AFA Panel: FinTech And Money In The Digital Age

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Arvind Narayanan discusses the technological and economical aspects of cryptocurrency from the AFA Panel titled, “FinTech And Money In The Digital Age.”

Presented by:

Arvind Narayanan, Princeton University

David Andolfatto, Federal Reserve Bank of St. Louis

Long Chen, Ant Financial / Luohan Academy

Jean-Pierre Landau, Sciences Po Paris

AFA Panel: FinTech And Money In The Digital Age

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Arvind Narayanan: I'm a computer scientist as Marcus said and this is absolutely my first time at this event. Everything is new to me. For example people kept telling me they have to go off to a job interview and I was very confused by that and then my mind was blown to realize that there is a centralized job market in your field. Computer scientists don't have anything like that. Nothing comparable and in fact as a research topic we're really interested in trying to build markets and systems more generally that don't require a central point of coordination and that actually brings us to crypto currencies. And so what I'd like to do is to give you kind of an overview of the tech landscape where things are now and where things might be going in the future and hopefully that will be useful to you to kind of set the stage for crypto currencies. And by the way I don't know if you know this but this week is literally the tenth anniversary of crypto currencies. And so let's talk about the first 10 years of crypto currencies and what we've learned from them and I'll give you three main points here. One thing is that I have been surprised. I would say to find how sound the underlying technology has been and what do I mean by that. Ten years ago most people would not have predicted that crypto currencies would stick around for 10 years.

It would have been quite possible and in fact it is possible today that there is a catastrophic Socceroo bug in bitcoin or any one of the other crypto currencies that we don't know about but which could cause the entire system to crash because for example it allows somebody to print money for themselves. So that is still possible. So the fact that the engineering has been so reliable as I would say a bit of a surprise and it's I think good news. The technology has been pretty sound so far the cryptography has been pretty sound and the game theory that goes into crypto currencies has also worked really well. And one point I would make here is that in a certain sense crypto currencies have worked better in practice than they do in theory. What do I mean by this. There have been a number of theoretical weaknesses that have been discovered by researchers in the way that crypto currencies work for example very recently there was a really interesting draft paper by Eric Budish at Chicago showing that if you look at what happens in bitcoin mining the costs of protecting it are a are a recurring cost to flow costs that needs to be paid by the record keepers of the system whereas the cost of attacking IS targets a one time cost and therefore if you look at the economics of crypto currencies it sounds like these systems should be much more easy to attack than than one would think. And so I think this is an important paper it tells us something really interesting. I've been responsible for coauthoring a couple of papers about how the incentives in cryptocurrency can all go haywire. But all of that said I think the fact that these types of attacks have so far not been observed in practice is good news and I think we actually need some updates to the way that we model these systems to make our theory in fact better model practice and I think the practical stability of these systems so far is telling us something. So that's my first point about what I think has been interesting about the first 10 years. The second point I'll make is that you know this one should be obvious but the development of these things has been a very chaotic process it's been completely rife with scams of all kinds lots of use of crypto currencies for various illegal activities as well as these repeated bubbles and hype cycles. We've been seeing.

I just wanted to acknowledge that I think fundamentally that doesn't take away from the value of crypto currencies but I just wanted to put that out there. One other point I'll make is that I think in terms of the adoption story it's been underwhelming it's been disappointing. For example we don't have you know as far as I know any country where people are using crypto currencies to buy their coffee so that use cases not really panned out at all. And I have a draft paper with my team at Princeton doing blockchain analysis because block chains are public data so you can see a record of all the transactions that have ever been made. And you can analyze it in various ways to try to tease apart the use of crypto currencies as a medium of exchange versus other uses like speculation and our tentative conclusion is that so far and this shouldn't be really that surprising. They've mostly been used for speculation so far. Now that said I'll come back to the first point on the slide here. One thing I want to point out is that because I think this underlying technology is sound even if a lot of these use cases have not panned out so far. One point I'll make is that unlike a product issued by a company let's say that doesn't find a lot of adoption right away the company might go out of business. But that is unlikely to happen with crypto currencies. I'm fairly confident that they're going to be around 10 years from now 20 years from now. So over the long run you know a lot of research.

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