(Photo: Wikimedia Commons)

Information Asymmetries, Blockchain Technologies, and Social Change

Reflections on the potential (and challenges) of Distributed Ledgers for “Market for Lemons” Conditions

We live in a data age, and it has become common to extol the transformative power of data and information. It is now conventional to assume that many of our most pressing public problems — everything from climate change to terrorism to mass migration — are amenable to a “data fix.”

The truth, though, is a little more complicated. While there is no doubt that data — when analyzed and used responsibly — holds tremendous potential, many factors affect whether, and to what extent, that potential will ultimately be fulfilled.

Our ability to address complex public problems using data depends vitally on how our respective data ecosystems are designed (as well as ongoing questions of representation in, power over, and stewardship of these ecosystems).

Flaws in our data ecosystem that prevent us from addressing problems; may also be responsible for many societal failures and inequalities result from the fact that:

  • some actors have better access to data than others;
  • data is of poor quality (or even “fake”); contains implicit bias; and/or is not validated and thus not trusted;
  • only easily accessible data are shared and integrated (“open washing”) while important data remain carefully hidden or without resources for relevant research and analysis; and more generally that
  • even in an era of big and open data, information too often remains stove-piped, siloed, and generally difficult to access.

Several observers have pointed to the relationship between these information asymmetries and, for example, corruption, financial exclusion, global pandemics, forced mass migration, human rights abuses, and electoral fraud.

Consider the transaction costs, power inequities and other obstacles that result from such information asymmetries, namely:

  • At the individual level: too often someone who is trying to open a bank account (or sign up for new cell phone service) is unable to provide all the requisite information, such as credit history, proof of address or other confirmatory and trusted attributes of identity. As such, information asymmetries are in effect limiting this individual’s access to financial and communications services.
  • At the corporate level, a vast body of literature in economics has shown how uncertainty over the quality and trustworthiness of data can impose transaction costs, limit the development of markets for goods and services, or shut them down altogether. This is the well-known “market for lemons” problem made famous in a 1970 paper of the same name by George Akerlof.
  • At the societal or governance level, information asymmetries don’t just affect the efficiency of markets or social inequality. They can also incentivize unwanted behaviors that cause substantial public harm. Tyrants and corrupt politicians thrive on limiting their citizens’ access to information (e.g., information related to bank accounts, investment patterns or disbursement of public funds). Likewise, criminals, operate and succeed in the information-scarce corners of the underground economy.

Blockchain technologies and Information Asymmetries

This is where blockchain comes in. At their core, blockchain technologies are a new type of disclosure mechanism that have the potential to address some of the information asymmetries listed above. There are many types of blockchain technologies, and while I use the blanket term ‘blockchain’ in the below for simplicity’s sake, the nuances between different types of blockchain technologies can greatly impact the character and likelihood of success of a given initiative.

By leveraging a shared and verified database of ledgers stored in a distributed manner, blockchain seeks to redesign information ecosystems in a more transparent, immutable, and trusted manner. Solving information asymmetries may be the real potential of blockchain, and this — much more than the current hype over virtual currencies — is the real reason to assess its potential.

It is important to emphasize, of course, that blockchain’s potential remains just that for the moment — only potential. Considerable hype surrounds the emerging technology, and much remains to be done (and many obstacles overcome) if it is to achieve the enthusiasts’ vision of “radical transparency.”

At the same time, the following examples and pilots show the various countries and sectors where it is beginning to gain traction — reducing fraud and waste, combating corruption and criminal activity, and generally increasing transparency and reducing information asymmetries.

  • Moldova seeks to fight human trafficking by leveraging blockchain to establish an immutable identity for children living in rural areas. For many of these children, a lack of identification documents or other data makes them invisible and untraceable across borders to authorities, and thus makes them vulnerable to exploitation by human traffickers.
  • To prevent voter fraud as a result of information asymmetries, Ukraine is using E-vox, which leverages smart contracts in order to fulfill a number of Ukrainian legal requirements. The system integrates multiple types of identity verification to increase the integrity of the voting system.
  • Bext360, a Colorado-based startup, uses smart contracts to pay coffee farmers fairly and on time. It uses a price determined through weighing and analyzing beans by the Bext360 machine, and helps small farmers overcome information asymmetries related to pricing and other market data.
  • WeTrust aims to create a more inclusive financial system that would allow anyone to access fair, equitable financial services without an expensive trusted third party.
  • BanQu creates an economic passport for previously unbanked populations by using blockchain to record economic and financial transactions and purchase goods. It thus allows unbanked populations to establish and “prove” their identity in global supply chains.

Three ways Blockchain Technologies address Information Asymmetries

These and other examples highlight that blockchain technologies can broadly address information asymmetries in three ways:

  1. Addressing information asymmetries at the supply and value chain by improving track and trace: The impact of blockchain is already starting to be felt in global supply chains, including in the pharmaceuticals and food industries. By immutably recording various steps in supply chains, (and other logistics chains), blockchain has the potential to reduce waste and fraud, crack down on duplicates and illicit products, and increase consumer safety. Blockchain in effect allows transparency watchdogs, as well as average consumers, to track the provenance of goods they purchase and consume, (such as diamonds), in the process leveraging the power of information so that consumers and citizens can make better choices.
  2. Addressing asymmetries related to the management of identity attributes: The lack of verifiable, self-sovereign identities is emerging as one of the major problems of the information age, enabling everything from identity theft to privacy violations, new and existing forms of surveillance, and other forms of fraud. Today, citizens do not control their online presences, and this not only leads to immediate problems but erodes long-term trust in the entire data ecosystem. Several projects are underway to use blockchain to remedy this situation. For example, the Illinois Blockchain Initiative launched a pilot project testing the value and feasibility of putting citizen birth certificates on the blockchain, giving citizens more control and an easier way to verify their identities. Likewise, Massachusetts Institute of Technology (MIT) is in the second year of a project providing blockchain-based digital diplomas to students. Though still reliant on the registrar’s office, the project aims to provide alums with more control over their credentials and the ability of others to view them.
  3. Addressing transactional inefficiencies resulting from information asymmetries through smart contracting: Much has been made of blockchain’s potential for automated contracting. Smart contracting has the potential to reduce fraud and transaction costs for businesses, governments and citizens. More generally, it has the potential to drastically simplify processes (by, for example, automating compliance and enforcement), thus opening up new business models and permitting average citizens to enter into complex and hitherto expensive arrangements with businesses, governments and each other. Smart contracting is an example of how existing information asymmetries can potentially be leveled and flattened, putting more power into the hands of citizens and consumers.

Blockchain Technologies and Traditional Means of Addressing Information Asymmetries

To date, information asymmetries needed to be overcome through a variety of institutional and ‘signalling’ means — such as the enforcement of liability and traceability provisions and/or disclosure requirements or monitoring by well-known and trusted institutions; the establishment of industry standards or professional norms; reputation-based mechanisms; or even “outcome-contingent” contracts (where the buyer does not pay until the outcome of the service is known). Recent developments toward “open data” or “open contracting” as part of the move toward “open government” can also be portrayed as efforts to prevent or address information (and power) asymmetries.

These institutional solutions, however, are dependent not just upon strong and trusted societal intermediaries but also upon an individual’s ability to access those intermediaries, or leverage the data made available, which explains why information asymmetries affect less developed countries and already excluded people more.

Whether blockchain technologies will provide a distributed, more egalitarian and democratic alternative to these institutional solutions remains to be seen as the presence of these same trust providing mechanisms may in fact be conditional for blockchain to be successfully implemented. Similarly, recent developments toward more private and permission-based blockchains may actually create new or reinforce existing information asymmetries instead of dismantling them (as we have seen with certain identity and smart contracting initiatives — and with ICO token offerings).

To monitor the potential of blockchain for social change — by tackling information asymmetries — The GovLab at NYU, an action-oriented think tank, is compiling a database of blockchain examples from around the world, and welcomes additions sent to blockchange@thegovlab.org.

(Thanks to Andrew Young, Raul Zambrano, and Anna Levy for substantive comments to the above)