Recommended Reading: Digital Currencies & Blockchain
Title: Beyond Bitcoin: Economics of Digital Currencies and Blockchain Technologies, Second Edition
Who:
- Hanna Halaburda (Stern School of Business, New York University),
- Miklos Sarvary (Columbia Business School, Columbia University)
- Guillaume Haeringer (Zicklin School of Business, Baruch College)
Published: 2022
Why:
What makes good money? How is a crypto currency different from a digital currency? A must-read for to develop a clear understanding of fungible and non-fungible tokens, and how their value and economics is realized through smart contracts on blockchain technology. Easy to read and follow the concepts that are explained very well, with good examples and background material that sets the context to appreciate what digital currencies are, and what are their limitations. This second edition reflects developments — ICOs, DeFi, NFTs, Dapps — in the past several years and hence offers an excellent introduction to the salient features of the Ethereum blockchain.
Aside: for those interested in learning more about “tokenomics”, I recommended reading Token Economy by Shermin Voshmgir (recommended in Oct). Those interested in payments and digital currency may enjoy Before Babylon, Beyond Bitcoin by David Birch (recommended in Aug).
What:
The narrative begins with a historical perspective on the development and role of money and currencies, with the aim of identifying and explaining salient attributes of tokens that preceded the advent of digital tokens and currencies. Is serves as the background and perspectives to inform a discussion about recent platform-based currencies, including but not limited to the World of Warcraft, Social networks, Facebook credits and promotion platforms.
Rather than subscribe to the standard definitions of money i.e. unit of account, medium of exchange, store of value, the reader is offered to explore tokens in terms of acquireability, transferability, and redeemability. Subsequently, it is in this context that the issues and limitation of platform-based tokens is examined, followed by a discussion about transaction costs, trust, counterfeiting, the challenges of introducing a new currency and the implications of competition.
Having addressed salient features of money, the authors offer a high-level overview of Bitcoin, describing the nature of the network and the nuanced elements therein — including how it operates, what are the limitations of the technology, and the nature of challenges encountered in creating a currency that is not under the control of a central institution.
This is followed by a discussion about the advances introduced through smart contracts on the Ethereum Virtual Machine. Therein, are discussion about fungible and non-fungible tokens and addressing matters of intellectual property, digital art, and governance.
In keeping with the subtitle (although some purists may differ in opinion) — there is a good treatment of blockchain for the enterprise — what a permissioned blockchain looks like and what are advantages of such a system — in particular the Hyperledger and Hyper Fabric initiatives and how they are used to address supply-chain issues for example.
The authors concludes with remarks on where the technology is headed, arguing that the evidence to date suggests crypto will resemble something similar to platform-currencies rather than fiat currencies; noting that what may be adopted on a large scale is different from the vison and design of Nakomoto. Nonetheless, blockchain technologies are the catalysts that ignites a new push to digital society, as such Bitcoin, or more generally blockchain, may be seen as a revolution.
Sampling of Quotes:
Re: How we look at money: We see that the textbook definition has an important drawback — it does not state the boundaries, does not define the environment for which it should apply.
Re: digital and cryptocurrencies: when people hear “digital currency,” their first thoughts will likely be “cryptocurrencies” and “Bitcoin.” This is not surprising: for the past few years these terms have appeared frequently in popular media, technical discussions, and even in policy debates and legislation.
Re: Bitcoin: The impact of Nakamoto’s paper has been immense. The solution … proposed, known as the Bitcoin protocol, was the first well-working solution to the problem of decentralized digital currency. More precisely, Bitcoin was the first fully functional decentralized solution to the problem of double-spending …. As such, it is an important contribution to cryptography and to computer science in general
Re: NFTs: If an NFT is linked to a piece of digital art, the art itself is not stored on the blockchain. What is often stored is metadata attached to the token that contains information regarding the asset.
Re: Decentralized Applications (Dapps): while it is possible that a Dapp is solely governed by smart contracts, like Uniswap, many Dapps are centrally managed by their creators, like NBA Top Shot or CryptoKitties. This is because smart contracts themselves can be permissioned, with the contract creator exerting significant power over the participants in terms of pricing and potential changes.
Re: governance and centralization: A user needs to have a minimum number of governance tokens to make a proposal for a protocol change. And then, the voting to accept the change is via smart contract with governance tokens. A user who has a large proportion of governance tokens may propose and vote in their proposal. This, again shows that Dapps that are decentralized by design, may become centralized in practice.
Re: gateway problem (i.e. reliability of the information on the blockchain): Permissioned systems have an advantage over permissionless one in solving the gateway problem, due to the ability of vetting validators and gatekeepers participating in the system, as well as removing the permission in case of misbehavior.
Other media:
November 3, 2022 While Hanna is a faculty member and NYU.
- Ep 48: Hanna Halaburda and Yannis Bakos on Bitcoin, Blockchain and DeFi Is Bitcoin just a bubble, or the first face of the future? What about blockchain and DeFi? Hanna Halaburda and Yannis Bakos join Vasant Dhar in episode 48 of Brave New World to dig deeper into these questions.
September 28, 2022 While Hanna is a faculty member and NYU.
- CyLab Blockchain Seminar with Hanna Halaburda Abstract: The development of Blockchains technologies, including smart contracts and cryptographic tokens, have a potential to change the competition between platforms. In this presentation, based on a couple of projects, I will discuss how utility tokens can help new platforms enter the market, and how governance tokens can help platforms to increase social welfare. I will also discuss limitations of these technologies in improving platform strategy and competition.
June 4, 2018, When Hanna was a Senior Economist with the Bank of Canada.
- Blockchain Revolution without the Blockchain? (Hanna Halaburda) In this talk from the Harvard Business School Digital Transformation Summit on March 7, 2018, Hanna Halaburda (Bank of Canada) presents “Blockchain Revolution without the Blockchain?”
