Blockchain research & industry insights

Take an in-depth look at blockchain technology's latest developments, projects and products.

Blockchains as Arbiters of Truth
Polling people on whether they think outcome A or outcome B will happen is not very effective in determining which of the two actually will happen. Polling is a poor indicator of future events for a variety of reasons: people with more expertise are given the same weight as those with little to none, people are biased, and not incentivized to give the correct answer. Even asking people about past events or facts are heavily influenced by their cultural and political leanings.

For instance if you were to ask people whether gun production increased or decreased during the Obama administration, the results are skewed by their party affiliation. (It increased 192%). However, paying people to give the right answer, or not answer at all, greatly increases the accuracy of the result.

For these reasons, prediction markets—a financial market on whether or not a particular event will occur— are more accurate than polling and other forecasting techniques, e.g. which movie will win best picture? will there be a second referendum on Brexit? will the FED raise interest rates? They’re more accurate for the simple reason that those in-the-know are incentivized to take a position, and take a more vested position, the greater their knowledge and confidence.

Many companies have used prediction markets internally for forecasting when a new product will launch or to predict sales. Simply asking managers for target dates, results in answers that are too optimistic—they’re motivated to be positive. With a monetary incentive (the more right you are, the bigger the bonus), more accurate forecasting can be made. Hewlett-Packard, Siemens, and Best Buy have all used internal prediction markets to forecast: sales, delivery date of products, store opening dates, and whether new services will be introduced on time. They outperform the companies’ traditional forecasting tools by up to 70%.

While some prediction markets do exist, they have failed to gain mass market traction. Gaining traction is hard because of the need for trust in the company making the market. There is no transparency that it’s set up fairly, that the company is not taking unfair advantage or users, nor guarantees that they will pay out the winners. In short, it’s a problem of trust.

This is where the blockchain comes in. The blockchain is the perfect platform to host the formulas and money of the markets. The code can be vetting and the payouts guaranteed to match what’s expected. Augur, Gnosis, and Stox are 3 prediction markets on Ethereum. In addition there are now user-friendly apps that are being built on these platforms. Guesser is an easy-to-use app that uses Augur smart contracts behind the scenes. I used it to make a prediction on the oscars. I predicted wrong.

For a comparison of Augur, Gnosis and Stox see here. To read more about Guesser see here.

For a good overview of prediction markets in general see this paper.
Is JPM Coin Really a Cryptocurrency?

The big news this week was the announcement of JP Morgan creating their own cryptocurrency--JPM Coin--to be used in it’s wholesale payments business, where it moves $6 trillion every day. The currency will only be available to JP Morgan’s institutional clients, where each coin is guaranteed to be redeemable for 1 US dollar.

The currency uses JP Morgan’s modified version of Ethereum called Quorum. By using a blockchain and cryptography it ensures that coins cannot be counterfeited, nor “double-spent”. It ensures that if a balance is decremented in one account, there must be some other account(s) that are incremented by an equal amount. In this way reconciliation times and costs are significantly reduced. In addition, like any cryptocurrency, accounts can be created by any participant independently, and money can be sent from party A to party B without B getting any of party A's credentials. Finally, such coins can be used in smart contracts to create complex business logic of how and when funds are moved.

In these respects, yes, JPM Coin is taking advantage of blockchain technology and can be considered a cryptocurrency. But it's only these technical efficiencies that it captures and goes no further. JPM Coin misses all the philosophical and revolutionary properties of a trustless cryptocurrency like bitcoin, or a crypto stablecoin like DAI on Ethereum.

What do we mean by trustless? It's the opposite of JPM Coin, which is a trustful currency. It only works when there is complete and total trust in JP Morgan--that they will reimburse every coin holder $1 per coin. Do we know whether JP Morgan will keep enough reserves to redeem all coins? What percentage of USD will they keep on hand? What happens if there were a run on the bank? JP Morgan is able to issue such a coin without having much oversight, or public audits of JPM Coin, because they are the largest bank in America. That is, they are too big to fail, and if they were to falter, the American taxpayer will step in as the lender of last resort.

In an ironic twist, the more trust we have in an institution, the less oversight and guarantees we demand of them. Compare JPM Coin with, say, the Gemini Dollar, a stable coin created by the Gemini exchange, which has a reserve of USD commensurate with the market cap of GUSD that is held by State Street Bank. Their balances are examined by outside auditors with public reports published monthly. Does JPM Coin have the same? It's unclear.

Bitcoin and other public cryptocurrencies take it further. There is no need to put trust in any institution for them to work. The issuance of the currency is controlled by the code of the system, which is public and resistant to manipulation. Because the supply is tightly controlled and predictable, the coins are able to take on a value of their own, with no need to be backed by any other currency. The network is the mint.

Of course, without backing by a stable asset like the dollar or gold, bitcoin and ethereum fluctuate wildly based on the whims of the market. A solution has been the creation of a new token on Ethereum, called DAI, which is backed by ether in such a way as to keep the value of DAI fixed at $1. In this way it is perfectly stable and yet completely trustless. There is no entity responsible ensuring there is enough ether to back the DAI. By design it’s guaranteed that there always will be.

So while JPM Coin is great validation of blockchain technology, it doesn't capture the philosophical and game theoretic innovations of bitcoin and other cryptocurrencies. It will find use and benefits for JP Morgan and their clients, but not be as powerful as its global, trustless counterpart. 

Create your own company on Ethereum in 5 minutes

One of the most cited economics papers of the past 50 years is Jensen and Meckling’s “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”. They advance the theory of the public corporation as an ownerless entity, made up of only contractual relationships. They build on the ideas of Nobel laureate Ronald Coase who explained how contracts allow firms to act as a cohesive entity making them more efficient than individuals, thereby giving firms their raison d'être.

DeFi will dominate the blockchain space this year

DeFi is moving quickly through the blockchain space and is sure to define it in 2019. ICOs are outright boring compared to the innovation and excitement around Decentralized Finance, already dubbed DeFi. We already know the blockchain does money very well—without a doubt the most successful “application” of the technology. But money is a not a static good; it can be sliced and diced in many different ways. The traditional financial world has created many financial instruments allowing money to be borrowed, lent, collateralized, basketed, hedged, leveraged, optioned, insured, and so on. Now all these instruments are coming to the blockchain. And made better. 

BlackRock and Northern Trust Express Interest in Blockchain

BlackRock, the largest asset manager in the world with $6.3 trillion in AUM, is reportedly evaluating the crypto-space, according to CEO Larry Fink, who told Reuters that the firm has assembled a working group focused on blockchain technology and digital assets such as Bitcoin.

Litecoin Foundation Acquires Stake in WEB Bank

Litecoin creator and Managing Director of the Litecoin Foundation Charlie Lee announced on Twitter Tuesday that the Litecoin Foundation has acquired a 9.9% stake in the German financial institution WEG Bank AG.  The equity was received from TokenPay, a strategic partner of the Litecoin Foundation, who transferred their shares in exchange for technical assistance with various blockchain projects from the Litecoin Foundation.

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