The blockchain paradox: Why distributed ledger technologies may do little to transform the economy

by admin 21/11/2016

Applying elementary institutional economics to examine what blockchain technologies really do in terms of economic organisation, and what problems this gives rise to.

by admin 21/11/2016

Bitcoin’s underlying technology, the blockchain, is widely expected to find applications far beyond digital payments. It is celebrated as a “paradigm shift in the very idea of economic organisation”. But the OII’s Professor Vili Lehdonvirta contends that such revolutionary potentials may be undermined by a fundamental paradox that has to do with the governance of the technology. I recently gave a talk at the Alan Turing Institute (ATI) under the title The Problem of Governance in Distributed Ledger Technologies. The starting point of my talk was that it is frequently posited that blockchain technologies will “revolutionise industries that rely on digital record keeping”, such as financial services and government. In the talk I applied elementary institutional economics to examine what blockchain technologies really do in terms of economic organisation, and what problems this gives rise to. In this essay I present an abbreviated version of the argument. Alternatively you can watch a video of the talk below. https://www.youtube.com/watch?v=eNrzE_UfkTw&w=640&h=360 First, it is necessary to note that there is quite a bit of confusion as to what exactly is meant by a blockchain. When people talk about “the” blockchain, they often refer to the Bitcoin blockchain, an ongoing ledger of transactions started in 2009 and maintained by the approximately 5,000 computers that form the Bitcoin peer-to-peer network. The term blockchain can also be used to refer to other instances or forks of the same technology (“a” blockchain). The term “distributed ledger technology” (DLT) has also gained currency recently as a more general label for related technologies. In each case, I think it is fair to say that the reason that so many people are so excited about blockchain today is not the technical features as such. In terms of performance metrics like transactions per second, existing blockchain technologies are in many ways inferior to more conventional technologies. This is frequently illustrated with the point that the Bitcoin network is limited by design…

Economics, Social Data Science

The limits of uberisation: How far can platforms go?

by admin 29/02/2016

Homejoy was slated to become the Uber of domestic cleaning services. It was a platform that allowed customers to summon a cleaner as easily as they could hail a ride. Why did it fail to achieve success?

by admin 29/02/2016

Homejoy CEO Adora Cheung appears on stage at the 2014 TechCrunch Disrupt Europe/London, at The Old Billingsgate on October 21, 2014 in London, England. Image: TechCruch (Flickr)

Platforms that enable users to come together and buy/sell services with confidence, such as Uber, have become remarkably popular, with the companies often transforming the industries they enter. In this blog post the OII’s Vili Lehdonvirta analyses why the domestic cleaning platform Homejoy failed to achieve such success. He argues that when buyer and sellers enter into repeated transactions they can communicate directly, and as such often abandon the platform. Homejoy was slated to become the Uber of domestic cleaning services. It was a platform that allowed customers to summon a cleaner as easily as they could hail a ride. Regular cleanups were just as easy to schedule. Ratings from previous clients attested to the skill and trustworthiness of each cleaner. There was no need to go through a cleaning services agency, or scour local classifieds to find a cleaner directly: the platform made it easy for both customers and people working as cleaners to find each other. Homejoy made its money by taking a cut out of each transaction. Given how incredibly successful Uber and Airbnb had been in applying the same model to their industries, Homejoy was widely expected to become the next big success story. It was to be the next step in the inexorable uberisation of every industry in the economy. On 17 July 2015, Homejoy announced that it was shutting down. Usage had grown slower than expected, revenues remained poor, technical glitches hurt operations, and the company was being hit with lawsuits on contractor misclassification. Investors’ money and patience had finally ran out. Journalists wrote interesting analyses of Homejoy’s demise (Forbes, TechCrunch, Backchannel). The root causes of any major business failure (or indeed success) are complex and hard to pinpoint. However, one of the possible explanations identified in these stories stands out, because it corresponds strongly with what theory on platforms and markets could have predicted. Homejoy wasn’t growing and making money because clients and cleaners were taking their relationships off-platform:…

Economics

Should we love Uber and Airbnb or protest against them?

by admin 30/07/2015

Some theorists suggest that such platforms are making our world more efficient by natural selection. The reality is a little more complicated.

by admin 30/07/2015

How Mexican taxi drivers feel about the sharing economy | YouTube

Reposted from The Conversation. An angry crowd has attacked Uber cars with bars and stones outside Mexico City airport, the latest in a series of worldwide protests against the ride-hailing app. More than 1,000 taxi drivers blocked streets in Rio de Janeiro a few days ago, and the service has been restricted or banned in the likes of France, Germany, Italy and South Korea. Protests have also been staged against Airbnb, the platform for renting short-term accommodation. Neither platform shows any signs of faltering, however. Uber is available in 57 countries and produces hundreds of millions of dollars in revenues. Airbnb is available in more than 190 countries, and boasts more than 1.5 million rooms. Journalists and entrepreneurs have been quick to coin terms that try to capture the social and economic changes associated with such platforms: the sharing economy; the on-demand economy; the peer-to-peer economy; and so on. Each perhaps captures one aspect of the phenomenon, but doesn’t make sense of all its potentials and contradictions, including why some people love it and some would smash it into pieces. Economic sociologists believe markets are always based on an underlying infrastructure that allows people to find out what goods and services are on offer, agree prices and terms, pay, and have a reasonable expectation that the other party will honour the agreement. The oldest example is the personal social network: traders hear what’s on offer through word of mouth and trade only with those they personally know and trust. In the modern world we can do business with strangers, too, because we have developed institutions to make this reliable, like private property, enforceable contracts, standardised weights and measures, and consumer protection. They are part of a long historical continuum, from ancient trade routes with their customs to medieval fairs with codes of conduct to the state-enforced trade laws of the early industrial era. Natural selection Institutional economists and economic historians theorised in the 1980s that these have gradually been evolving towards ever more efficient forms through natural selection. People switch to…

Economics, Governance & Security

Uber and Airbnb make the rules now — but to whose benefit?

by admin 27/07/2015

Outlining a more nuanced theory of institutional change that suggests that platforms’ effects on society will be complex and influence different people in different ways.

by admin 27/07/2015

The "Airbnb Law" was signed by Mayor Ed Lee in October 2014 at San Francisco City Hall, legalising short-term rentals in SF with many conditions. Image of protesters by Kevin Krejci (Flickr).

Ride-hailing app Uber is close to replacing government-licensed taxis in some cities, while Airbnb’s accommodation rental platform has become a serious competitor to government-regulated hotel markets. Many other apps and platforms are trying to do the same in other sectors of the economy. In my previous post, I argued that platforms can be viewed in social science terms as economic institutions that provide infrastructures necessary for markets to thrive. I explained how the natural selection theory of institutional change suggests that people are migrating from state institutions to these new code-based institutions because they provide a more efficient environment for doing business. In this article, I will discuss some of the problems with this theory, and outline a more nuanced theory of institutional change that suggests that platforms’ effects on society will be complex and influence different people in different ways. Economic sociologists like Neil Fligstein have pointed out that not everyone is as free to choose the means through which they conduct their trade. For example, if buyers in a market switch to new institutions, sellers may have little choice but to follow, even if the new institutions leave them worse off than the old ones did. Even if taxi drivers don’t like Uber’s rules, they may find that there is little business to be had outside the platform, and switch anyway. In the end, the choice of institutions can boil down to power. Economists have shown that even a small group of participants with enough market power—like corporate buyers—may be able to force a whole market to tip in favour of particular institutions. Uber offers a special solution for corporate clients, though I don’t know if this has played any part in the platform’s success. Even when everyone participates in an institutional arrangement willingly, we still can’t assume that it will contribute to the social good. Cambridge economic historian Sheilagh Ogilvie has pointed out that an institution that…

Economics, Governance & Security, Politics & Government

Why are citizens migrating to Uber and Airbnb, and what should governments do about it?

by admin 27/07/2015

What if we dug into existing social science theory to see what it has to say about economic transformation and the emergence of markets?

by admin 27/07/2015

Protest for fair taxi laws in Portland; organisers want city leaders to make ride-sharing companies play by the same rules as cabs and Town cars. Image: Aaron Parecki (Flickr).

Cars were smashed and tires burned in France last month in protests against the ride hailing app Uber. Less violent protests have also been staged against Airbnb, a platform for renting short-term accommodation. Despite the protests, neither platform shows any signs of faltering. Uber says it has a million users in France, and is available in 57 countries. Airbnb is available in over 190 countries, and boasts over a million rooms, more than hotel giants like Hilton and Marriott. Policy makers at the highest levels are starting to notice the rise of these and similar platforms. An EU Commission flagship strategy paper notes that “online platforms are playing an ever more central role in social and economic life,” while the Federal Trade Commission recently held a workshop on the topic in Washington. Journalists and entrepreneurs have been quick to coin terms that try to capture the essence of the social and economic changes associated with online platforms: the sharing economy; the on-demand economy; the peer-to-peer economy; and so on. Each perhaps captures one aspect of the phenomenon, but doesn’t go very far in helping us make sense of all its potentials and contradictions, including why some people love it and some would like to smash it into pieces. Instead of starting from the assumption that everything we see today is new and unprecedented, what if we dug into existing social science theory to see what it has to say about economic transformation and the emergence of markets? Economic sociologists are adamant that markets don’t just emerge by themselves: they are always based on some kind of an underlying infrastructure that allows people to find out what goods and services are on offer, agree on prices and terms, pay, and have a reasonable expectation that the other party will honour the agreement. The oldest market infrastructure is the personal social network: traders hear what’s on offer through word of mouth and…

Development, Economics

A promised ‘right’ to fast internet rings hollow for millions stuck with 20th-century speeds

by Bianca Reisdorf 24/03/2015

Tell those living in the countryside about the government’s promised “right to fast internet” and they’ll show you 10 years of similar, unmet promises.

by Bianca Reisdorf 24/03/2015

All geared up but no internet connection. Anne-Marie Oostveen, Author provided

Reposted from The Conversation. In response to the government’s recent declarations that internet speeds of 100Mb/s should be available to “nearly all homes” in the UK, a great many might suggest that this is easier said than done. It would not be the first such bold claim, yet internet connections in many rural areas still languish at 20th-century speeds. The government’s digital communications infrastructure strategy contains the intention of giving customers the “right” to a broadband connection of at least 5Mb/s in their homes. There’s no clear indication of any timeline for introduction, nor what is meant by “nearly all homes” and “affordable prices”. But in any case, bumping the minimum speed to 5Mb/s is hardly adequate to keep up with today’s online society. It’s less than the maximum possible ADSL1 speed of 8Mb/s that was common in the mid-2000s, far less than the 24Mb/s maximum speed of ADSL2+ that followed, and far, far less than the 30-60Mb/s speeds typical of fibre optic or cable broadband connections available today. In fact a large number of rural homes still are not able to access even the previously promised 2Mb/s minimum of the Digital Britain report in 2009. Serious implications As part of our study of rural broadband access we interviewed 27 people from rural areas in England and Wales about the quality of their internet connection and their daily experiences with slow and unreliable internet. Only three had download speeds of up to 6Mb/s, while most had connections that barely reached 1Mb/s. Even those who reported the faster speeds were still unable to carry out basic online tasks in a reasonable amount of time. For example using Google Maps, watching online videos, or opening several pages at once would require several minutes of buffering and waiting. Having several devices share the connection at a time wasn’t even an option. So the pledge for a “right” to 5Mb/s made by the chancellor of the exchequer, George Osborne, is as meaningless as…

Economics, Governance & Security, Interviews

Does a market-approach to online privacy protection result in better protection for users?

by Yong Jin Park 25/02/2015

Examining the voluntary provision by commercial sites of information privacy protection and control under the self-regulatory policy of the U.S. Federal Trade Commission (FTC).

by Yong Jin Park 25/02/2015

Ed: You examined the voluntary provision by commercial sites of information privacy protection and control under the self-regulatory policy of the U.S. Federal Trade Commission (FTC). In brief, what did you find? Yong Jin: First, because we rely on the Internet to perform almost all types of transactions, how personal privacy is protected is perhaps one of the important issues we face in this digital age. There are many important findings: the most significant one is that the more popular sites did not necessarily provide better privacy control features for users than sites that were randomly selected. This is surprising because one might expect “the more popular, the better privacy protection”—a sort of marketplace magic that automatically solves the issue of personal privacy online. This was not the case at all, because the popular sites with more resources did not provide better privacy protection. Of course, the Internet in general is a malleable medium. This means that commercial sites can design, modify, or easily manipulate user interfaces to maximise the ease with which users can protect their personal privacy. The fact that this is not really happening for commercial websites in the U.S. is not only alarming, but also suggests that commercial forces may not have a strong incentive to provide privacy protection. Ed: Your sample included websites oriented toward young users and sensitive data relating to health and finance: what did you find for them? Yong Jin: Because the sample size for these websites was limited, caution is needed in interpreting the results. But what is clear is that just because the websites deal with health or financial data, they did not seem to be better at providing more privacy protection. To me, this should raise enormous concerns from those who use the Internet for health information seeking or financial data. The finding should also inform and urge policymakers to ask whether the current non-intervention policy (regarding commercial websites…

Economics, Governance & Security

Will digital innovation disintermediate banking—and can regulatory frameworks keep up?

by Peteris Zilgalvis 19/02/2015

The role of finance in enabling the development and implementation of new ideas is vital—an economy’s dynamism depends on innovative competitors challenging and replacing complacent players in the markets.

by Peteris Zilgalvis 19/02/2015

Many of Europe’s economies are hampered by a waning number of innovations, partially attributable to the European financial system’s aversion to funding innovative enterprises and initiatives. Image by MPD01605.

Innovation doesn’t just fall from the sky. It’s not distributed proportionately or randomly around the world or within countries, or found disproportionately where there is the least regulation, or in exact linear correlation with the percentage of GDP spent on R&D. Innovation arises in cities and countries, and perhaps most importantly of all, in the greatest proportion in ecosystems or clusters. Many of Europe’s economies are hampered by a waning number of innovations, partially attributable to the European financial system’s aversion to funding innovative enterprises and initiatives. Specifically, Europe’s innovation finance ecosystem lacks the necessary scale, plurality, and appetite for risk to drive investments in long-term initiatives aiming to produce a disruptive new technology. Such long-term investments are taking place more in the rising economies of Asia than in Europe. While these problems could be addressed by new approaches and technologies for financing dynamism in Europe’s economies, financing of (potentially risky) innovation could also be held back by financial regulation that focuses on stability, avoiding forum shopping (i.e., looking for the most permissive regulatory environment), and preventing fraud, to the exclusion of other interests, particularly innovation and renewal. But the role of finance in enabling the development and implementation of new ideas is vital—an economy’s dynamism depends on innovative competitors challenging, and if successful, replacing complacent players in the markets. However, newcomers obviously need capital to grow. As a reaction to the markets having priced risk too low before the financial crisis, risk is now being priced too high in Europe, starving the innovation efforts of private financing at a time when much public funding has suffered from austerity measures. Of course, complementary (non-bank) sources of finance can also help fund entrepreneurship, and without that petrol of money, the engine of the new technology economy will likely stall. The Internet has made it possible to fund innovation in new ways like crowd funding—an innovation in finance itself—and there is no…

Economics, Social Data Science

Gender gaps in virtual economies: are there virtual ‘pink’ and ‘blue’ collar occupations?

by Vili Lehdonvirta 15/01/2015

Men and women tend to be rewarded differently for the same amount of work. Since online economies are such a big part of many people’s lives today, we wanted to know if this holds true in those economies as well.

by Vili Lehdonvirta 15/01/2015

She could end up earning 11 percent less than her male colleagues .. Image from EVE Online by zcar.300.

Ed: Firstly, what is a ‘virtual’ economy? And what exactly are people earning or exchanging in these online environments? Vili: A virtual economy is an economy that revolves around artificially scarce virtual markers, such as Facebook likes or, in this case, virtual items and currencies in an online game. A lot of what we do online today is rewarded with such virtual wealth instead of, say, money. Ed: In terms of ‘virtual earning power’ what was the relationship between character gender and user gender? Vili: We know that in national economies, men and women tend to be rewarded differently for the same amount of work; men tend to earn more than women. Since online economies are such a big part of many people’s lives today, we wanted to know if this holds true in those economies as well. Looking at the virtual economies of two massively-multiplayer online games (MMOG), we found that there are indeed some gender differences in how much virtual wealth players accumulate within the same number of hours played. In one game, EVE Online, male players were on average 11 percent wealthier than female players of the same age, character skill level, and time spent playing. We believe that this finding is explained at least in part by the fact that male and female players tend to favour different activities within the game worlds, what we call “virtual pink and blue collar occupations”. In national economies, this is called occupational segregation: jobs perceived as suitable for men are rewarded differently from jobs perceived as suitable for women, resulting in a gender earnings gap. However, in another game, EverQuest II, we found that male and female players were approximately equally wealthy. This reflects the fact that games differ in what kind of activities they reward. Some provide a better economic return on fighting and exploring, while others make it more profitable to engage in trading and building social…

Development, Economics

Broadband may be East Africa’s 21st century railway to the world

by Mark Graham 17/11/2014

The excitement over the potentially transformative effects of the internet in low-income countries is nowhere more evident than in East Africa.

by Mark Graham 17/11/2014

Connecting 21st-century Africa takes more than just railways and roads. Steve Song, CC BY-NC-SA

Reposted from The Conversation. The excitement over the potentially transformative effects of the internet in low-income countries is nowhere more evident than in East Africa—the last major populated region of the world to gain a wired connection to the internet. Before 2009, there wasn’t a single fibre-optic cable connecting the region to the rest of the world. After hundreds of millions of dollars of investment, cables were laid to connect the region to the global network. Prices for internet access went down, speeds went up, and the number of internet users in the region skyrocketed. Politicians, journalists and academics all argued that better connectivity would lead to a blossoming of economic, social, and political activity—and a lot of influential people in the region made grand statements. For instance, former Kenyan president Mwai Kibai stated: I am gratified to be with you today at an event of truly historic proportions. The landing of this fibre-optic undersea cable project in Mombasa is one of the landmark projects in Kenya’s national development story. Indeed some have compared this to the completion of the Kenya-Uganda railway more than a century ago. This comparison is not far-fetched, because while the economies of the last century were driven by railway connections, the economies of today are largely driven by internet. The president of Rwanda, Paul Kagame, also spoke about the revolutionary potentials of these changes in connectivity. He claimed: In Africa, we have missed both the agricultural and industrial revolutions and in Rwanda we are determined to take full advantage of the digital revolution. This revolution is summed up by the fact that it no longer is of utmost importance where you are but rather what you can do – this is of great benefit to traditionally marginalised regions and geographically isolated populations. As many who have studied politics have long since noted, proclamations like these can have an important impact: they frame how scarce resources can be…