Blockchain, Economics, and Litigation
In this Q&A, Catherine Tucker, the Sloan Distinguished Professor of Management and Professor of Marketing at MIT’s Sloan School of Management, is interviewed by Analysis Group Managing Principal Emily Cotton about ways in which blockchain technology is changing traditional views of business models, competition issues, and the role of economic analysis in both.
Catherine Tucker: Sloan Distinguished Professor of Management; Professor of Marketing; Sloan School of Management, Massachusetts Institute of Technology
Q. Blockchain is a term that has been popping up everywhere lately. Can you give us a brief description of the underlying technology that is more accessible to lay people?
A. Yes, blockchain is both a buzzword and something that is often obscured by a lot of technical language. Simply, blockchain is a different way – and its proponents would say, a better way – of recording and authenticating data and processes. I like to think of it as providing a new way of creating a database where all of the participants’ incentives are aligned to ensure data integrity. From an economic perspective, therefore, one of the major benefits of this technology could be to reduce transaction and verification costs.
Q. Most often we hear about blockchain and bitcoin at the same time. How does blockchain relate to cryptocurrencies?
A. Cryptocurrencies or virtual currencies (like bitcoin) were the first implementation of blockchain technology. Cryptocurrencies offer an alternative to traditional payment systems. It makes sense that cryptocurrencies were the first blockchain application because transactions require a lot of data and are a place where trust and verification are paramount. However, blockchain is not synonymous with cryptocurrencies. Instead, it is a general-purpose technology with applications to charity, real estate transactions, logistics, education, health care, and other fields.
Emily Cotton: Managing Principal, Analysis Group
Q. What is the major challenge for blockchain in an antitrust context?
A. I’ve been thinking about this a lot lately, as I’ve been publishing on and appearing on panels dealing with this topic. One primary theme is that antitrust law and the economic analysis commonly used are set up for contexts where there is a clearly defined firm (or firms) and a distinct set of consumers. Antitrust is predicated on the idea of identifying a firm and then trying to find evidence of the firm’s (and its employees’) intent. With a permissionless blockchain-technology-style database, you don’t have either a firm or employees that can be readily identified as having acted with anticompetitive intent. When what you are investigating is a permissionless decentralized database, how do you proceed? How do you determine whether parties acted in their unilateral best interest? How do you assess whether their actions were procompetitive?
Q. Beyond the practical difficulties though, do you expect firms or assets that rely upon blockchain technologies to receive more or less antitrust scrutiny?
A. There are elements of blockchain-style technologies that, in general – and assuming they are implemented correctly – may work to actually increase the level of competition in a market. Just as a small example, take something we call “forking.” If a particular blockchain platform isn’t meeting the needs of its consumers, then a group of developers can simply come in and “fork” the platform by providing an alternative protocol. For example, Ethereum, a blockchain platform, experienced a fork after members of its community disagreed about how to protect the platform against attacks. Such forking thus increases the rate of innovation and provides more choice to consumers. This introduces competition into digital platform markets in a way that we’ve never seen before.
Of course, another job of antitrust experts is to think about how a new technology such as blockchain could be used in ways that may be less desirable for consumers. There have been discussions that blockchain technology may be used for price monitoring or to facilitate collusive behavior by providing a platform for collusion. While that may be possible, those fears are not particular to the blockchain technology – most of the fears are embedded in the amount of increased interaction that blockchain technology, as with other technology platforms, may require among competing firms.
Q. What about barriers to entry?
A. When we consider barriers to entry in the context of blockchain, an important factor to consider is whether the blockchain requires permissions or is permissionless. In its original conception as a technology, blockchain was permissionless – there were intentionally no barriers to adding data. Since then, however, data security and integrity concerns have led to the development of permissioned blockchains. These blockchains tend to have access restricted to a defined community, such as a few firms or organizations. We don’t really know if establishing blockchain consortia along these lines will ultimately act as a barrier to entry, but that is where I would expect there would be the most scrutiny.
Q. In terms of economic analysis, do you think only antitrust practitioners should be concerned about blockchain, or are the applications broader than that?
A. I am anticipating that there will be many areas outside of antitrust where economics can help shed light on the underlying incentives at play. Naturally, we would expect there to be issues of intellectual property, financial regulation, class actions, and data security as firms, their competitors, their employees, and their consumers wrestle with a new technology. Probably the best analogy is the advent of new digital platforms such as Google and Facebook nearly two decades ago, and the extent to which these being entirely new business models led us to rethink many economic approaches towards litigation in platform markets.
At MIT, we are looking into these kinds of issues with the launch of a new lab, called the Cryptoeconomics Lab, which I have co-founded with Professor Christian Catalini. We are partnering with various companies in this space to try and understand the broad economic implications of this new technology. Given that blockchain technology itself has only been around a few years, of course, these are all very new projects, but they all wrestle with the question of incentives in this new digital ecosystem. ■