Undoubtedly, blockchain stands as one of the most captivating and widely-discussed disruptive technologies in the contemporary landscape. However, its potential is not always well understood.
In this episode of Bizcast, we speak with Ciamac Moallemi, the William Von Mueffling Professor of Business in the Decision, Risk, and Operations division at CBS.
Professor Moallemi guides us through the fundamental aspects of this emerging technology: what it is, plus the opportunities and drawbacks. He explains how this "trustless" technology has the potential to reshape the financial industry, while also detailing how CBS is equipping students to harness its full potential.
Watch or listen to the podcast using the links above, or read the transcript below:
CBS: Professor Ciamac Moallemi, thank you so much for doing this.
Ciamac Moallemi: Thank you. It's wonderful to be here.
CBS: We are here to talk about 21st century finance, and so much of this has to do with blockchain technology, so to level set our conversation, professor, can you tell us what is blockchain?
Moallemi: I think that's a great place to start. I think there are a lot of misconceptions around blockchain. Very often, ideas related to blockchain are intermixed with cryptocurrencies and the narrative you read in the press is the price going up, is the price going down, so on and so forth. I think that's not the interesting part. I think the interesting part about the blockchain is its use as a technology. In other words, what does it actually do and what is it capable of? And to that end, it is a new technology.
There are three ingredients to blockchain. The first ingredient is that it is a computer. So a modern programmable blockchain like Ethereum is a general purpose computer. It has data, it has code that can operate on that data in various ways. So that's the first aspect. But then we start to add functionality, namely it applies ideas from economics. And one of the key ideas from economics is the notion of private property. So blockchains are like computers where there's also a notion of you have different agents participating, those agents can own certain things, and there's permissions in terms of who is allowed to do what and so on. So that's the second aspect.
And maybe the third aspect is, unlike a typical computer, for example, your laptop that you may use at home or whatever, the blockchain, we don't run individually, it's collectively run by a group of people called miners or validators. So if you will, it's a computer in the sky that's not really operated by any individual person, but is operated through a consensus mechanisms.
And what this means is different people, because no one person is controlling this computer, we can collectively agree to run our code on this computer and that takes the form of what's called a smart contract. The smart contract is literally a piece of computer code that runs on a programmable blockchain. And because it is being run by many different validators, all of whom are checking each other's work in this “computer in the sky,” we can be assured that it's trusted and that it's going to execute as we intended and that nobody is going to cheat. So in this way, we can think of a blockchain as a new computational extraction that is going to allow different groups of people to interact in different ways.
CBS: One of the biggest tech companies, I recently read, market it as a moment to revolutionize the financial world. Why does it have this level of potential?
Moallemi: So I think, even thinking beyond the financial world to think what's the ultimate endgame, what's the promise of blockchain, I think you have to take a step back and look at the way that we interact with each other in society today. More and more, these interactions are modulated through information technology. If you go outside, you don't call a cab anymore, you call an Uber. If you want to go on vacation, you leverage Airbnb. And so the dominant paradigm here is we have these platforms that are coordinating different types of people, let's say drivers and riders, and this is becoming the dominant paradigm.
And while these platforms generally work very well, I'm certainly happy with Uber's service, there's a problem in there in that, once you have these large tech platforms, very oftentimes, they can exert monopoly power. And this is because the types of businesses in these platform economies have very strong network effects and so, hence, natural monopolies form. For example, in the ride sharing space, the more drivers a company has, the more riders will go there, which in turn will attract more drivers and so on. And what you eventually expect, what economics predicts, is that eventually there will be one dominant player.
And the way you see this play out is, if you look at platforms like, let's say, Uber, it does not provide the car, Uber does not drive the car, does not pay for the gas, it does none of that, but they take 30 percent. And so the fact that platforms like Uber, and Airbnb, and Amazon, and the Apple App Store and so on, the fact that they're able to really extract these very, very high prices, in Uber's case for simply running a website, that suggests that they have monopoly power.
Blockchain offers an alternative. So we're not there yet, but the future promise of blockchain is really to, instead of coordinating people through a centralized tech monopoly, coordinate them through smart contracts, coordinate them in a way where, let's say drivers, can bid how much they want to be paid, riders can bid how much they want to offer, people can be matched, prices can be set by market forces and not through a centralized actor. And so this is the idea of decentralization and blockchain really provides a technology that can allow that.
CBS: So what are some of the successful applications you've seen so far?
Moallemi: The biggest successes in blockchain are in the financial world. If you look at what people are doing right now, like, let's say, on the Ethereum blockchain, which is probably the most popular and active smart contract based on blockchain, it is basically what's called decentralized finance. And the idea here is to replicate traditional financial functions -- for example, lending and trading -- but do it in a decentralized way.
Now, let me explain what I mean by that. If you think of the way we typically do something like trade a stock, well, there's exchanges, there's places like NASDAQ or the New York Stock Exchange or so on, or in the cryptocurrency world, we can think of places like Coinbase. So these are, again, centralized entities where buyers and sellers go and they do price discovery and they trade and so on. What blockchain allows is allows you to do this in a way where there's no trusted central counterparty, in a way where people can directly trade with each other, potentially with less intermediation and also without the need to trust people.
And I think a great example of needing to trust people going wrong is the recent collapse of the FTX exchange. This was a centralized exchange that traded crypto products and, in order to trade on that exchange, you had to put your money there and it turned out to be a giant fraud. I think ideas like decentralized finance allow a way around that where, again, we can perform those common functions, people can lend money, they can borrow money, they can exchange assets, but without trusted intermediaries.
CBS: it’s the use of the word trust that can sometimes trip me up. It's a good thing that it is a trustless platform – why?
Moallemi: Trust can be good. The idea of people know each other, extending credit, that's very powerful, but on the other hand trust also imposes constraints on things. For example, we have to be in a common legal system, and we have to hire lawyers and so on and so forth. Being in a trustless environment lets you interact with a much broader range of people potentially all over the globe in a way where you don't need to rely on those things.
CBS: So is the elimination of bad actors one of the things that this decentralized finance does better than traditional finance?
Moallemi: Yes, yeah I mean I think it's very explicit about trust relationships and doesn't require the same level of trust that we require in traditional finance, but I think there's also other ways that decentralized finance offers some advantages. Maybe the biggest one is this idea of composability. The idea of composability is that if you have different financial functions, like let's say borrowing and lending versus trading, they're all kind of different computer programs they have APIs, like programming interfaces, and you can combine them in a different sorts of ways -- the word people like to use as money Legos -- it's kind of like you have this different types of functionality and you can combine them in unique ways. In the traditional finance world, it’s difficult to do things like that. Let's say you want to buy some stock, and then with that stock you want to hold it, but at the same time you want to borrow money against it. You can do that in the traditional financial system -- it's called margin lending. Your broker will allow you to buy the stock and then we'll lend you a money against it. In the decentralized finance world all those pieces can be can be picked apart. You can decide to trade in one protocol a borrow and another protocol and combine them in ways that maybe the protocol designers hadn't even and anticipated, so it really offers all the openness and ability to define new things that you get through computer programming.
CBS: So a lot of benefits to it. What about some of the some of the cons for it?
Moallemi: It’s a nascent technology. There's a lot of issues. I'll highlight a couple of them, and I think it relates back to some of the points we discussed earlier. While, again, we get all the benefits and the flexibility of computers and computer software, there's also downsides, namely, for example, bugs. It's very difficult to write a computer program that doesn't have a bug.
So for a traditional computer program, let's say you're implementing the Uber app on an iPhone, if it has a bug, maybe the app crashes or something like that, maybe your customers can't access a service for a while, but it's usually probably not catastrophic or existential. In the blockchain world, where the computer programs are smart contracts, if there is a bug, it is quite likely that, or it's possible, that someone can leverage these bugs to steal money. So a small bug can, all of a sudden, lead to maybe an exchange being drained of all its assets. So this idea of hacking and bugs in smart contracts, this is one huge issue that needs to be addressed.
A second issue that needs to be addressed is, because of the fact that there's limited trust relationships, in general, there's a little bit less credit. And what that means is that things on the blockchain are typically more capital intensive. So for example, to trade on an exchange, you typically don't have to put up all the money up upfront. You can put up some money and your broker lends you other money. And while you're trading during the day, there's credit relationships between, let's say, the exchange and the executing brokers and clearing brokers and so on. All these people know each other and they trust each other.
And what that lets you do is lets you create this environment where large amounts of money are being exchanged, but it doesn't tie up a ton of capital. In the crypto world, nobody trusts anybody for good reason. You don't know who the person on the other side of the trade is. So because of this and because of a lack of credit, you end up posting capital in many different places and there's less capital inefficiency.
Finally, I think a big issue in blockchain is it inherits a lot of the issues in the cryptocurrency world – namely, it's an unregulated space. And I think the positive side of that is you can try new ideas and you can innovate. The downside of that is we don't have the consumer and the broad protections that we're used to. So you see all the scams, the frauds, and so forth that we see in the crypto currency space.
CBS: So where are we in terms of regulation?
Moallemi: Right now the regulatory environment is very challenging. My sense is, in decentralized finance and in crypto more broadly, there are certainly a lot of bad actors. I think some types of regulation are certainly warranted, but I think we're in a situation where, maybe earlier in the cycle, there wasn't enough regulation. And now, we're in a little bit of a bear market and you've had these major scandals like FTX. Maybe the regulators are cracking down, but it's not necessarily fully being done in a constructive way.
And what I mean by that is, again, I don't want to advocate that there should be no regulation. I think regulation serves a very powerful purpose, but the way it's being implemented right now is really regulation by enforcement, really regulation by going after bad actors, which is fine, let's go after the bad actors, but also, I think regulators have a role in maybe illustrating how things should be done.
CBS: So what do you think is needed to realize that potential?
Moallemi: We haven't found the right product market fit for blockchain. We found one product market fit, which is finance. And again, as I mentioned, if you look at what people are actually doing with blockchain today, most of it is decentralized finance. So I think what is missing in the blockchain world right now are applications, maybe non-financial applications, which is interesting for me to say, being a finance person, that connect to the real world and provide a utility wherein then we can layer the finance on top.
CBS: Turning to our curriculum here at Columbia Business School: first question, why is this subject important for business school students?
Moallemi: So I think our students want to be at the forefront of technology. Technology is, again, becoming a dominant force in business and society. And I think blockchain is a novel technology. And I think, to the extent that students are interested in topics like entrepreneurship or venture investing, some of those businesses that launch will be blockchain, some of those, the funders will be in the space. And so I think it's important to engage with the technology and understand it in order to be able to pursue the business opportunities.
CBS: And how is it being taught in courses right now?
Moallemi: We have a number of different courses here and I'll go through some of them. We have a class called Blockchain Cryptocurrencies and Digital Tokens Demystified. This is taught by Professor R.A. Farrokhnia. This is a short intensive block week class. It's taught entirely over the course of a week. It's meant to be a quick, but not superficial introduction to the topic.
Beyond that, we have a semester-long introduction to blockchain taught by Professor Gur Huberman and Omid Malekan, which is a broader and also simultaneously deeper introduction to blockchain. And building on that, Professor Huberman also has a class called Blockchain Market Infrastructure and Uses, which starts to get into the applications and talks about smart contract programming and so forth. So those are mainly the technology classes.
In addition, on the regulatory side, we have a class taught by an adjunct professor, Donna Riedel, where she focuses on regulatory and legal matters related to blockchain. So we're trying to offer a broad curriculum that, again, might be relevant for the next generation of entrepreneurs or venture capitalists who are entering the space.
CBS: Are you seeing CBS students finding opportunities in this field?
Moallemi: We are, but that said, it's a challenging time. We're in the middle of a bear market, in terms of crypto. The environment is economically challenging. So it is not a traditional career route. If you come here, for example, and you want to do investment banking, it's very obvious what to do. You go to your coffee chats, you go to your interviews, you get a summer internship, so on and so forth. I think, for something like blockchain, I think it's a little bit more challenging. Those tracks aren't necessarily there, but that said, I think the students who do pursue that direction, they have to do a little bit more of the legwork on their own in terms of meeting people and engaging with alumni who are in the industry.
But my philosophy is always you get out of it what you put into it. So if you really leverage the Columbia Business School environment, really leverage what's going on here in terms of the research, our alumni networks and so on, I think there's a lot to get out of it. And to that end, as part of the Digital Future Initiative, I run something called the Briger Family Digital Finance Lab and our mission is to explore applications of digital technology and digital transformation and finance broadly, but one large direction there was blockchain. So we have a digital finance seminar series where we bring in top academics researchers, as well as top researchers from industry. We've been organizing conferences and panels and so forth.
Finally, I think that the last point is just where we are. New York City is a major center in terms of blockchain technology, but especially in decentralized finance. And I think some of that comes from the fact that, of course, New York City is also the center of traditional finance in the United States. So there is an entire ecosystem downtown of startups, larger players, venture investors.
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