While Bitcoin is only ten years old, the origins of the technologies behind it go back much further, and its future implications are still not clear.
CoinDesk’s head of research, Nolan Bauerle, gave a talk at the Columbia Business School’s Program for Financial Studies this week, alternatively titled “Crypto-Economics” and “Crypto Through the Looking Glass or, How to Think About the Crypto Revolution.”
The Program for Financial Studies is an excellent source of engaging seminars and events on a wide variety of finance-related topics, especially its annual News and Finance Conference which has of late focused on the uses of artificial intelligence in finance—particularly natural language processing techniques—as they relate to the news.
Bauerle spent the bulk of his two hour talk on the history of Bitcoin and other cryptocurrencies, the related recent history of cryptography and how it relates to cryptocurrencies, the rise of the study of Cryptoeconomics on campuses such as MIT and the University of Western Ontario, and finally, but most intriguing to us, the potential for the Internet of Things to be a “killer app” for Blockchain technology.
The Internet of Things (IoT) refers to the network of embedded electronic computing devices in a wide array of everyday objects, all enabled to communicate with each other and with the Internet. Basically one of the future dystopias that you may have envisioned where your toaster can conspire with your refrigerator, stove, alarm clock, and online grocer to wake you up too early on a weekend morning to eat a way too big, auto-cooked, hot breakfast before it gets cold.
We recently experienced the joys of a remotely controlled IoT thermostat in a short-term rental house in the mountains. The snow was coming down hard outside, but the home owner was at a warm beach and couldn’t be convinced to turn up the heat for us much beyond the temperature where water freezes. But we digress.
Bauerle brought up the key point that once there is a sufficiently large number of IoT devices in use, especially in dynamic and constantly changing environments such as self-driving cars, it would make sense for each device to keep its own record of what happened rather than constantly connecting to a central source or database. That’s an obvious use case for distributed ledger technology and could in fact become one of blockchain technology’s “killer apps.”
We first wrote about self-driving cars last summer in our look at the potential uses of blockchain in the logistics industry, and we intend to delve further into applications of blockchain to the Internet of Things soon.
Bauerle mentioned another blockchain use case that he will be experimenting with over the coming months. He has written a science fiction novel and will be self-publishing it with the twist that he will also be selling security tokens that will be entitled to a portion of 30 percent of his book royalties whereas traditional publishers can take up to 95 percent of royalties. He plans to enable coin owners to be able to see and verify his book sales results on all ecommerce platforms via their private keys. This would not be a completely trustless system, however, since direct cash sales of his book wouldn’t be logged unless he takes care of that himself. The coins would be redeemable for Bitcoin or perhaps a stablecoin linked to the fiat currency of the holder.
We think that this is a promising use case for artists’ royalties, especially for those of lesser-known artists, which have gotten crushed since the advent of digital media. However we will be keeping an eye out for authors hawking copies of their books, and only their own books, for cash on street corners.
Bauerle’s royalties coin plan followed his discussion of the history of cryptography in the U.S. since World War II. Because of the importance of cryptography in defeating Nazi Germany and Japan during that war, and its continued importance during the Cold War, the U.S. and allied governments severely limited publication of papers and books about cryptography that in the past had been used primarily by countries and generally for war.
A series of papers published in the mid to late 1970s by researchers such as Whitfield Diffie, Martin Hellman, and Ralph Merkle led to what is considered to be the first civilian innovation in modern cryptography which solved the key management problem. The key management problem refers to the ability to send a message that can only be read by the intended receiver without either the sender or the receiver needing to agree on a secret key.
This was accomplished by the introduction of the concept of public and private keys, which together combine to form a digital signature. This ultimately became a critical part of Bitcoin where a unique private key is held by each user (a bearer instrument) and is essentially their “coins.”
Bauerle calls Bitcoin the largest deployment of public key infrastructure and brought up hashes (“the workhorses of cryptography”) which he described as easy in one direction but hard in the other direction, similar to the ease of breaking a plate but the extreme difficulty of putting it back together like new. We heard more about hashes last week at Columbia University’s LedgerFest.
Regarding Bitcoin, Bauerle said that it behaves like the reserve currency of the cryptocurrency universe. It’s always possible to trade other cryptocurrencies for Bitcoin and vice versa but not always possible to directly trade non-Bitcoin tokens for other non-Bitcoin tokens. He went on to say that every day that Bitcoin survives, it becomes more like gold.
Bauerle also circled back to Blockchain and claimed that it could be exempt from GDPR regulations because individuals control their own private information there via private keys.
Finally, Bauerle got to the original title for the presentation that we had seen, Cryptoeconomics. He described Cryptoeconomics as the convergence of finance, cryptography, behavioral economics, law & regulation, mathematics and game theory, computer science and distributed systems, network security, governance and group psychology. That was a lot to digest at the end of a two hour seminar, but we are looking forward to investigating what MIT and the Ivey School of Business are up to in their new Cryptoeconomics centers.