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Blockchain, Economics, and Litigation – Analysis Group

In this Q&A session, Emily Cotton, Vice President of the Research Group, interviews Catherine Tucker, Distinguished Professor of Management and Marketing at MIT’s Sloan School of Management, about the ways in which blockchain technology is changing the traditional view of business models, competition problems and the role of economic analysis in both.

p. blockchain is a term that has been popping up everywhere lately. can you give us a brief description of the underlying technology that is most accessible to laymen?

a. Yes, blockchain is both a buzzword and something that is often obscured by a lot of technical language. Quite simply, blockchain is a different way, and proponents would say a better way, of recording and authenticating data and processes. I like to think that it provides a new way to create a database where all the incentives of the participants are aligned to ensure the integrity of the data. From an economic perspective, therefore, one of the main benefits of this technology could be to reduce transaction and verification costs.

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p. most of the time we hear about blockchain and bitcoin at the same time. How is blockchain related to cryptocurrencies?

a. cryptocurrencies or virtual currencies (such as bitcoin) were the first implementation of blockchain technology. cryptocurrencies offer an alternative to traditional payment systems. It makes sense that cryptocurrencies were the first application of blockchain because transactions require a lot of data and it is a place where trust and verification are paramount. however, blockchain is not synonymous with cryptocurrencies. instead, it is a general-purpose technology with applications for charity, real estate transactions, logistics, education, health care, and other fields.

p. what is the main challenge for blockchain in an antitrust context?

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a. I’ve been thinking about this a lot lately, as I’ve been posting and appearing on panels dealing with this topic. A major theme is that antitrust law and commonly used economic analysis are configured for contexts where there is a clearly defined company (or companies) and a distinct set of consumers. Antitrust is based on the idea of ​​identifying a company and then trying to find evidence of the company’s (and its employees’) intent. With a permissionless blockchain technology style database, you don’t have a company or employees that can be easily identified as having acted with anti-competitive intent. when what you are investigating is a permissionless decentralized database, how do you proceed? How do you determine whether the parties acted in your unilateral best interest? How do you assess whether your actions favored competition?

p. however, beyond the practical difficulties, do you expect companies or assets that rely on blockchain technologies to receive more or less antitrust scrutiny?

a. There are elements of blockchain-style technologies that, in general, and assuming they are implemented correctly, can work to really increase the level of competition in a market. just as a small example, take something we call a “fork”. If a particular blockchain platform does not meet the needs of its consumers, then a group of developers can simply jump in and “fork” the platform by providing an alternative protocol. For example, Ethereum, a blockchain platform, experienced a hard fork after members of its community disagreed on how to protect the platform against attacks. such a fork thus increases the rate of innovation and provides more choice to consumers. this introduces competition into the digital platform markets in a way we have never seen before.

Of course, another job for antitrust experts is to think about how a new technology like blockchain could be used in ways that may be less desirable to consumers. There have been debates about the use of blockchain technology for price control or to facilitate collusive behavior by providing a platform for collusion. while that may be possible, those fears are not specific to blockchain technology: most fears are rooted in the amount of increased interaction that blockchain technology, as with other technology platforms, may require between competing companies.

p. what about barriers to entry?

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a. When considering barriers to entry in the context of the blockchain, an important factor to consider is whether or not the blockchain requires permissions. In its original conception as a technology, blockchain was permissionless: there were no intentional barriers to aggregating data. since then, however, concerns about data security and integrity have led to the development of permissioned blockchains. these blockchains tend to have restricted access to a defined community, such as a few companies or organizations. We don’t really know if establishing blockchain consortia in this way will ultimately act as a barrier to entry, but that’s where I’d expect there to be more scrutiny.

p. In terms of economic analysis, do you think only antitrust professionals should be concerned with blockchain, or are the applications broader than that?

a. I anticipate that there will be many areas outside of antitrust law where economics can help shed light on the underlying incentives at play. Naturally, we would expect there to be intellectual property, financial regulation, class action, and data security issues as companies, their competitors, their employees, and their consumers grapple with new technology. Probably the best analogy is the advent of new digital platforms like Google and Facebook nearly two decades ago, and the extent to which these entirely new business models led us to rethink many economic approaches to litigation in platform markets.

At mit, we’re investigating these kinds of problems with the launch of a new lab, called the cryptoeconomics lab, which I’ve co-founded with professor christian catalini. we are partnering with several companies in this space to try to understand the broad economic implications of this new technology. Given that blockchain technology itself has only been around for a few years, of course these are all very new projects, but they are all struggling with the question of incentives in this new digital ecosystem. ■

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