it’s just digital wallpaper that’s wrapped around a process that’s quite antiquated and slow. So when you pay with Paypal, you’re still using your credit card network, still going through your bank, still going through the merchant bank, it might be going through a payment processor… and there are fees associated with that, which you may not see directly but the merchant has to pay them, it’s called the inter-change and it can range online anywhere from 1-10%, that it ends up passing through in the process of stuff that you purchase. And it does take a couple days to clear and settle these transactions, so there’s friction in the system. By contrast, if you were to make a payment with, say, a cryptocurrency, you would send the money to the merchant in exchange for goods and services, it would take about ten minutes to clear and settle, would arrive instantly, and everyone would know the transaction was complete, without necessarily having to rely on the traditional financial infrastructure. You know, if you’re an online merchant and your gross margins are 8%, and you pay 2% interchange, if you can take that to 0, you’re talking about 25% margin expansion. So that’s kind of interesting. What’s more interesting to us is, what this technology could mean for not just payments, but every single part of the financial services industry, from accounting and audits to the investment banking wholesale finance function of big financial firms, to everything in-between. And also, more broadly, what it means for the world of business.

GW: So instead of exchanging a cryptocurrency, how would I go about trading a stock, for example?

AT: Yeah--

GW: Or, actually, in your book you talk about how real estate exchanges could take place this way, is that right?

AT: This is an area we think is quite interesting, specifically how you could fix the land titling issues in a lot of part of the world. So there’s an economist named Hernando de Soto, who I’m sure you’re familiar with, who basically says the biggest obstacle to economic mobility is not, as many people think, financial inclusion. So that is whether or not you have access to basic banking. It’s actually property rights. And he estimates that 70% of people who own assets, who own property, in the developing world actually have a flaky title to it – basically meaning it’s unenforceable. And it’s unenforceable for a variety of reasons. There could be a duplicate claim from someone else who says they also own the land, there could be a duplicate claim within the government by some corrupt official who would rather you not be able to enforce that claim, it could just be that someone in the system has lost the record of who owns what and so you can’t enforce it. And this is the biggest issue for a lot of people, because home is not just a roof over your head, it’s also potentially a source of income, it is a place you can burrow against to finance anything from starting your business to paying for an education. So the idea with blockchain, is that when transactions are entered into on this network, they’re recorded through this ledger which is immutable. So what would be really valuable in a lot of parts of the world, is if the land title registry for houses were in a place that was completely immutable, where they couldn’t be altered by a corrupt government official, or they couldn’t have a duplicate claim, where you could know and trust that the information in there was secure, and that you could use it as a way to move up in the world. And this isn’t just hypothetical, this happens all the time all around the world. You know, in Haiti, in the immediate aftermath of the earthquake, the Red Cross of the USA raised half a billion dollars to build houses. They were supposed to build a hundred thousand homes, they ended up only building six. And the only reason why is that when they got there, the plot of land they were supposed to build on had dozens of duplicate competing claims, there were people in the government that were each pushing their own agenda, and it became a total quagmire. In Honduras, a couple years ago, the government started expropriating land from people who were living by the seaside, and handing it over to cronies in government, and that led to a bloodless coup. Now the government of Honduras is working with a blockchain company. Same thing happened in Georgia, in Eastern Europe, where the government--

GW: Well I actually… I actually saw this firsthand in South Africa, the shanty towns, and people lamented the fact that one of the reasons the shacks in the slums of Capetown were never improved is because the people have no title to it, and therefore any improvement they made essentially could be taken away at any point. So I’m very impressed with the de Soto argument, and the idea that blockchain might essentially enable people to have property rights more securely. So I wanna talk about… how do you get this verification? How do you make sure it’s secure?

AT: The most important thing with this particular use case is the data that’s going in is high quality. Because the last thing you want to do is record information about who owns what that’s inaccurate, because that will actually exacerbate problems rather than solve them. So, the way it would work, in a system like this, could vary. And you probably want to know the distinction, at this point, between public and private blockchain which is worth exploring here. So something like Bitcoin; this whole thing started with Bitcoin a few years ago, which was really just an experiment in monetary policy, but it actually ended up working as a form of making payments, and now it’s worth quite a bit of money and it’s caught the imagination of a lot of people. Bitcoin is an example of a public blockchain, meaning that it’s fully decentralized, it is read and write access for anybody, so anybody can both see what’s happening on the blockchain and can also enter into transactions with peers and have those transactions recorded. It is open source, so it is available for anyone to make iterations to it, to try and make improvements, that if accepted by everyone in the community will become permanent. And it’s global, in reach. By contrast, over the past couple of years, a lot of big business leaders in financial services and technology have been exploring private blockchains. The idea that, well, if I’m Goldman-Sachs and you’re JP Morgan and the other guy is DBS and Credit Suisse, maybe we don’t want transactions and financial assets that we all enter into to be completely transparent and visible to everyone and accessible to all, maybe we’d like to make this somewhat… closed system. So that’s where you go to private blockchains, or what’s called permission blockchains, which are basically blockchains composed of a bunch of participants that have effectively been invited in. The level of privacy can range, so for example, the blockchain could be write access only for twelve different banks, so they’re the only ones who can actually do transactions on the blockchain. But it could be read access for shareholders, regulators, auditors, maybe even the public as a whole, that’s something that’s sort of customizable. So--

GW: When you mentioned Honduras, is that… their property records, was that a private blockchain?

AT: Right now they’re working with a company called Factom, which I think is trying out both private and public. The use case for real estate transactions and titling which is the furthest along is in Georgia, in Eastern Europe. And they’re looking to do it on the public blockchain, which is actually to say the Bitcoin blockchain. The fascinating thing about this is, the Bitcoin blockchain itself, may support this asset and this cryptocurrency that people use to either pay for goods and services or to speculate on a financial asset. But the underlying technology can be used to validate technology in a variety of other different kinds of asset classes. So if you’re looking for the system that is the largest and most secure and proven most resilient to attack, why not try and tie yourself into that blockchain to do transactions and other assets? So in Georgia, in Eastern Europe, that’s what they’re doing right now. They basically want to take their existing land titles, assetize and basically securitize these property titles as digital assets that people--

GW: I guess… what I’m confused by is… suppose I make up a title, in a Georgian property, and I sell it. How does that get detected?

AT: So if you didn’t actually have a piece of property, you just created a--

GW: But I say… [Laughs] I show the guy the property, I don’t happen to own it, and I do a transaction on this open network.

AT: Well, you only have--

GW: I thought it was going to be a closed network, and that what you would have is essentially all of the property records would have to be transferred to the blockchain.

AT: Yeah. No, that’s basically correct. It’s not like a Wild West scenario where people can just conjure up land titles. It’s one of those things where you need to partner with the government to move the titles themselves onto this kind of a platform.

GW: Okay, got it.

AT: And then… so that’s what I said earlier, that it’s really important that the data going in is accurate, because I think what’s more likely to occur… See, this is a fascinating use case, because in places like Amherst, Massachusetts or Toronto, Canada, there are issues with the land titling system, you know, it’s largely paper based, there’s no friction cost… but generally speaking you don’t worry about whether you actually own your property. But in places like Honduras or Haiti, that’s such a corrupted system that people almost always assume they don’t own their property. So the area this would be needed the most would be places like Haiti and Honduras, but those places lack the political will, lack the resources and are probably too corrupt to actually implement it. So it’s a funny catch-22. So I actually think the areas, the types of places this would actually be effective, would be middle-income countries, so places like Georgia or maybe South Africa as you pointed out, you know, Indonesia… places where you’ve got a government that has the resources, and you’ve got perhaps enough political will to actually fix a broken system, but where the system in place isn’t already so good that there would be no reason to do so. So I think that’s where you’d likely see it gain the most traction. But it does require the tacit approval and active engagement of government to make it happen.

GW: Can you tell me a little bit about how… I’m entering my information at the same time the other side of the transaction is entering the corresponding transaction? The other side of the transaction? And then how is it verified? Can you talk a little about that?

AT: Yeah, for sure. And it really depends, because blockchain is an umbrella term that really describes a few different things. But in the case of a public blockchain, and there are a few, but Bitcoin is one, Ethereum is another… people are entering into transactions all the time, party A, party B agreed to a transaction, and the transaction clears if they both agree to it. And every so often, in the case of a Bitcoin blockchain it’s every 10 minutes, in the case of Ethereum it’s actually a shorter interval, all those transactions are bundled into this thing called the block. And that’s broadcast to everyone in the network. Now most of the participants in that are just there to transact, to buy and sell, but some of them are there to support the network, the validators of the transaction. And in the case of this public blockchain, they’re called miners. Not like little people, like pickaxe miners. And they basically commit large computing resources to try and tease out whether or not transactions have occurred. Now to go into how that works is not really worth the time, but it’s important to note that by doing that they’re able to tell whether or not a transaction happened, and whether or not someone’s trying to defraud a transaction. So for example, you send twenty dollars, they want to make sure you can’t send that exact same twenty dollars twice, that’s basically what they’re trying to solve for. It’s called the double standard, double payment problem. The critical thing is once they’ve all reached consensus, once everyone in the network has reached consensus on whether or not the transaction in that block is valid, that block is added to the blockchain, which is the record of all transactions going back to the beginning of commerce on the blockchain. Now, what’s critical about it is there’s a reference, number essentially, inside each block, which refers to the information in the preceding block, which refers to the information in the preceding block. What that means, in effect, is that if you wanted to hack the blockchain – you know, send the same money twice, or send the same share twice, or vote twice, or whatever the transaction might be – you wouldn’t have to just go back and… you know, beat a firewall and move a number in the database, you’d have to actually go back and rewrite the entire history of commerce on that blockchain going back to the beginning of time, and do so in a very short period of time, fighting against the very powerful computing resources. It’s not one giant server farm, it’s not one big mainframe, it’s millions of computers all over the world. By some estimates, the Bitcoin blockchain is said to be anywhere between ten and one hundred times as powerful as all of Google server farms put together. So in practice, it’s very difficult to break this thing. It’s not impossible, no one’ll ever say something’s unhackable, if I say that it’ll get hacked tomorrow.

GW: [Laughs]

AT: But compared to what we have today, where financial information about transactions, about personal records, about sensitive data is stored in a centralized deposit location behind a firewall, and the real only blind defense is really to build a firewall as big and as high as you can. Once someone gets through it or over it, they can basically run amok. And we see this with startling regularity, across a variety of industries. Including, by the way, the NSA. If the NSA can’t secure their data, what hope does any company or individual really have? So this is a way to…

GW: And you’re securing data by making it public to everybody.

AT: Well, what you’re securing is data about the data – metadata – that’s public to everyone. But the specific nature of that data is encrypted, and can only be accessible by the people who are able to access it. But the record of what has occurred, in these sort of broad terms, is--

GW: You know, I completely agree – your book goes into more details of the technical aspects, and you’re right, we probably don’t need to go into that. But we’ve talked about how you could revolutionize things by allowing people to secure property rights. It also struck me when I read the book, that it also has the ability to sort of… shake up property rights, in a sense of what economists like to call creative destruction. I had a couple of students last year who were working on the peer to peer exchange, so I was very excited about this magnifying the ability of peer to peer exchange. And in your book, you actually talk about peer to peer exchange without third parties, specifically Airbnb, and I thought it might be interesting for you to talk a little bit about that. About how this facilitates peer to peer exchange.

AT: Yeah, of course. Well, Uber, Airbnb, Lyft, taskrabbit… these companies are part of the so-called sharing economy, and they epitomize Schumpeter’s creative destruction in action, basically. Which is that… they are the disruptors. They’re the ones who took an old industry and turned it on its head, everything from lodging to the taxi cab industry. Except there’s one little problem with this description of them as sharing economy companies… I actually think they’re not sharing economy companies, and I think they’re successful because they don’t share. They aggregate, they aggregate excess capacity that exists out in the world – be it cars, or hotel rooms, or individual skills – to essentialize intermediary and then resell it to a growing market, and then they capture most of the value. They capture 20% which is the fee, of course, that they take off the top, but the underlying equity value, the value of the enterprise itself – 55 billion dollars in Uber’s case – is not owned by those who share, it’s owned by those who aggregate, so centralizing an intermediary. So we think there’s an opportunity for blockchain to disrupt the disruptors. And it goes to one central thing… are you familiar with Ronald Kos, professor of--

GW: [Laughs] I’m an economist, of course, you have to be!

AT: You’re an economist, so you know a little bit about this guy. [Laughs] So Kos basically said – and I’m simplifying, I’m sure you know more about this than I do – the reason we have firms is transaction thought. So long as it’s cheaper to do something inside the boundaries of a company rather than in an open market, companies will continue to grow. Even though the open market may be the best way to allocate scarce resources and organize capability in an economy, it doesn’t matter because transaction cause to friction make it easier to do inside the firm. He pointed to a whole bunch of costs, like the cost of search, the cost of coordination, the cost of contracting, the cost of establishing trust, the cost of negotiating and enforcing contracts. And that’s why in the early days of the firm, like Ford Motor Company, when transaction costs were high because technology was fairly nascent, the company did everything. They weren’t just a car manufacturer, they had a steel plant, rubber plantation, mahogany, you know, mill, and all this stuff. So the internet helps to lower some of those transaction costs, and we think blockchain will take them down even further. So consider Uber, for example. You have to ask yourself, well, what exactly does Uber do? I think Uber does basically five things. The first thing it does, it has an identity component. You open up the app, you see the name of the driver, what kind of car he’s got, how long he’s been on Uber, etcetera. It’s got reputation, you know that driver’s got a 5 star rating, a 4.5 star rating. Similarly, they know whether or not you have a 4.5 or 5.5, whether or not you’re someone who gets in the car and yells at the driver and whatever. They do contracting, in a sense. When you get in an Uber and they take you to your location, and you are pleased with the service, you pay. If the Uber doesn’t pick you up, you don’t pay. If you call the Uber and cancel 2 minutes before, you pay 5 bucks. You’re entering into these little micro-contracts that dictate how much you ought to pay given certain situations. They have a payment component which is not their own, but is integrated into Uber through your bank, your credit card company, your Paypal, etcetera. And on top of that, they do some complex computing, like the Uber pool or autonomous vehicles. So, within that first four: identity, reputation, contracting and payment, the cost of doing that on blockchain might actually be significantly less than they are right now on Uber. Identity, identity and reputation. Well, if you have a persistent, unique identity which is your own, and your reputation is based on transactions you enter into, on a system that records it in a way that everyone can trust that it’s real, that could be a better way of indicating whether or not you’ve got a good identity than what we have today. Contracting, there’s technology you can build on top of blockchain called smart contracts, which is basically just computer software that mimics the logic of the contract, guaranteed enforcement, execution and payment. Payment, you’ve got native digital payment technology that’s integrated into the technology. So, I’m not saying that Uber… or rather, that the new sharing economy is going to be one where we all live in a giant collective, and no one’s actually making any money, there’s still lots of value to be created here. But I do think that there will be new models that will displace Uber, and potentially put them out of business that leverage the power of these technologies. And it could be one where the drivers each commit… in the same way that you when you buy a license or medallion, you know, you buy money to pay into the delivery business, what if everyone paid in $5,000, a million people in one city, that would be a lot of… or a million people in a network, a hundred thousand people, that would be enough to finance the talent to do the last part, which is all of the complex technology, everything else you could basically automate. So the idea is that it could empower individuals, it could reinvent the share economy in a way where ownership and value is shared more equally amongst those who create it, rather than asymmetrically by an intermediary that’s [inaudible].

GW: Right, and I would just point out that by lowering those overhead costs, you spur the economic activity that underlies it as well, that’s the sense in which I imagine a successful blockchain is leveraging peer to peer exchange, making more of it happen.

AT: Yeah.

GW: And you mention identity, and when I read your book I was a little bit concerned about this, in the sense that… what identifies somebody on a blockchain? And what is to prevent me from having more than one identity?

AT: Nothing is preventing you from having more than one address where you could send money to and from. In the same way that nothing would prevent you from having more than one bank account that you can move money in and out of. And to be sure, this is still early days. But the opportunity here is for individuals to have their own identity, which they can use in a whole bunch of different situations, and where that information is theirs. Because right now, there is a funny thing that happened during the digital age, since the first generation of the internet came around, that we’ve created this whole new asset class called data. And it’s probably the most important asset class of this economy, in the same way science and equipment asset of the industrial age, or land is the most important asset of the agrarian age. But the weird thing about it is that we all create it – by that I mean, me, you, students, people all around us, but we don’t own it. It’s owned by Facebook, it’s owned by Google, it’s owned by your bank, it’s owned by your government, it’s owned by your healthcare provider. And there’s a virtual you out there, professor Woglom, but it knows you better than you know you, you know? You don’t know where exactly you went, what exactly you bought, what exactly you said, one year ago to this day but the virtual you does. And there are problems with that. The first one is that it prevents you from being able to use some of this really interesting data to manage your affairs better, but the really big issue is privacy. And you know, it’s wrong to assume that large institutions and governments who know a lot about you are always acting in your best interests. It’s just not what our free society is built on, it’s not. So I think it’s problematic. And it’s especially problematic for the billions of internet users, more than it is even for us. So what if… the virtual you wasn’t owned by intermediaries, but rather was something you controlled? Basically a personal avatar. And that identity as you has different components. So there’s you the professor of Amherst College, you the customer of the bank, you the citizen of the United States, you the user of social media – I don’t know if you use social media – user of social media, etcetera. And you only need to divulge the information that’s absolutely necessary to get what you want out of an interaction with an intermediary. So for example, if you’re paying for something online, the merchant doesn’t actually need to know who you are. If you go down to the hot dog stand, buy a hot dog and a soda, the guy doesn’t have to see your driver’s license. He just wants to know that you have the cash, and we have this great little bare instrument called DICash that allows you to pass the value over. So there are situations online where we’re leaving this trail of bread crumbs that’s way longer than what we need to. The flipside to that is that there are other interactions where giving away other information is advantageous to us. And the best example would be your bank. You know, if you don’t tell your bank anything about you, it’s very difficult for them to justify opening an account or sending you a loan, because they don’t know if you’re a worthy creditor, if you’re a criminal, etcetera, etcetera. So in that situation, right now, the bank asks you for a whole bunch of data points, what’s your address, utility bill, driver’s license… and then they go to your FICO score, or you know, your credit score depending on who the provider is, and it actually gives them a tiny incomplete, laggy, poorly constructed snapshot of whether or not you’ll pay back a loan. So what if you in an interaction with the bank could tell them more about yourself, that you and they could know to be trustworthy, that could help you gain access to lower interest rate on your mortgage, or access to more products, or better terms on your licensure, etcetera. Like the information about your Ebay history, or what you do on social media, or whether or not you’ve entered into these transactions with other financial services companies that don’t go to FICO but end up showing that you pay back your loans, like micro-credit assets. What if you could share information to your licensure about how often you go to runs, what you eat, whether or not you participate in triathlons? I mean…. Right now, the thing that matters most to them when making an actuarial calculation is that they get the risk right. And knowing that you’re someone who eats well, exercises regularly, is important for that. Right now there’s really no way for them to get that information in a way that’s trustworthy, but there is a way, we think, with blockchain technology, where information that comes from say a sensor in a wearable piece of athletic gear or a shoe, could be reported to a ledger, that it could be read-acceptable by the insurance company, by you, and they could both see the person they’re insuring is living a healthy lifestyle. So the critical insight here is not that they have less information, it actually could be they have more information, but it’s the individual who owns and controls it, it’s them who decides how to use, and how to not use.

GW: I see sort of two issues. One is the Donald Trump revealing of medical records – I mean, for sure, he’s not going to reveal medical records on Dr. Oz that show he has problems. And two, if I can maintain more than one identity, why can’t I have the healthy lifestyle identity which I show to the insurance company, and then I have my private identity that I don’t show to my insurance company where I live it up? [Laughs]

AT: [Laughs] Well, I guess you could. Maybe you’re someone who likes to do drugs after you run your triathlon, I don’t know. [Laughs]

GW: [Laughs] If I use the different identities, the insurance company is going to suspect that and it’s going to be a problem. By the way, we also privately have talked about… and I want you to speak to this, in terms of… would this not facilitate criminal activity and other sorts of transactions, because of the privacy? And you were telling me the FBI is delighted by blockchain, and I don’t… I don’t understand that. So I thought you could talk a little about that.

AT: [Laughs] I wouldn’t say ‘delighted with blockchain’, but… their reaction to Bitcoin was surprising. But more broadly on that point… in the book, we kept coming across issues that might derail or sidetrack or even prevent all this great stuff from happening. And we started coming across so many of them that we dedicated an entire chapter to it. It’s called “Showstoppers: Why Blockchain Might Fail”. And there are a few issues that need to be resolved… some of them are technical, how do you scale this technology to meet the demands of the modern economy, and all this complexity, to what do you do if criminals use it. And it’s a very real concern that should not be dismissed, but it’s one where I think misconceptions reign. There’s a misconception that Bitcoin is a tool used by criminals, and that governments hate it, and that blockchain because it’s related to Bitcoin must fall into the same camp. Well, it’s not entirely true. Bitcoin is used by criminals, in the same way that cash is used by criminals or gold bars are used by criminals, or any sort of medium of exchange is used for illicit purposes… and though it might be more anonymous or difficult to track than say, moving money with a credit card or through a bank account, it’s actually significantly more traceable than any payment that’s made in cash. And that’s because cash is fully anonymous; it passes a bare instrument from party A to party B. And that’s why governments all over the world are trying to outlaw those large denomination notes, because it turns out that the five hundred is only used by drug dealers, no real people actually use that thing. With Bitcoin, by contrast, it’s not that it’s totally anonymous, it’s pseudonymous. So… like I said, there’s this public record of transactions that are happening between parties. Now you might not see the name or know the location of the parties, but you can see the transaction. And you see the same kinds of transactions over and over again, coming from the same kinds of addresses, and with some other policing you might actually be able to find out who that person is and whether they’re using it for something illegal. And that’s why, in the aftermath of one of the early Bitcoin… failings of one of the companies that was paying in Bitcoin was called Silk Road. The FBI started calling Bitcoin prosecution futures, because whenever someone spends it, down the road with enough information they can actually trace it back to who the original spender was, and they were able to reclaim a whole bunch of lost coin. So it’s an issue. I think technology is always painted as a tool that’s used by ne’er-do-wells… It was true for the internet, it was true for early social media companies like MySpace, ISIS uses twitter today… It’s really hard to say it’s the technology itself. If someone robs a bank and steals a million dollars, you don’t blame the million dollars, you blame the bank. So if you’re a company that’s got digital assets and a criminal tries to steal it, it’s on you to make sure that doesn’t happen, it’s not on the underlying technology. You know, technology doesn’t have any moral agency. It’s not a tool that can be used… rather, it’s not a tool that can be used for creating prosperity alone. It really depends on who’s wielding it. It can just as easily be used as something that doesn’t create prosperity, that creates problems, like nuclear power, there’s a good example. [Laughs] So--

GW: I couldn’t agree with you more, that a technology, first of all, it’s compelling, it’s going to happen whether the government likes it or not. The important thing is to get the benefits without the bad things. Okay Alex, we’ve talked a lot about some of the issues and some of the benefits, but let’s come back to the sharing economy and how blockchains could leverage the sharing economy.

AT: Yeah, so, I talked a little bit about Uber and all of the functions of Uber, that could be disrupted or disintermediated through this technology. And the same is true for AirBnB. So, in the book we lay out a couple of hypotheticals. One is called Super, Super Uber, and the other is called B Air BnB, blockchain air bnb. And so, maybe just talk about Super for a second. So, imagine in the not too distant future, cars aren’t owned by any one person. They kind of exist in the comics, and they’re not driven by any one person, they’re actually self-driving vehicles. So, you would log on to fill out an application, and you would find a car in your area that would meet your criteria. You need to get to work quickly, so you’d want a car that would pass other cars in the fast lane. You want a big car because you’ve got a couple other people in the car with you. You want an SUV because it’s snowing outside, etc. That car, your car, will communicate with the other cars in the area, bid in real time for the car that makes the most sense, and that car will come pick you up and it will drive you wherever you’re going. If you’re old school and you prefer to drive your car to work or wherever you want to go, you could drive it and then it could drop you off, and then it could go out into the world and start earning money on your behalf, bidding for a business in this market place where most of the functionality is managed and coordinate through blockchain technology and not a traditional mediary. And where the car itself is autonomous in more ways than one. It’s not that it is just self-driving…it could be that it buys its own fuel, it pays for its own insurance, it negotiates liability in the case of a crash or an accident. The only thing the car can’t do, is go to court itself, but the idea is that…and this is not science fiction. You know, there are thousands of autonomous vehicles hitting the road in Pittsburgh, like next week—right?—with Uber.  This is happening faster than we think it is.  So, it’s this interesting confluence of different technologies (automation, machine learning, blockchain, and others) which, together, will create all new kinds of business models.  So in the book, that use case around the sharing economy, we call blockchain cooperatives.  Blockchain cooperatives are one of seven new business models that we think are possible.  We talked a little bit about bigger better data, how the individual can take control.  One thing that I think that’s really interesting is the supply chain itself, or the energy grid for that matter.  Both of these things we think can be transformed.  So with the supply chain, it’s really important that, you know, the providence—the origin of the goods that are moving through the system—that you can track them in real time.  If everyone…if every single thing in the supply chain for something you were building had a sensor on it that was emitting information to a rector that everyone could see and trust, you would be able to solve for some big problems.  For one, it would make it more efficient; it would reduce friction.  It would make it more difficult for illegal goods to be moved through the economy.  And it would probably make it more difficult for illegal activity, and wrongdoing, and mischief to happen.  So, I think if all of the aluminum, for example, in the global aluminum market, were marked with an RFID tag that was reported to a rector, it would be really difficult for Chinese billionaires to store 6% of it in the Mexican desert, for example, which apparently has been happening for the past 3 years, I don’t know if you read that crazy story.  Or, say, diamonds, or palm oil, or rare earths that go into iPhones and Samsung devices—I mean, these are things that matter to companies, that matter to consumers—and finding ways to make that system more transparent would be really helpful.  One other one which I think is really fascinating is the “Internet of things,” which is a real buzzword these days.  You know, this idea that within 5-10 years, there will be tens of billions, maybe trillions, of connected devices doing everything from managing our affairs to driving us around to generating power to managing our health—all these kinds of things.  These devices will need a way to communicate data and financial information to each other securely, privately, and without any friction.  If your lightbulb is metering power from the grid at 100^th of a cent of kilowatt-hour, or about 100^th of a cent an hour, or something like that, it’s not going to use the Visa network, or the Swift network, or HDH, it’s going to have to do a peer-to-peer transaction.  So, the power grid, I think, is due for an upgrade.  Right now, the energy grid is a lot like a lot of other industries.  It’s based on an industrial model, where there’s a big centralized provider that broadcasts service to the customer base. It takes it one step further because most power generation sources have regulated utility to basically dictate price to the consumer.  So, if everyone, instead of getting power from a big industrial power source, had their own panels on their roofs, they could generate power.  But this is nothing new; this already exists today.  What’s different is that, today, if you generate power in excess of what you use, you can sell it back into the grid wholesale.  Or, if it’s more than 10% energy going back in, it basically just evaporates—it’s useless energy.  So why can’t you take all that excess energy—and it’s generated quite often in places like Australia, and the southwest of the United States, and Portugal, where there’s actually a lot of sunlight—why can’t you take that energy and sell it peer-to-peer?  So now, there’s been no real way of doing that.  But now, you’ve got companies like NASDAC in California building distributive energy grids that enable people to take power, bundle it into an asset, and trade it in real time in an open marketplace to their neighbor or to a local business.  And the same thing in New York, there’s a company called LL3 that has a mini grid in Brooklyn that now has 300 homes tied into it where all these people are taking power, bundling it into little securities, selling it peer-to-peer, and all these transactions are clearing and settling on blockchains.  So, for one, it could help make a power grid that’s more resilient to attack or failure.  You know, the ConEd plant in New York City went down in Hurricane Sandy and 2 million people were without power.  So, if everyone had distributed sources of energy, that would be more resilient.  It would be more efficient because a lot of the energy that’s generated by big plants is actually lost in transmission.  The longer distance it has to travel, the more it just kind of dissipates into the environment.  And also, of course, if everyone was using renewable sources, it could help to alleviate pressure on the environment.  So, there are lots of reasons to be hopeful and optimistic about this technology.  The critical insight I’m trying to share with you now is that people assume that technology is going to make the financial services industry more efficient, that it’s going to replace PayPal and Visa.  That might be true, and certainly it will have a big impact on financial services, but that’s only one of the seven different areas that I think it will be disruptive.  You know, when you start to think about how this could impact privacy, health records, the power grid, sharing economy, the music industry, and everything in between, the deep architecture of the firm, with all the transaction costs to make the company work more efficiently, and you start to see what kind of potential it has.  So, I’m optimistic and I’m excited about it.

GW: Well, it’s interesting that you brought up the electricity because my son has solar panels and he has excess capacity and he cannot sell it back to the electric company—

AT: Exactly!

GW:--He can sell it to me, but the funny thing is that the transactions cost involved, which assumingly the blockchain will diminish, make it almost prohibitive.  So, that’s an interesting—a personal—example.  But we have gone on for too long, and sadly, we have just touched the surface, and I want to…the people who are listening to this would be well-advised to read your book, The Blockchain Revolution, because there are lots of other interesting issues, and you’ve given us a vision of what may happen in the future, and if 10% of what you’re suggesting could happen does happen, it’s going to change things dramatically.  So, I’ve really enjoyed reading it and I’ve really enjoyed talking with you today

AT: Thank you very much.  It was a real pleasure.  Wonderful conversation.  And, yeah, I’d encourage people to read the book and get involved.