In the next bout of “Searching for the energy of Blockchain” on August 13, Professor Eric Maskin of Harvard University and Chen Long, Secretary-General of Luohantang, discussed the operation of blockchain technology on the market and the mechanism , Information asymmetry, signalling along with other economic issues. Professor Maskin first offered an entire lecture around the influence of blockchain technologies on mechanism style and cryptocurrency predicated on blockchain technologies. This article makes an in-depth interpretation of the educational framework and articles of the lecture.
Eric Maskin, Nobel laureate inside economics, professor at Harvard University
Professor Maskin offers made outstanding efforts in the essential fields of modern economics, including community choice theory, sport theory, incentive concept and information concept, and mechanism style. Mechanism design refers to the objectives of confirmed organization (such as corporate revenue). , Authorities taxation, economic efficiency, sociable fairness), whether and how exactly to design a couple of sport (or sport) rules so that everyone participating in economic activities can act out of these own interests while having private information. The ultimate result of the overall game can reach the goal set by the business. The 2007 Nobel Award in Economics had been honored to three United states economists because of their outstanding contributions to the creation and growth of mechanism style theory.
The contribution of the three economists to the Nobel Award is to create an analytical framework which includes three basic concepts. The first is incentive compatibility. When making the mechanism, we must consider a simple constraint, that’s, people use their private information to make choices for their own advantage. Professor Leonid Hurwicz initial introduced incentive compatibility as a constraint to the mechanism design problem. The second is the revelation process. Designing the optimal mechanism beneath the constraints of incentive compatibility is generally a quite complicated mathematical issue. Professor Roger Myerson reduced this complex issue to a simpler mathematical issue. It corresponds to a couple of special mechanisms, that’s, mechanisms that straight display your private information. They are known as direct mechanisms. The third is implementation concept. Given an objective, can an incentive compatible mechanism be designed to achieve this objective? Usually there are lots of equilibrium points under one mechanism, some equilibrium points can achieve the goal, and some cannot. Muskin analyzed the enough and necessary problems for all equilibrium points to achieve this goal. That is called the idea of implementation.
Mechanism style is a set of concepts, frameworks and methods for analyzing troubles. Mechanism can be an educational expression, which corresponds to systems and guidelines in reality. If you wish to attain a social objective value, you need to style a system, which we call a mechanism, which is a set of guidelines of the overall game. When you style this set of guidelines, consider that everyone will react to your set of guidelines. The market itself is really a system. Can this technique make full use of information to attain the best in community? This alone must also be created and proven.
Maskin’s idea would be to put it within this platform when considering economic systems. Considering that everyone has their own interests to use details, and in order to achieve a certain objective, can you possess a couple of guidelines to carry out your goal; so when the goal is certainly implemented, the cost is the lowest. The machine we usually discuss, after making it a mathematical design, is a mechanism and a couple of sport guidelines. Under this set of sport guidelines, everyone has their own interests and incentives because of their own interests. Under such circumstances, studying the look of the optimal mechanism is indeed an extremely complicated issue, but it can be imagined that its applications are extremely broad.
Blockchain is among today’s most exciting and most likely to produce modifications. Blockchain can realize the transmission of worth and information beneath the premise of protecting privacy, such that it can are likely involved in four application areas. There is a marketplace economy , People can conclude a transaction and never have to set up strong trust between your two events. The blockchain goes a step more. Both parties in a transaction can know nothing about each other, need not know the identity of the other party, or even the geographic location of the other party. The most immediate application delivered by blockchain is money transfer. Present blockchain applications makes it possible for you to exchange money from one finish of the planet earth to the other properly, cheaply and quickly.
In addition to exchanges, blockchain can are likely involved in the transmission of delicate information (medical information), voting, logistics monitoring, and power distribution. I can share my medical information with you through the blockchain, and you can only see the elements of the information that are relevant to you. In addition, I can control access rights to make sure that only those that must have access to the information have access rights. This is an important feature of the blockchain to protect privacy (Shape 1).
Shape 1 Blockchain can realize the peer-to-peer P2P secure transmission of currency and private information
Blockchain may be used to vote for truth. Suppose we have a listed business and you want to conduct board elections. We are able to utilize the blockchain to vote on the web in complete security. After the finish, voters can check to make sure that votes are counted correctly, without any trust in official vote statisticians (Shape 2).
Shape 2 Blockchain can realize peer-to-peer P2P secure transmission of currency and private information
Blockchain may be used to track the origin of delivery and logistics. Assume I have a company and I want to ship goods to a certain place. In this case, I can utilize the blockchain to make sure that the products I distribute are transported from the designated ship, not any other ship, no matter how many ships are sailing at sea. I’m also able to ensure that just this ship knows the problem and destination of the cargo, that may protect privacy. If there are many different sources of electrical power (around the offer side), then blockchain may be used for electrical power distribution to make sure that the house can get the least expensive and most effective electrical power all the time.
In the Dutch auction scenario that effectively allocates resources, blockchain can solve various information security and privacy pain points. For scarce sources, such as stereo frequency, essential oil and mineral growth resources, how can companies participating in the auction give the best The bidding cost close to their true worth, in order to realize the optimal allocation of sources, is a issue of mechanism design, and it is also the specialty of Professor Muskin.
Let’s assume that the resource will probably be worth 10 million U.S. bucks to a company, they would not bet 12 million U.S. bucks, otherwise they would have to really pay out 12 million U.S. bucks. But the issue now is that when the resource is certainly respected at US$10 million, their bet will be significantly less than US$10 million. If they bet $10 million and win, they will get something worth $10 million and pay out $10 million, having a net income of zero. The corporation may bet 8 million or 7 million US bucks, which will reduce their chances of earning, but at the very least it can ensure profitability if indeed they win. All companies will do this, so this mechanism cannot guarantee the winner may be the company that basically values ??sources the most.
How do we solve this problem? In fact, we have a very smart solution. Allow each business bid and give resources to the company with the best bid. Nevertheless, the winner paid not their own bid, however the second highest bid. Assume there are three companies altogether, one bet 10 million U.S. bucks, one bet 8 million U.S. bucks, and one bet 5 million U.S. bucks. The winner is the business that bet $10 million, plus they only pay $8 million (Shape 3). Each business will give a precise bid based on the quantity of its resource valuation. This can ensure that the winner is the business that values ??resources most.
Shape 3 Blockchain solves the discomfort points in the Dutch auction mechanism
In reality, there are three pain points in the Dutch auction picture:
- Companies usually do not desire to publicly disclose the amount of resource valuation and bidding;
- So how exactly does the being successful company know that the next highest bid cost is real;
- So how exactly does the losing business know that their bet is really less than the winner?
Therefore, we hope to establish a system that allows the company with the best bid to cover the second maximum bet without publicly disclosing bet information. At this time, the blockchain comes in handy. It could ensure that the winner can view the next highest bet without producing the bid details public. At the same time, the winner can be sure that the amount he paid is correct, and the loser can be sure that there surely is a company that bids increased, but will not know what the winner’s bet is.
Thus, blockchain can solve almost all privacy issues involved with mechanism design. We are able to arrange the mechanism accordingly to make sure that no one however the winner knows the actual winner’s valuation of sources is. This is a major advancement in mechanism design, since it means that we can use the mechanism in ways of privacy security, and all of the data that companies desire to keep secret could be kept secret.
The scope and influence of cryptocurrencies such as Bitcoin are limited. Professor Maskin offers reservations about the scope and influence of cryptocurrencies such as Bitcoin. Weighed against fiat currency, can Bitcoin bring any more advantages? Although the exchange and transmission of Bitcoin is simple, the fiat currency can also realize simple exchange and transmission features through technical updates.
Traditional lawful currency has 4 advantages over Bitcoin
- Traditional legal currency doesn’t have the speculative and dramatic worth fluctuations like Bitcoin. If you are an ordinary buyer and desire to anticipate the value of one’s investment profile, the volatility of Bitcoin’s worth is a disadvantage. It is difficult for traders who hold a great deal of Bitcoin to anticipate the worthiness, while traders who keep RMB or US bucks can easily anticipate the worthiness. Speculators may like Bitcoin, but normal traders can’t stand it.
- Bitcoin along with other cryptocurrencies are often used for unlawful dealings, while traditional government-issued currencies are regulated and difficult to utilize for unlawful transactions.
- Traditional currencies may be used for an extremely wide variety of dealings. With RMB or USD, you can purchase anything you wish. Currency as a medium of exchange can greatly enhance the exchange capacity of commodities.
- Bitcoin is developing towards the original barter trade. Bitcoin is not quite liquid, and there are relatively few commodities that can be purchased with Bitcoin, because a lot of the transaction parties are unwilling to simply accept Bitcoin. The innovation of currency would be to a large level to make the exchange of goods simpler, and the usage of Bitcoin deviates from the purpose of currency as a medium of exchange. Fiat currency is certainly endorsed by the government, and uses legitimately guaranteed trading and payment tools. In commodity dealings, legal currency must be accepted as payment.
Cryptocurrency is potentially harmful with regards to monetary control plans and financing to the true economy. A accountable government will conduct countercyclical monetary plan adjustments, and the usage of cryptocurrencies will reduce the effectiveness of monetary policy.
Since the beginning of the 20th century, responsible governments have always used monetary plan as an important plan tool to combat economic economic downturn and inflation. If the economy falls into economic downturn, the government or main bank can increase the cash supply. The goal of this is to create it simpler for corporations and entrepreneurs to acquire loans to put into action production projects, increase output and generate occupations, and help the economy out of economic downturn.
Once the economy is flourishing, the government or central bank does the opposite. During the economic boom, there is a risk of inflation, and the main bank can try to tighten the amount of money supply. In fact, monetary policy is extremely important in latest history. Recalling the fantastic Economic downturn in 2007 and 2008, in america, Europe and The far east, main banks implemented the countercyclical monetary policy I just mentioned, which is very important to prevent the Great Melancholy.
At that time, some individuals worried that the fantastic Depression like the 1930s would happen again. This is indeed very possible. After all, a quarter of the work force had been unemployed and the economic economic downturn lasted for 10 years. However, the Given, the European Main Bank and the Main Bank of The far east rescued us. Each one of these banks have taken corrective measures to improve the money offer. Despite the serious recession, the recuperation had been relatively fast (Shape 4).
Shape 4 The main loan company regulates the economy countercyclically by controlling the amount of money supply
What’s wrong with cryptocurrency? If individuals make use of cryptocurrencies instead of traditional currencies, the main bank’s monetary policy will no longer be as effective. When the main bank escalates the cash supply, it is important for individuals who make use of cash to be sure that the increased cash is valuable, which is why monetary policy works well. If people make use of private cryptocurrencies like Bitcoin, monetary policy won’t work, and we will lose an important tool to battle recession (Shape 5). This is the first major problem of cryptocurrency.
Figure 5 Private cryptocurrency whose algorithm controls the minting procedure cannot control the amount of money supply
Cryptocurrency cannot replace the function of banks to assess dangers and provide loan products to entrepreneurs
Another problem with cryptocurrencies relates to the banking industry. Proponents of cryptocurrency sometimes say that making use of cryptocurrency will not require a loan provider. Suppose I want to remit cash to you, you don’t have to go through the bank to utilize cryptocurrency, and cryptocurrency can shop ¨currency〃 ¨properly〃. But in fact, the most important function of banks would be to assess dangers and provide loan products to entrepreneurs.
People deposit their profit the bank, and the bank changes it around and the amount of money as loan products to entrepreneurs. Business owners with good concepts get bank loans, and entrepreneurs without good concepts cannot get bank loans. The bank operating system has an essential feature: usually banks don’t just make use of their own cash to give, because many entrepreneurs’ ideas require more funds than banks can provide. At this time, they often borrow money from other banks and then supply loan products to entrepreneurs. This is the so-called (loan provider) leverage impact. If a loan provider invests part of its own money and borrows the remaining funds needed, they are supplying so-called leveraged loan products. This actually assists increase bank revenue. Assuming that a concept may bring a 20% come back, the bank simply lends its own funds, state $100. In this case, the bank can recover $120. Nevertheless, if you borrow 900 US bucks from other banks, you’ll invest a complete of 1 1,000 US bucks, and lastly recover 1,200 US bucks. After repaying the lent 900 US bucks, there will be a income of 200 US bucks along with a 200% come back. Thus, leverage can significantly increase the bank’s personal returns, which is good for the bank. By issuing leveraged loan products, banks can help more entrepreneurs, which is also good for economic development. Thus, leverage may be a good factor for the whole economy.
If we have been not using traditional currencies, but cryptocurrencies without banks, who will provide loan products for entrepreneurs? You can find two possibilities. The foremost is crowdfunding. Business owners advertised that we now have tasks that need cash to build up, and interested individuals can invest. Nevertheless, investors generally don’t really realize the tasks they invest in. They might be good tasks or they could have no future. In fact, almost all crowdfunding tasks are failing. Thus, the problem with crowdfunding is that we now have too many poor ideas to get funding, rather than many good concepts to get funding. I am not really stating that crowdfunding itself is not good, but that banks are more professional and can better evaluate when lending.
The second way would be to have a fresh institution born, and make a precise assessment of the project such as a bank. And such new risk assessment agencies need to acquire leverage like banks, however the leverage promotes the contagious aftereffect of lending between institutions, and could put the entire economy at risk. In the general banking sector, supervision prevents too much leverage of banks, such as the Dodd Frank Work, Basel Banking Regulations. However, in the cryptocurrency field, there is no matching leverage legislation and regulation, so the cryptocurrency economy is at risk of serious economic crisis.
I want to summarize that blockchain technology and ideas are good, but (private) cryptocurrencies aren’t necessarily beneficial. I predict that within the next couple of years, government-issued lawful currency it’s still the main form of currency, including blockchain-based technologies. Private cryptocurrencies will have fun with a small role on the planet economy. The government should continue steadily to make use of monetary plan to combat economic economic downturn and inflation. Banks should continue steadily to have fun with the role of risk assessment and the primary funder of entrepreneurial tasks. Blockchain can make all these features easier and more secure, and can have an effect on other objectives and applications, such as mechanism design.