Kevin Werbach is a professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania. He is an expert in emerging internet technologies, telecommunications policy, electronic commerce, and regulation. Werbach is the author of “The Blockchain and the New Architecture of Trust” published last year.
Quartz: Why did you decide to write a book about blockchain and the law?
Werbach: I kept talking to smart, knowledgeable, and thoughtful people who felt they just didn’t understand what was going on with blockchain—not so much that they were skeptical, but no one had explained the phenomenon in a way that they could really appreciate what [is] interesting or significant about it. So, I tried to write a book that provided that kind of clarity, that wasn’t just for people who are already in this world, but that then went deeper than just describing the potential and could talk about some of the challenges as well.
Has your book created any blockchain converts?
I’m not trying to convert anyone. I think this is an extraordinarily exciting set of technologies with enormous potential and I believe it will have major impacts on many different aspects of business in the world. But I’m not certain of that and I’m definitely not certain of any particular trajectory. So, I’m trying to arm people with the information to make their own decision about how it’s relevant to what they do.
Do you think that blockchain hype is dying out? Where do you see it going from here?
I’m naturally a contrarian. This was my feeling during the dotcom bubble, which I was involved in 20 years ago. The time when everyone is super excited, for me, [is when] I want to see things get more solid. And the times when everyone is convinced that it’s over are actually the times that I find the most intriguing.
The hype is, unfortunately, really tied to the crypto prices and I think if those come back—and I certainly wouldn’t exclude the possibility that bitcoin will go up again—then I think we’ll see that kind of hype again. But I think the hype which suggested that, in a couple of years from now, all these major companies and industries would be running on blockchain and people would be commonly using cryptocurrencies to make ordinary payments, has clearly run its course.
The other piece of this is that, honestly, there simply are not many good examples of adoption at scale. There are more examples than people think of actual adoption of blockchain technologies, but you can’t point to an Amazon or eBay or Google of blockchain yet. If and when we see things that either have millions of users on the retail side or major enterprises are putting a significant level of activity on a distributed ledger platform, then that’s going to rekindle some excitement.
Which distributed ledger technology (DLT) applications seem promising?
On the enterprise, there’s real, low-hanging fruit—things like payments and supply chain and various derivatives of supply chain, like provenance and trade finance. These are situations where everyone understands there are tremendous inefficiencies [to] having multiple companies in the same transaction keeping their own copy of the same information. So there are hundreds of examples in that general space, some which are more successful than others, none of which are at massive scale.
The issue is the ones that are going to succeed are not going to succeed because they have some fundamentally better technology. They’re going to be the ones that have the right fit between how they architect the technology, the needs of the organizations involved, the governance structures, and the timing being right, which is hard to predict.
Some corporations refer to their DLT platforms as blockchains when that might not be the most suitable description. What has your experience of that been like?
I think there is a little bit too much religion about at what point something is truly a blockchain. There’s a technical definition—the word says “blockchain,” so you [must] have a hash-linked chain of blocks. But there’s a number of things we would consider blockchain that aren’t technically blockchain because they use a different data structure.
There’s a very important difference between a public, unpermissioned blockchain and a private, consortium distributed ledger, but I don’t think those are radically different things to the point where it doesn’t make sense to talk about them in the same context. Using the word blockchain was magic pixie dust for a while. Now, things are shifting the other way, where a lot of [corporations] are burying the term. And I don’t much care.
The issue is basically [whether] this evolution of technology is using a different approach that has no points of central control in a way that creates shared visibility into information which didn’t exist before.
Is there a platform that you think is best positioned to succeed?
No, I think there will be multiple blockchain and DLT platforms that serve different needs. For example, I’m very skeptical that bitcoin will be the “one to rule them all” and that everything will collapse into bitcoin. But I’m also skeptical, at this point, that bitcoin will go away, because it [does what it does] quite well. And it’s got so much activity behind it.
There are multiple platforms and there is really a whole generation of platforms that are in development right now that seem very exciting, but it’s too early to tell either whether they will get implemented successfully or whether they will take over from the existing platforms.
It’s one thing to say “I can build something that has a better throughput [transaction processing capability] than ethereum,” but people aren’t going to instantly switch to whatever platform has the highest transaction throughput if they’re invested in the ethereum ecosystem. So, I don’t think that’s a question that can’t be answered right now. But there’s four or five of them, at least in the public blockchain world, that seem quite promising and I wouldn’t rule them out as being among the winners.
Kevin Werbach’s recommendations:
- Books: The Age of Surveillance Capitalism by Shoshana Zuboff
- Podcasts: Conversations with Tyler (Tyler Cowen), Making Sense (Sam Harris)
- Projects to watch: Dfinity, Tezos, ALGORAND
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A hash function is a one-way, mathematical process that turns information, or input data (e.g., a word, a phrase, a number), into an output of a fixed length. Any modification to the input data drastically changes the output of the function. Adding even a single letter to an entire book would change its hash. Here’s an example of a hash:
Hash functions help put the “crypto” in cryptocurrency, because they’re what ensures the security the system. For bitcoin, new transactions (records of people sending the cryptocurrency to one another) go through a hash function, SHA-256, to produce outputs that are 256 bits in length. If the output starts with a certain number of zeros, then the person who found the hash is rewarded with new bitcoins. The more zeroes that are required at the start, the harder it is to win new units of the cryptocurrency.
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Kraken—a digital token exchange based in San Francisco—has acquired Crypto Facilities, a London-based cryptocurrency derivatives trading platform, in a deal worth more than $100 million. The firms announced the deal yesterday (Feb. 4).
Crypto Facilities offers 24-hour trading for futures tied to a range of assets, including bitcoin, ether, XRP (Ripple), litecoin, and bitcoin cash. The company shares pricing data, including a bitcoin reference rate, with the CME Group for the CME’s bitcoin futures product.
Kraken is seeking a $4 billion valuation through investments from its wealthiest customers (minimum investment is $100,000). The acquisition expands its available financial products and helps Kraken compete internationally. While other exchanges contend with layoffs amid the downturn in crypto prices, Kraken reportedly plans to keep all 25 Crypto Facilities employees and CEO Jesse Powell anticipates more acquisitions in 2019.
Takeaway: Despite the CME and Cboe offering bitcoin futures, the US market for crypto derivatives has generally fallen flat. Kraken’s acquisition is clearly about Crypto Facilities’ UK authorization. In Europe, crypto derivatives enjoy high leverage limits. (Crypto Facilities touts a 50x leverage ability.) This means futures might be more profitable on a per-customer basis as compared to spot market trading, where profitability is driven by transaction fees on large trading volumes. But take note: In December, UK regulators said they would consult in early 2019 about a potential ban on crypto derivatives sold to retail investors.