Episode 13: Neha Narula on Blockchain, Cryptocurrency, and the Future of the Internet

/ Economics, Technology / 11 Comments

For something of such obvious importance, money is kind of mysterious. It can, as Homer Simpson once memorably noted, be exchanged for goods and services. But who decides exactly how many goods/services a given unit of money can buy? And what maintains the social contract that we all agree to go along with it? Technology is changing what money is and how we use it, and Neha Narula is a leader in thinking about where money is going. One much-hyped aspect is the advent of blockchain technology, which has led to cryptocurrencies such as Bitcoin. We talk about what the blockchain really is, how it enables new kinds of currency, and from a wider perspective whether it can help restore a more individualistic, decentralized Web.

Neha Narula is the Director of the Digital Currency Initiative at MIT. She obtained her Ph.D. in computer science from MIT, and worked at Google and Digg before joining the faculty there. She is an expert on scalable databases, secure software, cryptocurrencies, and online privacy.

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11 thoughts on “Episode 13: Neha Narula on Blockchain, Cryptocurrency, and the Future of the Internet”

  2. Pingback: Sean Carroll's Mindcast Podcast: Neha Narula on Blockchain, Cryptocurrency, and the Future of the Internet | 3 Quarks Daily

  3. JOHN ISAACS

    You don’t here too many people talk about the value of money as it relates to a person’s time, which is arguably the one thing we all can agree is extremely valuable to us all. I would argue the value of a dollar is underwritten by our minimum wage. In otherwords a dollar is worth the understood value of an hour of a person’s time regardless of their knowledge, skills, or productive output. But that is just my humble opinion.

  4. JOHN ISAACS

    You don’t here too many people talk about the value of money as it relates to a person’s time, which is arguably the one thing we all can agree is extremely valuable to us all. I would argue the value of a dollar is related to our minimum wage. In otherwords a dollar is worth the understood value of an hour of a person’s time regardless of their knowledge, skills, or productive output. But that is just my humble opinion.

  5. Brian Smith

    A few observations: first, nobody ever seems to refer to Neal Stephenson’s hilarious book ‘Cryptonomicon’ that prefigures Bitcoin. Here a group of computer geeks come up with a regulation- free digital currency and mayhem ensues. The flashbacks in the hefty tome about Alan Turing et al during WWII are very interesting.

    The problem in the book for the inventors is the Dark Web aspect of things. In real life Bitcoin has already featured in payoffs for computer hijacks and the like. From a past life in banking, I know that even US and UK banks are often (un?)witting players in shady transactions, but cryptocash could be even worse.

    The KYC and AML references that went unexplained in the podcast stand for Know Your Customer and AntiMoney Laundering rules for banks. These rules try to control illegal payments. These are far from 100% effective and often a pain for legit customers but better than nothing.

    Of course, the difficulty of actually using digital currency to pay for anything us a more effective control right now in hampering widespread use than any regulations.

    But even if you do succeed in using,say, Bitcoin to buy something, you haven’t completed the transaction. You’ve swapped one asset for another and you may be liable for a capital gains tax if the Bitcoin you used was swapped for more than you paid for it. If you mined it, your tax basis might be deemed zero.

    Alternatively, the tax guys could make you liable for capital gains tax but disallow you offsets on capital losses: they could also fiddle with long/short tax rates. It would be a complete filing nightmare if you’ve made more than a few transactions in Bitcoin. Or you could not report the activity and be subject to bigger problems if caught.

    Plus holding large values in cryptocash has its own dangers. The rise of ASICs-based mining shows how things can change. RSA-based assets may not survive Shor’s algorithm on quantum computers where there’s no offline back-up.

    System friction, fragility, and complexity are still going to compromise trust in the cryptostory. The number of cryptocash scams running right now is amusing if you stay away from them: one I just saw had Sweden moving all its currency into cryptokronas. Cryptocrap!

    The basic idea cryptocurrency idea has promise but real not virtual risk. Right now, buying Bitcoin a while back was a good idea: buying it today is a speculative investment. You could do OK but you could also walk away without even a tulip bulb.

  6. Maharani

    Great episode, but I found it disappointing that the immense negative environmental impact of proof-of-work cryptocurrencies (such as Bitcoin) wasn’t even glancingly mentioned.

  7. Hartmut Koerner

    You asked what money is, and explained mining of cryptocurrencies, but you failed to explain, that 90%+ of all money currently is „fiat money“ / created as credit by the banks. That is were a lot of the problems with our banking system come from. I thought every smart person on earth did their research on that after the banking crisis in 2008, damnit Sean I‘m disappointed!

    At one point you even hinted that money was created centralized, which is simply not true! – Currently you need an institution with a banking license (aka bank), and someone willing to go into debt / willing to borrow money from that bank, and that bank needs to agree to it (aka think that you have enough creditworthyness for the amount you want to borrow), and then that bank needs to hold a minor percentage (about 5% afaik) of all their outstanding loans as reserves in central bank money with their central bank (- or certain securities that are declared by the central bank to be acceptable as reserves.)

    When a bank gives a loan, that money is created out of thin air, and neither the central bank nor any branch of government has a hand in it! When like 5% or so of outstanding loans a bank has lended out go sour / are unretrievable, those 5% central bank reserves get wiped out so to speak, and that bank goes bankrupt! (Which happened in 2008 with a few banks, and would have happened with pretty much all of them etc. – but that is another story…)

    There are money reform movements in a lot of countries all over the world, trying to get their lawmakers to take back the privilege of money creation from the private banking sector to the state – in Switzerland their even was a plebiscite on that (- which sadly the reform movement lost by a wide margin.) But the banks won‘t give that up without a fight – because it is their main business model: collecting interest on money they created out of thin air! Selling debt contracts should never have been allowed, no matter how sliced up they were: at least you need to force the banks to keep the risks they created for themselves, which they had to have a look at in the first place, when they decided to give a loan etc. – This whole system (of bringing money into existence today, that practically is borrowed from your future self, with the help of a institution) only works, when everybody in the process is held responsible for his actions / acts in a responsible manner.

    Google for positive money (or Monetative if you are from Germany or Switzerland) for more information. There is a case to be made, that the things new money is used for (and the interest gathered during the process) should be in the public interest, and not in the hands of a few private banks, as the new money dilutes the money supply right now, but only brings with it products and services only in the future if successfully put to use.

  8. Hartmut Koerner

    To be fair: your guest hinted at / pointed at the role of investment banks in the current system and the insane amounts of money that are sometimes involved in the IPOs of start-ups etc. – she just didn‘t explain the whole process very well: which in my understanding again actually is the creation of money through credit.

    So when investment banks „create wealth“, they quite literally do that by finding firms or investors for whom they can create money out of thin air by „lending“: there are waves of mergers and acquisitions done with credit (= freshly created money): in segments of the economy where there isn‘t yet an oligopole (- where the margins are thin because of too much competition), they pick out players that seem promising and allow them to take over their competitors: so afterwards there often is an oligopole which can extort more money from their customers / suppliers / own workforce etc. (- we call that „rationalization“), so the debt can be paid back with interest.

    Same with financing start-ups with credit (freshly creating money for them) and then recouping the money through drummed up stockmarket speculation / doing IPOs: when there seems to be a „disruptive“ technology entering a field, it can be introduced with tons and tons of freshly created money (= credit), when an investment bank has trust in a player and it‘s business-plan and can drum up enough speculative interest in the stockmarket afterwards.

    Same thing with breaking up of large enterprises and asset-stripping them etc.: the bank only needs an investor who has a profitable idea and some percentage of own assets as security, and then it can create large amounts of new money / „leverage“: so often it‘s not so much „liberation“ of unused profit potential, than actually directly wealth creation by the creation of fresh money in the first place (- that afterwards has to be recouped by a bit of real estate speculation etc. to allow the paying back of the debt with interest, that has been loaded onto the firm that had been bought with freshly created money in the first place.)

    In theory, if the world GDP is to rise by e.g. 3%, you would need to expand the amount of money (=credit in the current system) by just 3% – or if you don‘t increase the money supply, you can increase the „speed of money“ by 3% (- make the same amount of money do 3% more by changing hands more often: which becomes harder to do, the more concentrated wealth is: money in rich peoples hands doesn‘t circulate as much: it just sits there in search of investment / asset-classes / speculation, without actually doing the work it is supposed to do in creation of new products and services, but only jacking up the prices of things that are already there.)

    In reality credit = freshly created money was used to a large part for speculation. I don‘t remember the actual numbers, but over a decade the GDP has risen maybe 160%, while the money supply has risen 380%: which is fueling asset bubbles, greatly enhancing boom and bust cycles etc.

    Also every now and then debs have to be cancelled / written off: you can‘t load excessive debts on individuals, nor firms, nor states: when the payment of interest alone is eating up all the profit we are nearing a natural endpoint: if you still pump more credit into the system you only get wealth redistribution effects, without getting a bigger cake! The system starts to eat itself up – the endpoint of a cycle leads to a reset in the capitalist system: it is long overdue, and US is probably the only society that had several cycles without wars and revolutions on it‘s own soil, that often accompanies the end of a cycle.

  9. Hartmut Koerner

    At the end of the cycle, the rich try to shift their wealth away from banks (- which will go under with the unrepayable outstanding debts), and into asset classes in which counterparty risk seems less: real estate, gold, crypto-currencies: this is purely for wealth preservation and doesn‘t need to actually return a profit on investment: it just needs to survive the collapse of the banks. This actually accelerates the implosion, but it creates the seeds for the next cycle: there is „underinvestment“ in most sectors of the economy: firms buy back stocks, instead of investing in growth, because in an economy that is overladen with debt, there is no real growth anymore, but only redistribution, the state is underinvested (- the infrastucture is crumbling, so is the education system, because even the state can no longer service its debts: the IOUs are bought by the central bank, because private investors lose confidence). The only thing still oing on is displacement competition: if you think that the end of the cycle is far enough out to recoup the debt you need to take on, to buy out your competitor, then you try that: you survive, he drops out. If you think the end of the cycle is near, you yourself decide to drop out: because when the system crashes and you are still in debt, you get wiped out. There are no win-win-situations anymore, only lose and lose less, until a large part of the debt gets reset / wiped on a global scale: be it by hyperinflation or bankruptcy or debt jubilee.

    P.S. I‘m not an economist – I‘m a nurse, but that is my understanding.

  10. Hartmut Koerner

    A few things I forgot to mention:

    Intellectual Property rights, patents, art are also asset classes expected to survive the collapse of banks. Resetting the system can also happen by introducing a new currency: often following a war or civil war or revolution.

    When considering what counts as debt-overload, of course you have to look at interest rates and especially the role of compound interest (- which also is another area where you could do very interesting / radical reforms: having money breed money / having a class of „rentiers“ in a society is not inevitable, but depends on the rules how you setup your money system: read about Silvio Gesell etc.)

    As mentioned in the podcast, money is mainly a legal and a social construct – the easiest way to do away with a specific debt, is having your central bank buy it. The Central Bank can do that whenever you set the rules accordingly / give it the mandate by the government to do so, while it still has the trust of the people. If the people of the USA demanded from their government to mandate the FED to buy all student loans, and then never ask for the money back, so be it. Also during the banking crisis there was no need to bailout the creditors: the FED could have easily just bailed out the debtors instead: buy all houses that are in foreclosure and then just don‘t foreclose.

    Read the works of Prof. Richard Werner on the power of central banking. (There‘s even a documentation „Princes of the Yen“ based on his book, that you can watch on YouTube.)

    P.S.: sorry for grammatical errors (like lended instead of lent) and typos in my earlier posts – English is not my first language.

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