Speakers associated with the Oxford MSc in Law and Finance recently met for a panel discussion on Technology and Finance.
TJ Saw, Deployment Strategist at Palantir Technologies, who was involved in the development of the Ethereum project, was asked to give an engineer’s perspective on blockchain. He explained how a combination of technologies that have been around since the 1970s, brought together, has ultimately led to this socio-economical innovation. While a blockchain is essentially a database, it introduced the concept of 'data scarcity', enabling the digital transfer of value instead of the mere copying of data. TJ also showed how the concept evolved from the Bitcoin blockchain, essentially a two-column spreadsheet, to Ethereum, a Turing-complete decentralised computer.
While data scarcity is indeed a very interesting concept, not much has been seen yet in terms of actual applications of it, e.g. in the form of a blockchain-based digital rights management. It appears that its technical implementation beyond payments is not an easy task.
Building on TJ’s overview, Lisa Rabbe, founder and CEO of Stratosphere Advisors, took a look at the current crypto-mania, reminding the anarcho-origins of blockchain as a logical extension of the freedom of information, a kind of ‘freedom to transact’, and the scepticism it still encounters in mainstream circles. She then took an attempt at explaining the technical specifics of the technology as well as its ‘unhackability’ and cyber-attack resilience before she concluded with a list of concerns ranging from governance issues to environmental effects.
It should be mentioned, however, that with quantum computing nearing market-readiness, current cryptography as used in distributed ledger technology like blockchain will probably not remain ‘unhackable’ forever. Given that the human factor is one of the biggest risks in terms of cyber vulnerability, it is also dubious to what extent blockchain is more cyber-attack resilient than other solutions.
Alessandra Sollberger, CEO at Evermore Health, emphasised the importance of always asking whether blockchain is actually needed for the use case at hand, as due to its lack of scalability, it is the worst database solution possible unless at least one of its two special characteristics are needed: its censorship resistance or trust-replication mechanism. She stated that these two, however, make it really powerful but might also make the technology not that corporate friendly. She highlighted the possibility to send micro payments as one important and truly innovative use case as a result of the very low transaction fees required but also stressed the need for strong governance mechanisms because of the technology’s appeal to criminals (an area now commonly referred to as Cryptoeconomics).
While it is true that for many (if not most) of the use cases for which distributed ledger technology is propagated today it is not actually needed as a technology, the standardisation that the use of a common ledger among different stakeholders of a value chain brings might add value in itself. In that case, the hype currently associated with the technology might still help to facilitate its implementation as a common standard.
Rounding up the panel, it was upon Oren Sussman, a Reader in Finance at the Business School, to provide an academic's perspective on the developments. By telling the story of how the mini cabs managed to survive the rise of Uber in the London taxi market, he explained that, while new technologies might appear ground-breaking, it is not easy to predict their actual effects. In particular, it is not always the most fascinating technology that eventually prevails and manages to monetise its value. Like the London taxi market, where the mini cabbies merged until they reached a scale that enabled them to arrange for their own online booking system, markets tend towards vertical integration, raising the question of who would be overtaken by whom. On that, he explained the economists’ rule of thumb according to which the holder of the more specific skill would typically take over the holder of the more generic skill.
There would have been many other interesting questions from an economist’s perspective, e.g. what the reduction of transaction costs might mean for market incompleteness and financial inclusion, what the use of a common ledger with (at least for the participants) publicly available information could do to current information asymmetries in finance and business at large, or what the concept of data scarcity could mean for information-related public good problems.
Lukas Wagner is an Associate at Clyde & Co Düsseldorf (Germany) and served as the President of the Oxford Fintech & SmartLaw Society in 2017-18.