If you’ve heard of blockchain, it’s likely in the context of cryptocurrencies. But can the promise of a secure, decentralized digital-ledger system in and of itself transform the way companies operate? We asked three experts: professor of economics Eric Budish, alumnus Darryl Glover, ’10 (EXP-15), and recent New Venture Challenge winner and Evening MBA student Meenakshi Chitra Lakshmanan
Eric Budish is professor of economics and a director of the Initiative on Global Markets at Chicago Booth, as well as a research associate at the National Bureau of Economic Research. His recent paper on cryptocurrency, titled “The Economic Limits of Bitcoin and the Blockchain,” was published in June.
I’m skeptical that Bitcoin—or other similar cryptocurrencies—will become what cryptocurrency believers fantasize about. Some fantasize it will become the global currency or a global store of value like gold. Some imagine it will become an important part of the global financial system, another currency alongside dollars and euros that moves around the world in serious quantities.
My paper is trying to make an argument that’s quite skeptical of these possibilities. Satoshi Nakamoto, the anonymous founder of Bitcoin, came up with an ingenious way of creating trust in a database without a centralized, trusted party. I respect it as a computer science innovation, but my research shows it’s a really expensive way to generate trust because it’s only as trustworthy as the cost of attacking it. That cost is within the reach of eccentric billionaires, and certainly within the reach of a nation. Elon Musk could not attack the US Federal Reserve system, but he could attack Bitcoin.
“Much of the excitement about blockchain is actually excitement about better data management processes.”
The high cost of security is another major roadblock to blockchain’s business potential. Consider a lock on a door: if you have a much more expensive house than me, or your artwork is a lot more valuable than whatever I have hanging on my walls, you’ll invest more in security; but if your house is worth a thousand times what my house is worth, you don’t need to spend a thousand times more than me on home security. There are returns to scale.
Not so for blockchain. My research shows that blockchain security is extremely linear, so you would need to spend a thousand times more to get a thousand times more security.
Part of this is because of the way blockchain is designed, so that if one person or group controls more than 50 percent of the computers on the network, they can control which blocks are appended to the blockchain. In blockchain parlance, each block, or group of transactions, is mined when individuals, or miners, compete to solve complicated math puzzles quickly. The winner validates the block, attaches it to the end of the blockchain, and reaps a reward in Bitcoin. Some miners have banded together into mining pools that work together in the competition and split the rewards they win. Today there are a number of large Bitcoin mining pools. I don’t think there’s any one that’s over 50 percent; but in combination, they could get to 50 percent somewhat easily.
Another insight from the model regards flow vs. stock costs. As you probably remember from your econ courses at Booth, flow costs are recurring costs, whereas stock costs are one-time larger expenses, like the monthly rent of an apartment versus its purchase price. My research shows that miners on the blockchain must be receiving enough flow payments for their work running the system that they are incentivized not to attack it and reap a one-time stock payment for sabotage. Think about Visa, the credit card company, which manages a vast network of payments for retailers and other businesses who accept credit cards. Imagine what would happen if every ten minutes, the users— that’s you, swiping your card—had to pay fees to Visa, which were large in comparison to what Visa’s managers would be able to steal if they mounted a successful attack on the Visa network (undeterred by rule of law . . . since one of the main points of bitcoin is to be outside the legal system!).
When writing the paper, I was trying to ask myself: If this is right, why hasn’t Bitcoin already been attacked? It’s interesting to think about the incentives of the current miners, who were early believers in Bitcoin, which has been going up a lot. They’re probably net big holders of Bitcoin and they’ve invested a lot of capital in specific Bitcoin mining technology that would become worthless. If you’re a big holder of Bitcoin, the last thing you want to do is attack it. When thinking about the long-run economics of the system, you can’t rely on miners who have made huge profits from a steep run-up in the value of the cryptocurrency. At some point, we have to reach a steady state.
Much of the excitement about blockchain is actually excitement about better data management processes. Some of it is about distributed ledgers or databases with companies such as Walmart and IBM. That’s completely real. Using well-architected databases to robustly track information and have that information be searchable is hugely important. It’s not intellectually new, but data is an increasingly important part of the economy.
A lot of Wall Street back-office processes are comically antiquated. People think we can use blockchain to make them more efficient. Blockchain woke people up to how backward some processes are. That part is also very real, although a little confused, again, the hype is really about better data management processes rather than about what’s intellectually innovative about bitcoin.
My paper doesn’t prove definitively that there’s no way to do decentralized anonymous trust in an effective economic way. Maybe someone will come up with an innovation that makes Bitcoin-style blockchains more resilient to majority attack.
I disagree with people who believe Bitcoin will take over the world, at least in its current form, but Bitcoin may evolve into something we haven’t considered yet. Intellectually, I am waiting to see.
Darryl Glover, ’10 (EXP-15), is a principal and chief clinical officer of iSolve, which is a technology and health-care consultancy based in suburban Philadelphia that supports the life-sciences industry by leveraging blockchain.
Many have argued that blockchain technology could revolutionize the worlds of financial services, retail, government, and beyond. But I believe it can be just as big a disruptor in the pharmaceutical space. A decentralized, secure electronic ledger such as blockchain can track drugs along the entire drug supply chain, from the manufacturer to the patient. One major business application could be using blockchain to expedite drug recalls, and in particular, to do targeted recalls of drugs found to be harmful or ineffective.
The current recall process is fragmented. Each day I receive multiple email notices and pharmacies receive faxes indicating that a medication has been recalled.
Currently, it is very difficult to know which patients might have received a recalled drug. Although this is improving as more and more individual medication packages are marked with serial numbers, pharmacies that use blockchain would also be able to get all other documentation for a particular drug they distributed in case any issues come up.
“With blockchain, manufacturers would simply send a push notification to all parties who received the medications—from the wholesaler to the pharmacy to the patient.”
In the past, pharmaceutical companies struggled to provide data at local levels along the pharma supply chain. With blockchain, manufacturers would simply send a push notification to all parties who received the medications—from the wholesaler to the pharmacy to the patient. This could ensure that pharmacies receive timely notifications, and it could save money by precisely targeting the notifications to the organizations and patients directly affected by the recall.
Blockchain clearly makes a business case for enabling pharma IT systems to be interoperable, portable, and secure, while making sure that manufacturers, distributors, patients, and regulators are all able to interact with one another in a safe and secure ecosystem.
A lot of biopharmaceutical companies are also looking to blockchain to help them maintain regulatory compliance. In the United States, the Drug Supply Chain Security Act, or DSCSA for short, was implemented by Congress in 2013 to help protect consumers from exposure to drugs that might have been counterfeit or stolen, or that are harmful in any way. By next year wholesalers need to verify that all returned products are still tradable and haven’t been recalled or reported as counterfeit. Because this requires wholesalers to compare serial numbers of returned products against manufacturer lists, blockchain can help identify such recalled products while protecting data integrity and privacy. Because transactions recorded in a blockchain’s digital ledger can’t be altered, the data is guaranteed to be secure. This is of huge significance to researchers, regulators, and health-care professionals in their efforts to keep patients safe.
Blockchain isn’t without its drawbacks, however. There are limits to the amount of data that can be placed on the individual blocks in the chain and the transaction speed for exchanging data isn’t always fast. But despite some flaws, there’s no doubt that blockchain has the ability to disrupt the Big Pharma landscape.
Meenakshi Chitra Lakshmanan is an Evening MBA student and winner of the 2018 Edward L. Kaplan, ’71, New Venture Challenge for Manifest, a software company standardizing 401(k) transfers.
I view blockchain as the next evolution of technology solutions to solve many of the world’s most pressing problems.
There are many applications of blockchain, most widely known for underpinning cryptocurrencies including Bitcoin, Ether, and thousands of others. But in my line of work, I’m not using blockchain to exchange currency. Instead, my company uses this distributed-ledger technology to make employees’ 401(k) transfers seamless.
“The current model of transferring is so cumbersome, 89 percent of people who start it never complete the process.”
We’re using the blockchain model to create a network among 401(k) providers that will eliminate the thousands of dollars left behind or cashed out by employees who move on from one employer to another. There hasn’t been an automated or easy solution for transferring these accounts. The current model of transferring is so cumbersome, 89 percent of people who start it never complete the process, which can take up to 60 days. At Manifest we’re providing a solution to this issue.
Accounts with low balances are often cashed out, as 60 percent of the population who have balances less than $15,000 choose to incur the withdrawal penalty and income tax rather than seeing a transfer through. Often, high fees and neglected investments eat at an account when investments are left behind. Regardless of an account’s balance, it takes a fixed cost in administrative hours to facilitate the transfer.
The distributed-ledger technology we’re using is a solution for what I believe is an important economic issue. There’s been about $3 trillion lost in the 401(k) industry over the past 10 years from people not transferring their 401(k) funds over to their new employer. Because it’s incumbent upon the employee to move the funds, most people resort to the path of least resistance: either cashing it out and paying a heavy tax or forgoing the funds altogether. When I started the company, we surveyed more than 2,500 participants and found that nearly everyone regretted not having transferred their retirement dollars.
Technology has always been evolving; take for example the shift from mainframe computers to distributed computing with small servers to today’s cloud environment. Blockchain is the next wave in technology evolution. You hear so much about blockchain these days that some think it has become a fad—as in, “Let’s use it for everything!” Some even compare Bitcoin to the ’90s tech stock bubble or even the 1630s tulip bulb mania.
Given Bitcoin’s wild price swings, much remains to be seen about its viability as an alternative currency. But Bitcoin is just one application of blockchain. I believe that commercial use cases for blockchain technology are yet to come. At Manifest, we’re already getting two 401(k) providers to start talking with one another because they believe in the security that blockchain technology provides. They know that data won’t be compromised, and large investment companies can assure their users that their information is secure.
Blockchain is still in its early years and can be operationally expensive. But its potential, including that of the distributed-ledger technology our company uses, has been gaining attention and momentum, as this technology can solve real inefficiencies in the industry including the 401(k) space, in which almost billions of dollars are lost every year on both the provider and employee sides.
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