BITCOIN thoughtful considerations and feedback

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    Bitcoin world is full of people who know nothing about economics or cryptography; they only know that they could have made millions if they had not sold at the bottom. These people tell themselves that they are redeemable, that Bitcoin is just the MySpace of cryptocurrencies, that they will have another opportunity to get in early on some other revolution. These people can be dangerous, but most of them are easily preyed upon.

    I think this may explain the origin of “blockchain technology”. It lets people talk as if clones of Bitcoin are important without having to remind themselves of Bitcoin. If someone says “blockchain technology” to me I give him the benefit of the doubt and write him off as someone who doesn’t know what he’s talking about. If I find out that he’s intelligent, then he’s most likely a con artist.1

    When people say “blockchain technology” to you, you can often replace it with “mana”, or “chakras”, or “quantum” and it makes sense the same way. “Blockchain technology” has evolved into a sound Bitcoiners use to extract money from venture capitalists and one another, similar to the way that male birds use a song to attract females. It’s a phrase for people who know there is a lot of money around, but don’t exactly know where it’s coming from.

    I don’t see that there is a lot of use for some kind of general “blockchain technology” outside of its application in Bitcoin. In Bitcoin, the blockchain is a way of solving the double-spending problem without privileging any party as to the creation of new units or of establishing a consistent history. This is an extremely costly and complicated way of maintaining an accounting ledger. How often do I really need to do my accountancy in this way? I would say that it is only a good idea when the game being played is so important that no one can safely be put in the position of referee. There are not a lot of things that I would really need that for, but I think there is a good argument to be made that a blockchain is a reasonable alternative to the monetary system under which the rest of the world is currently oppressed. Otherwise I’d really rather be able to keep my accounting records to myself rather than leaving them out in public.

    There are no applications of blockchains which do not involve a double-spending problem. A blockchain that was used for an application with no double-spending problem is nothing more than a database, so you could just replace it with a distributed hash table. People have also used the blockchain for timestamping. This only works because Bitcoin has become well-known as a point of reference. If you had a need for timestamps, you certainly wouldn’t invent a blockchain to do it.

    Yet people are running around everywhere in the Bitcoin world screaming “blockchain blockchain blockchain” for all kinds of non-intuitive purposes until they’re buried under piles of money. I can’t believe how long it’s taking for people to get wise to this ruse, but I hope it won’t last too much longer. A blockchain does not have a wide range of applications. However, there is one application2, namely that of being a currency, which is overwhelmingly important.

    Money as a Hallucination

    The foundational fallacy about money is to explain in physical terms what is really a sociological phenomenon. Money is about macroeconomics even if we’re talking about a small currency like Bitcoin. Gold is not valuable because it is durable, fungible, portable, and scarce; it is valuable because of a beneficial and self-sustaining tradition in which it has a special place. The physical properties of gold make such a tradition possible, but they do not determine that it will arise; other goods with similar properties may also become the traditionally established good. Bitcoin is the same way, of course. It could not run without the technology behind it, but its value is what makes it important. People who think “blockchain technology” is important are making the same kind of mistake as the people who think gold has intrinsic value.

    What’s weird to me is that I know I have heard many people express correct ideas about what money is and then look at me like I’m crazy when I seriously consider the implications of what they said. I have heard people say to me things like, “money is just a shared hallucination” or “the value of money is whatever we all agree it is”. Yes! That is correct. That’s exactly what I’m saying. And if money is a shared hallucination, then you can’t replicate Bitcoin’s value by replicating the technology. You would have to also replicate the hallucination, which you can’t. You’ll have two blockchains, but only one of them has a shared hallucination. This makes one of them valuable, the other worthless.

    If that seems like a strange claim, think about the alternative: it means that it should be possible to create value for essentially no work. Every new blockchain ever produced was built on the premise that you can create a valuable investment that offers no income for the fixed cost of copying Bitcoin with alterations.

    There is nothing magic here. Human behaviors have real costs and benefits. Money may be little other than a bunch of people attributing value to something without much direct use. It doesn’t matter if this sounds ridiculous; if there is a behavior that corresponds to this belief which benefits people, then they will keep behaving that way. Other people had better understand what they’re doing or else they will become relatively poorer.

    Money as a Behavior

    The overwhelmingly most popular thing to do with gold is to store it away and leave it for long periods of time. Therefore, an explanation for the price of gold should mostly depend on the reasons someone would want something that is good for being stored away, with some minor additions due to gold’s use as jewelry and in industry. We can study money as behavior by abstracting away all the uses of money other than that of storing it. No matter how silly that sounds, we know that it must be good for something because people actually do it and have been for some time.

    When I talk about money as a behavior what that means is that everybody has a socially established number that is objectively associated with them. They can show other people how much they have, and everyone will agree as to what the number is. People can do something which subtracts from this number and adds to another person’s number. Also, people demand to have higher numbers. This means that they are willing to give up other things in order to increase their number. If we know the costs and benefits of increasing the number, then we can understand the price of these numbers on the market.

    There could be many reasons that people are able to behave in this way. The numbers could correspond to amounts of a physical good, like gold or wampum, which people physically pass among one another. They could correspond to numbers which are managed and guaranteed by an institution, like dollars or World of Warcraft gold; or it could be numbers that are stored in a blockchain as in Bitcoin; or maybe we all just use the honor system and keep track of our own balances and don’t cheat.

    Often, economists define money in a way that makes money a unique good in an economy. I do not define money this way. There could be more than one good which acts like money. Instead, I will show that in the long term I would expect a single money to dominate.

    The Risk of Money

    Money is often explained in terms of the inconvenience of trading in a barter system.3 While bartering might well be inconvenient, that alone is not enough to explain the existence of money. It would certainly be nice if we could all settle on a good to use as money. However, there is no guarantee that everyone will be nice enough to do that. It is possible to imagine a tribe of people who are all very good economists and who all understand and like the idea of money, without having enough confidence in one another as to get it working for real. The first person among them would be taking a risk because he would have to work or sell his property in exchange for something that’s good for not much other than being stored. His risk would only pay off if everyone else was willing to follow suit, and how could they possibly guarantee to him that they really would do so?

    For almost a year, this was what it was like in Bitcoin. Although Bitcoiners suspected that Bitcoin could be money some day, its price was zero. Consequently, it was completely useless as a form of money. For a long time, Bitcoiners wanted the price to be higher than zero, but they could not make it so just by wanting it. Bitcoin did not fundamentally change as a piece of software when it first developed a price; the only thing that changed was people’s’ willingness to trade dollars for it.

    In general, there is always an individual cost to accepting money, even when the use of money is very widespread. If I work in exchange for money, how do I know that money will still be valuable by the time work is out and I am ready to do my shopping? If I work for something I can directly consume then at least I can get some utility out of it no matter what. But if I accept something whose main use is as a medium of exchange, then I am depending on there being future people willing to accept that money later.

    This is why people can’t just will money into existence and why the inconvenience of a barter system cannot explain the existence of money. There’s a risk. In order to explain why people would use money, we need an individual benefit to match with the individual cost; otherwise people would never prefer to use money no matter how socially beneficial it was.

    The Utility of Money

    There is an individual benefit to using money, and it’s very simple. The person who accepts money gets to defer his decisions about what to buy to a later time. Someone who does not want to use money must have a better idea about what he is going to do with the goods he receives in payment than the person who accepts money. When one has money, then one is not committed. If I am the first person to accept money in payment and my bet on it pays off, then I have the option to choose what I want later, and I do not have to choose based on the limited information I have now. This benefit explains why someone would want something that is good for keeping in storage. If he wants to keep his options open, then he can open his vault the moment that the right opportunity comes along.

    I have now provided a trade-off which, I contend, explains the value of money. I have not proved that there are no other costs and benefits to using money, but I don’t know of any others. If someone can show me that there is another reason to hold money, please do. Now I’ll talk about what this tradeoff implies for the value of money.

    The Value of Money

    In this article, I mean value in the investment sense. So the value of money is the purpose it serves in your portfolio and how much you would want. For the investor, the value of money is determined by the tradeoff of commitment versus optionality. If he wants more deferred choices, then he needs more cash. If he wants more income, then he should get stocks or bonds.

    The reason someone might want to defer his choices is because there are limited periods of time in which investments go on sale. A difficult thing about business is that it is easy to make mistakes whose consequences are not evident until long after they are unavoidable. When that happens a business needs cash in order to survive long enough correct itself. During these times, good businesses can be bought cheaply for limited periods of time. This is why an investor wants a cash balance ready to spend. You never know what is coming, but if you have cash you are prepared for whatever it is. Holding a stock is a commitment to a particular enterprise, whereas cash keeps your options open.

    The reason that buying an investment is a commitment is that you cannot always sell an investment easily for cash. It might go on sale, just as in the previous paragraph, and then the investor cannot get the same amount of cash back that he put into it. If there is a crash, the investor might not be able to follow through on his commitment and must sell at a loss. On the other hand, an investor who can realistically make the commitment won’t care so much if there is a recession because he is prepared to weather safely through any bad times.

    The interesting thing about the tradeoff of optionality versus commitment is that changes in the overall use of money in an economy can change the nature of that tradeoff for an individual person. The more demand for money there is, the less risky it is for an individual person to hold money. If you were the first person to sell goods or labor for money, then you would probably look insane or immensely stupid to bet that other people would want this stuff in the future. On the other hand, if many people are using money, then you are merely depending on there not being a hyperinflationary event in the immediate future. In that case, you might look insane or stupid for worrying about such a remote possibility at all.

    In short, money becomes more useful the more people use it.

    This may seem like a very obvious conclusion given how many words I took to arrive at it, but it has some funny implications that are hard for a lot of people in Bitcoin to accept because they have money riding on a presumption that the opposite is true. As more people begin to hold money, the rational response of everyone else is to try to hold more than they already have. Everyone, therefore, will try to increase his cash balance at the same time, and they will do this by bidding larger amounts of other goods in exchange for it. In other words, all prices tend to go down, and money becomes more valuable. Effectively, everyone ends up with more money, except that they end up with more valuable units of money rather than higher sums of it; and furthermore they end up with larger fractions of their portfolio in money as well.

    The Network Effect

    This is the opposite of how most investments work. If the price of a stock goes up, then the value decreases because its dividend yield is smaller in proportion to its price. If the price goes up too much, an investor would eventually want to sell for something cheaper. By contrast, $100 worth of bitcoins today has a better value than $100 worth several years ago, even though the price of bitcoin is much greater. The value is better because there are more opportunities to unload the bitcoins at the owner’s discretion.

    A positive feedback between price and value implies that the growth or shrinkage of money can be self-sustaining. One might well find this conclusion hard to accept. Afterall, value in a business is built by hard work and careful strategy, whereas money can somehow drive its own value according to me. I would invite anyone to explain Bitcoin’s value any other way. And saying “bubble” doesn’t count because that’s virtually the same thing. Money is basically a self-sustaining bubble. We don’t yet know if Bitcoin will arrive at a self-sustaining state, and even if it doesn’t the “blockchain tech” people are still wrong because in that case there would be no good blockchains rather than one.

    What would a self-sustaining bubble look like? Naturally, there must be a limit to the growth of money. As the value of money increases, eventually the individual benefits of holding more of it will go down. This happens as the market cap of currency becomes a larger and larger fraction of the whole economy. There are only so many errors that the economy produces for a cash-holder to take advantage of. The economy becomes saturated with money once there are enough investors sitting around with piles of money such that they are able to catch all the errors that are worthwhile. At that point it is no longer individually beneficial to hold more money even if the value of money has gone up. This prevents the value of money from going up further until more people or businesses are added to the economy.

    This limit is independent of the underlying technology of the money. If people were sufficiently honest, it could run on nothing but the honor system. Thus, the value of money is a macroeconomic phenomenon, even for a tiny, quirky cryptocurrency like Bitcoin. This is the reason why Bitcoin can be worthless one year and valuable the next without a fundamental change to the software or protocol, and why it can range in price by enormous margins over short periods of time for reasons that seem inscrutable. It’s because the value of money is a shared hallucination, and the price is caused by the vividness of that hallucination.

    How Bitcoin’s Value Was Created

    For a year after Bitcoin was first released, it had no price and was quite worthless. Therefore, the value was not created when the software was originally developed. It was caused by step-by-step investments that came later. Since it first gained a price, Bitcoin has had periods of rapid price increases. There can be events which are set off for no apparent reason in which Bitcoin’s price drives itself rapidly up or down. A small price increase is interpreted as an increase in demand. An increase in demand would mean that bitcoin is becoming more useful and therefore more valuable. Hence, more people buy in and cause another price increase. These manias make people outside wonder if Bitcoin is for real. They make people who previously thought that Bitcoin was stupid to think that they should maybe buy a little bit just in case there could actually be something to it. In other words, they are starting to think that Bitcoin is good for the only thing that money is actually good for, which is to be kept just in case.

    Above I wrote about the hypothetical idea of a tribe of economists who all wanted to develop a money economy but could not because each felt the investment to be too risky. Here is how they could solve that problem. They could go around in a circle and take turns investing tiny amounts. Then none of them has to take a big risk. Their economy would not be monetized after one round, but they could see who among them was willing to take a small risk. If they had all shown themselves willing to invest a little bit, then many of them would be willing to risk a second round. If the game should proceed well, the economists would start to think about how wealthy each would be if they managed to get more than the rest. Soon the game would cease to be orderly as they all tried to sell as much as possible in order to buy the new money while it was cheap.

    Bitcoin did not arise out of a barter system. The dollar and the other state-managed currencies had long since subsumed nearly all trade. However the calculation of the initial investors to Bitcoin was very similar to that which faced the economist tribesmen. It was clear to many that Bitcoin would be cool if you could actually buy things with it. However you can’t buy anything with it and its investment prospects depend on the presumption that it somehow one day will be demanded in exchange for goods. How could one even estimate the risk of such a possibility? The fact that other currencies already existed does not change the problem. From the perspective of a Bitcoin investor, Bitcoin might well have existed in a barter system in which Dollars, Yuan, Euro, Pound, and Yen were traded rather than tea, silk, salt, and flint. The only difference is that the national currencies are better competitors than tea or salt, so the risk is greater than if Bitcoin had arose in a real barter system.

    Competing Currencies

    I’m not against competing currencies in the sense of thinking people should be physically prevented from creating them. I am against competing currencies in the sense that I think currency competition is inherently monopolistic and that it is extremely dishonest or stupid to promote a new currency as an investment without taking this reality into account. So I am against competing currencies in the sense that someone who creates a new currency had better be able to present a case that his idea is capable of replacing the current system, and should be treated as a con artist otherwise.

    The fact that money has a positive feedback between demand and value implies that there cannot normally be a stable equilibrium between two moneys. Any initial imbalance between them would tend to expand. If one currency was slightly more preferred than the other, people would react to this by demanding slightly more. This makes the preferred even more preferable than before. Any two moneys will interact in this way, thus leaving one to dominate the rest.

    Many people get fooled upon first entering Bitcoin because they think diversification is important. The problem with diversification is that it is possible to create an infinite amount of bullshit at no cost, and if you diversify into that you lose everything. Diversification only makes sense among investments which are not bullshit. If we were looking at a bunch of stocks that all already paid dividends, then diversification would make sense. On the other hand, there are potentially an infinite number of scamcoins. During late 2013 and early 2014, new ones were being produced and hawked every day. They can be produced at this rate until everyone who thinks diversification is a good idea goes broke. Now that all the dumbest people have gone broke, the focus has shifted to using “blockchain tech” to exploit ignorant venture capitalists.

    There is always some risk in accepting money in payment, even something very well-established like dollars. If everyone settles on the same money, then they have coordinated so as to reduce that risk as much as possible. If you expect people to use two currencies, you have to have some reason that both would offset risk in different ways. I have never seen an altcoiner or “blockchain tech” enthusiast come anywhere near to addressing this issue. Clearly, if two currencies are virtually identical, such as Bitcoin and Litecoin, then whichever currency is bigger has the advantage. Recently, Litecoin’s price has decoupled from Bitcoin’s somewhat, so maybe people have finally figured this out. Once Litecoin loses its shared hallucination, no amount of sloganeering will bring it back.

    Litecoin prices, all-time (via CoinMarketCap)

    But what about something more elaborate? Let’s pretend for a moment that Ethereum actually worked and was actually something that competed with Bitcoin on some level. Do its smart contracts give it a serious advantage over Bitcoin? I don’t see how Ethereum’s smart contract system would tend to bring in opportunities to unload ethers which are superior to the opportunities provided by Bitcoin. No matter how cool smart contracts sound, they make Ethereum just another appcoin, and as with other appcoins, people will reduce the risk of holding them by not holding them, or holding them for as short a time as possible. This willdrive the price down until they are useless in trade.

    By the way, I would prefer to be called a “Bitcoin minimalist” rather than a “Bitcoin maximalist” because the other blockchains appear useless and are easliy eliminated.

    Bitcoin Versus the Dollar

    On the other hand, Bitcoin improves over the dollar (and other fiat currencies) where it actually counts. The dollar is not very good for storing “just in case”. Over long periods, it loses value due to inflation. You can’t carry cash around or the police will take it, and if you leave it in a bank, you can have your account frozen and the money drained if you use it for purposes deemed unacceptable. You cannot own dollars the way that you can own bitcoins. It is not that Bitcoin comes at no risk; it is rather that you can always expect to have the same fraction of the total later on, if you secure them properly.

    The national currencies are affected by forces which are beyond your knowledge or control. They are managed by committees serving the governments issuing them. The people on these committees speak in a jargon that is not only incomprehensible to most people, but unbearably dull even to those who do understand it. Everyone is affected by them, but most people will not bother to learn to understand them. They manage the currency in the national interest, which is not always the same thing asyour interest. They can change the rules about how the currency can be spent you can use them or increase the government’s supply. 4 It is usually not possible to predict what they will do, at least over long time spans.

    This is not possible under Bitcoin’s current rules, and it would be difficult to change them in ways that might eventually enable anything similar. Although many new bitcoins will be created in the future, the release schedule is publicly known, and is therefore already priced into current Bitcoins. Therefore Bitcoin will not lose value as a result of inflation. It might lose value as a result of losing popularity, and this risk is greater than that of the dollar’s (at the moment).

    Thus there is a genuine qualitative difference between Bitcoin and the dollar, from an investment standpoint. It doesn’t mean that Bitcoin will necessarily defeat the dollar. It just means that Bitcoin has a relevant competitive edge. There are still significant disadvantages to Bitcoin; it is slow to confirm and difficult to maintain anonymity. However, Bitcoin has done well against the dollar so far and there is real-world commerce that has grown to rely on it. In addition, every time bitcoin grows, its risks decline relative to the dollar’s.

    Final Thoughts

    The reason, therefore, that the monetary aspects of Bitcoin are particularly interesting is the possibility that Bitcoin could become the preferred good for being stored away. If it did, then its value would grow until it was a significant part of the world economy. That would be a significant change for the world and for Bitcoin’s early adopters. Call me crazy, but I think that possibility has more portent than the possibility of applications of blockchains outside of Bitcoin, and is a lot more likely, too.

    Bitcoin the protocol is like a great work of engineering. Its pieces are all adapted to its function. It is not the technology, but what the technology enables, that is most interesting. The blockchain as a concept had no reason to escape the esoteric circles of developers and engineers. Yet when people looked at Bitcoin, the only terms by which they knew how to understand it was as a new technology. But Bitcoin is more like a new tradition than a new technology. It is as if a small section of the crowd in a packed stadium has started to do the wave, and you can bet on whether the wave will eventually fill up the entire stadium.

    If someone says “blockchain tech” to you, you might as well walk away right there.5 They’re just trying to sell you on their new decentralizedcrowdfunded blockchain tech internet of bitthings appscam. You knowthat they’re lying because everyone who acts like them is a liar and someone who was not a liar would actually do something to distinguish himself from them. Someone who knew what he was talking about would know that you can’t just string a bunch of buzzwords together in order to generate an idea that makes sense. Unfortunately, if a lack of basic critical thought is widespread, and if everyone becomes invested in everyone else’s stupidity, then nobody wants to know either, at least not before they’ve found a favorable time to exit their position. This will probably never happen because although they may think they’re preying on other people’s stupidity, they are more likely being preyed upon instead.

    1. On the other hand, just because someone is dumb does not mean that he is not a con artist. Based on my experience in Bitcoin, I think that many con artists have an instinct to remain as stupid as possible about how they get money so that they can keep believing that they are brilliant entrepreneurs. 
    2. do one thing and do it well” 
    3. When Austrian economists say barter system all they mean is an economy in which no good is used as money, even though the term has much more specific connotations for many people. 
    4. In the US, it is really congress and the executive branch changing the rules, and the Federal Reserve changing the supply. This distinction doesn’t really matter for the purposes of this article, but some people think it’s important because the federal reserve is designated as a private institution, whereas congress is composed of elected representatives. 
    5. This includes Hillary Clinton

    “Blockchain technology” has evolved into a sound Bitcoiners use to extract money from venture capitalists — Love it…. This is so spot on…

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    Yes, in theory, Bitcoin should be insurmountable as digital money. Unfortunately, in practice, it is losing its network effect to other digital currencies for a number of reasons, principally because control of the Bitcoin network has gone over to a company whose business interest is to force transactions off of Bitcoin onto their own platform (yet to be delivered), supported by a censorious scammer who bans and deletes anyone who complains about the direction Bitcoin is headed on /r/Bitcoin or bitcointalk.

    People are talking about blockchains because Bitcoin has foundered upon the shoals. Were it not for the failed leadership of Blockstream, your “hyperbitcoinization” prediction would most likely have already happened. Instead, the last new high for Bitcoin was almost three years ago! Now what is increasingly likely to happen is that a Bitcoin 2.0 platform designed for speed and scalability is very likely to suck the market cap right out of Bitcoin on its way to world domination. Ethereum is the most likely candidate, despite their current issue with the DAO theft.

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      “Unfortunately, in practice, it is losing its network effect to other digital currencies for a number of reasons”

      False, the bitcoin domination index has not dropped below 80%, EVER…Other coins have been gaining momentum which is fine, bitcoin can’t do everything, there is much left to invent. However the problem of sending value from A to B has been solved with bitcoin and NO other coin comes close to it’s security.

      “People are talking about blockchains because Bitcoin has foundered upon the shoals. ”

      False, people are talking about blockchains because wallstreet hates to use the word bitcoin.

      “Were it not for the failed leadership of Blockstream, your “hyperbitcoinization” prediction would most likely have already happened. ”

      False, pure speculation. Blockstream and Core continue to push out innovative technology from segwit, to schnorr, to lightning, thunder, bolt, falcon and beyond. It’s getting hard to keep up with all the scaling technology being built. However it takes a while to actually be implemented and be used by the ecosystem. Within 2 years time the scaling debate will be a distant memory.

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      You are probably giving too much importance to the owner of… most people don’t ever visit that site, nor they go to /r/Bitcoin. I read in there a couple of times, then I didn’t really need it. People don’t care about the technology behind Bitcoin, not while it’s beginning to spread so quickly. It was important in the beginning, now it’s not. I can bet 999 people on 1000 don’t give a damn about Satoshi Nakamoto or the owner of, they just see there’s so much traffic, trading, value, so they know it’s solid to an extent, so they enter the circuit.
      On the other side, you talk about Ethereum, which has far a smaller base than Bitcoin, far less investment and is far less known. You can’t still buy shit with it anywhere, and the first flag app was a failure. Yet you promote it. And here it looks like a Cognitive Dissonance problem: you have proof that quakes shake Bitcoin and Bitcoin is still on the wave, and you have proof that the first quake happened to Ethereum practically killed it, and still you are fan of it.
      I will agree that if there’s a coin that can compete with Bitcoin it’s Ethereum, but that’s all but sure. Bitcoin is like what Windows was in the past: Windows was crap in respect to AmigaOS or MacOS, but it was THE STANDARD. Everybody had it, it worked everywhere, it wasn’t dedicated.
      Bitcoin is in the same situation: it came first, it’s world spread.
      Ethereum has still to born, nothing is around that uses Ethereum, NOTHING. At the moment it’s vaporware, while Bitcoin has been adopted by some millions of people and its growth is going up geometrically.

      see more

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    Daniel Krawisz’ article has sent me into self-reflection and considerable thought. I am a columnist and consultant that believes strongly in blockchain-based solutions–and NOT just to solve the double-spend problem.

    I was host and MC of The Bitcoin Event (New York). This Fall, I am teaching Blockchain concepts at several New England schools. I am also co-chair of The Cryptocurrency Standards Association. I recently wrote an article that strongly criticizes the rush to invest in or announce blockchain-based services that are not both permissionless and fully distributed among users who generate or “own” the data: Is a Blockchain a Blockchain if it Isn’t?

    The article is cautionary—it warns that many Blockchain proposals convey little or no advantage—But it falls far short of claiming that a Blockchain is useful only for Bitcoin or applications with a double-spend problem. This just isn’t the case! I think that Krawisz may be limited by narrow vision…

    The statement about the double-spend problem may be technically correct, but what Krawisz fails to consider is that many processes and mechanisms are substantively analogous to this same problem.

    Some prescient organizations (IMO, most are entrepreneurial, but a few are big legacy companies) will reap rewards from their ability to recognize *which* problems in affairs of business, social interaction, scientific research and politics can be positively transformed by injecting a Blockchain database or other distributed, permsionless, crowd-sourced, authoritative component.

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      the desire to turn anything and everything into capital has a meeting with destiny. Bitcoin value tokens are a commodity, the Bitcoin protocol is a consensus mechanism which is rat poison to capital finance – they want the technology that produces the value tokens (because it is money) but, yet, it is their nemesis. As soon as you run a meaningful blockchain it is based on – and enforced by – consensus, then who needs the “runner” of that blockchain? If the consensus is only that of a centralized party, then a SAP database is both cheaper and faster – the R3 (or IBM or Fed) “blockchain” is only a pretence.

      Commodity charts go up and down according to social mood and with no observable correlation to news or fundamentals. Not only is Bitcoin a citizen programmable money, its a paradigm shift with revolutionary bias in favor of the non-centralized.

      Good luck to them, they’re consuming large doses of a power laxative that Satoshi designed with the centralized authority, specifically, in mind.

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      Ellery Davies – Could it be that you believe blockchain technology has as yet untapped, but profound, value because the alternative would leave you with no career?

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    Who should NPR Planet Money call about the Bitcoin they sent but it never showed up?…

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    Great article Daniel !

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    “…you could just replace it with a distributed hash table.”

    Isn’t the blockchain the only known way to “perfectly” secure the values in an always-on peer-to-peer hash table? Isn’t “double spend” just a specific example of its ability to not have “accidental” overwrites in the database?

    “There is an individual benefit to using money, and it’s very simple. The person who accepts money gets to defer his decisions about what to buy to a later time.”
    Another benefit is that it allows system-wide intelligence if it can be used only (or primarily) under the conditions required by the governing legal system. This enables society to reduce or prevent monopolies, tragedy of the commons, externalities, and wealth concentration (democracy resulting in progressive taxation for community benefits). This is why smart contracts are a smart companion to currency and why currencies are on a per-nation (legal force) basis. This is key to the Euro’s problems.

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    No mention of the crippling 3tx/s capacity limit….The author should stop projecting so much.

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      As a value repository, that limit is more than enough. Most transactions to day are done by traders. Bitcoin is, today, like a reserve currency. It’s network is not good to make everyday shopping, but it’s more than enough to save your wealth from your failing currency if you live in Venezuela or in Russia in example.
      So just don’t make the mistake to consider Bitcoin as a method of payment: it’s not. It’s not NOW and it’s not necessary now. People look at it as different things: investment, wealth saving, mostly.
      So that limit is unimportant. And the proof of this is that adopters keep growing despite that limit.

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        “As a value repository, that limit is more than enough.”

        That is a fallacy.

        The “value repository” function requires capacity too.

        The 3tx/s limit, inherently cripples all the potential this system have, because it limits the number of participants who can transact.

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          You are wrong. I have some BTC and I am not touching them, and like me, there’s millions of people out there already that have bought into it.
          And until we are here, and there’s no reason why we shouldn’t, Bitcoin will have value, and until that day, more people will buy it.
          I don’t need to make transactions with it, not now. I bought it as an investment. People from countries in crisis like Venezuela or Brasil or Russia or China are buying it also to escape their countries currency inflation.
          We don’t need more than that number of transactions.
          And the proof of what I say is that the userbase keeps expanding.
          Maybe Bitcoin will never become a network to make real time payments, also because while the userbase expands, transaction time probably will increase, but it will surely hold up as a repository of value, there’s no escape to that, nothing in the world can beat it.
          There are a couple of ways to destroy it, one is to cut off internet, the other I won’t say here and to nobody, but it’s very unlikely to happen anyway.

          see more

          • Avatar

            Currently there are way less than 10M Bitcoin owners….if only a fraction of the potential users (internet connected people) wanted to obtain BTC we would experience a week or not months long backlog rendering the system useless.

            Also, there is no such thing as sitting on an asset indefinitely. I’m not even sure how people imagine this to work?

            Bitcoin is valuable because it’s useful. The store of value function distills from it’s usefulness.

            If you cripple the network, you destroy the store of value aspect on the long term.

            Bitcoin is a payment system, a new form of money. Small blockers go against the very fundamentals of the system.

            The reason small blockers didn’t create their own “store of value scheme” is the fact that it would fail because it would lack network effect and utility.

            Also, you seem to think that Bitcoin exists in a vacuum. While nobody would be incentivized to own bitcoin (more like cripplecoin currently), while there is another system which has a cap on issuance AND utility.

            see more

            • Avatar

              I’ve actually written a book about Bitcoin, so, no, I don’t think it “exists in a vacuum”.
              Still, the network is there, inefficient, and Bitcoin is gaining adopters. You can’t deny it, so what are you talking about?
              I see a Cognitive Dissonance problem here: you have PROOF that Bitcoin is being adopted, with all its network problems, and despite this you WISH Bitcoin sucks because the network is not so efficient.
              My dear, Bitcoin is efficient enough for its actual function: subtract people from central banks shit fiat currency. People buy it as an investment, they don’t need to exchange over and over.
              That problem may arise in the future, but solutions are being designed already, as you probably well know.
              Your opinion is different, ok, but I really see a Cognitive Dissonance problem here.

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                I’m talking about the stone wall front of adoption in the form of the 1MB limit.

                Not sure why can’t you comprehend the implications of a 3tx/s limit.

                You are the one who is delusional if you think that it’s ok.

                “. People buy it as an investment, they don’t need to exchange over and over.”

                But that needs capacity as well (to obtain it, and to use it when needed). Also, only a very few people can afford to sit on an asset infinitely.

                The people who have savings keep them to:

                1.) Have wealth to fall back on

                2.) Spend it time to time on things they need

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                  No you are the delusional one, or just plain idiot, because Bitcoin is not going to hell, it’s growing and despite this you insist that there’s a problem.
                  There’s no problem.
                  People like it like it is, as I wrote (but Cognitive Dissonance doesn’t allow you to see that), they keep adopting it, it’s spreading everywhere, slowly, but it’s happening.
                  Now I say goodbye to you, because you are just a waste of time. Hold onto you fiat currency, don’t buy Bitcoin, I really don’t give a damn:)

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    In my opinion LTC has a lot of potencial for the sole reason that BTC price will grow beyond of the economic power of average Joe so when people realize they can’t afford bitcoin then LTC comes in scene like second safe heaven just like gold and silver do.

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      Doesn’t make sense.
      While Bitcoin will keep growing, like the article explained, other coins will keep losing ground.
      People will invest on the coin that grants more stability and growth.
      If it’s Bitcoin, and it is, people will migrate on it.
      People that have LTC now will slowly sell it and buy BTC. There’s no escape from this process, unless Bitcoin had to suffer some absurd drama.

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      If it grows more and can retain value over time, it won’t be a “gamble” anymore but a safe haven investment, which is also very good. Also, we’ll probably deal mainly in mBTC denomination in the future if the price goes very high.
      Altcoins will probably retain their value over trading or because they are tied to particular services, but not much more.

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    Seriously, no. You write things like ‘global macro-economics’ but completely misinterpret the implications. I don’t even know where to start. This “institution” has jumped the shark. Tell me how you write about the implications of a new gold standard and the macro-economic aspects and don’t at all refer to 20 years of lectures and writing on the subject by the world’s leading thinking/speaker on Ideal Money, John Nash.

    How do you think you are smart when you ignore this? How can you claim to be reasonable when you completely go against the reasoning and rationality he laid forth?

    You have to do your homework sir.

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      That’s not an argument, sir.

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        “The fact that money has a positive feedback between demand and value implies
        that there cannot normally be a stable equilibrium between two moneys. Any
        initial imbalance between them would tend to expand. If one currency was
        slightly more preferred than the other, people would react to this by
        demanding slightly more. This makes the preferred even more preferable than
        before. Any two moneys will interact in this way, thus leaving one to dominate
        the rest.”

        Do you find this statement true in regard to reality? Do we not function in a world today with many and multiple currencies?

        • Avatar

          I find it true. We have many currencies only insofar as we have many countries and each demands taxes in their own fiat currency. Think of all fiat currencies as one currency bc in effect that is what it is: different flavors of the same currency. What are your currency options for paying for something within a country? Usually just one. Bitcoin is the first really new choice that achieved any kind of scale.

          • Avatar

            Ya, of course the point holds true when you start grouping separate currencies as “one”, but like I point out, that’s not observable reality and its irrational as an argument.

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              I’m only grouping fiat currencies as one currency for my argument because they are the exact same thing and serve the same purpose relative to the country they’re in. If the whole world were one county that used, let’s say, the dollar, you wouldn’t see rival fiat because of the phenomena the author describes.

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                Just to be clear, you are saying that if the whole world used one currency you wouldn’t see a rival fiat?

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                  I am saying if there were one world government with one fiat currency that was used for all taxes everywhere, as fiat is, then you would not have competing currencies. You would still have commodities, and WoW money, and others but you would only have one currency that you could go to any merchant and use to buy goods and services.

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                    And you really can’t see how your premise is your conclusion in that statement?

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                      The premise is that there is one fiat currency used worldwide as part of a one-government world. The conclusion is that this currency would “dominate the rest”, as was first stipulated. Perhaps it was too much to say there would not be competing currencies but I do agree that any other currencies would be dominated by the one fiat.

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                        Your premise of one fiat currency used world wide is identical to your conclusion that suggests such a currency would dominate.

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                          Not really, because we’re talking about things happening over time, and the important point is that such a currency would CONTINUE to dominate for the reason stipulated, if ever the situation of one global fiat arose.

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                            You feel that your conclusion, which is a re-statement of your premise, becomes valid when time is introduced to our inquiry of observable reality?

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                              Yes. Think in terms of the currencies being like cars in a race that has no ending and new cars can enter the race at any time. With a premise of One-World Fiat being the only car at the beginning of the race, the conclusion that One World Fiat will always dominate any new entries to the race is not circular reasoning, if that’s what you were implying.

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                          So what? If that currency is better than all the other ones, this could happen.
                          The only “obstacle” would be that you have to trade “stuff” for that currency, thus another widespread good of exchange would be around anyway, like gold in example.
                          But here we are talking in absolute terms, not in real terms.
                          There will always be some other commodities, but Bitcoin is the “perfect” currency for a number of reasons.
                          You probably know this well already, so why are you insisting like this?

        • Avatar

          All those currencies are mandatory for each country. They are a method of control of population and of countries economy. Wasn’t it for countries lines, there would be a single currency. And Bitcoin goes exactly past those lines.

          • Avatar

            The division of the globe into nations, and the currencies that support such divisions, are necessary in order to foster economic diversity and global sustainability.

            Bitcoin goes past those lines, but it does not erase them. And it does not preclude national money systems.

            Thats a fallacy insincere players like Andreas A. passed around.

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              Bitcoin goes past those lines, and does not need to do anything else.
              Also, Bitcoin IS money, and it’s quite ideal, much more ideal than all the other forms we have had up until now.

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    Your style of writing really gives away the fact that you like to sound a lot smarter than you really are. If you do not see the value of smart contracts then you are just an idiot with an opinion… Seriously. Also, if you think bitcoin is going to replace fiat you are wrong there as well. Bitcoin is evolving into more of a commodity than a currency due to the fact that it is very illiquid, I don’t see that changing anytime soon.

    • Avatar

      Regarding BTC being illiquid, is it easier to pay $98.76 in cash or credit card ? Some (self?) education on the part of the seller and customer is needed for sure but wouldn’t it be easier to pay in BTC than via credit card (,especially with the rapidly improving UI) ?

      Other reasons are

      1. Government compliance that can be bypassed like KYC norms.
      2. Paperwork and other hoops required to jump through tie up with a credit card company (or private sector compliance).
      3. No need for credit history for either party.

      BTC has both the advantages of cash and credit card. The only disadvantage it shares with credit cards is the need for electricity and data transmission connectivity.

    • Avatar

      Why should a smart contract have to reside on a blockchain ? It could easily reside on a redundant array of independent disks on servers around the world.

    • Avatar

      This article made me realize that the nakamoto institution is a sham not based on reason and logic.

    • Avatar

      McDolans – I agree with the commodity/illiquidity aspect of BTC. For now. But that can change in a very short time. This “commodity” could surpass the liquidity of the USD, or any other fiat currency quite soon.

    • Avatar

      McDolans: To whom are are you referring? -To the original author? -Or to reader feedback in one of these comments?

CEO Pay is a Shareholders Issue !!!

CEO Pay is a Shareholders Issue !!!

Meeting-room board alberto balatti maltaway

Presidential candidates once campaigned on taxes, government spending, and foreign policy. But more recently, executive compensation has suddenly become a hot topic for winning the public’s approval. In the U.S., Donald Trump has called high CEO pay “a total and complete joke” and “disgraceful,” arguing that CEOs stack boards with their buddies who rubber-stamp excessive pay. Hillary Clinton has lamented that “There’s something wrong when the average American CEO makes 300 times more than the typical American worker.” And in the UK, Theresa May launched her ultimately successful campaign to become Prime Minister with a speech that proposed to curb executive pay.

Politicians typically make two suggestions for pay reform. First, to cap, or at least force the disclosure of, the ratio of CEO pay to median employee pay. Second, to put pay packages to an employee vote, or as May suggests, put workers on boards.

While I agree that a) in many companies, pay is far from perfect and ought to be reformed, and b) that political leaders are right to be concerned about how wealth is distributed in society, there are a number of problems with the proposed approaches.

It is shareholders who bear the costs of paying the CEO, and so it is unclear whether the government should intervene. A common argument is that high pay has indirect costs — in particular, it incents CEOs to take actions that hurt society. However, there is no evidence that the level of pay indeed has these effects.  While it’s the level of pay that captures politicians’ (and the public’s) attention, it’s the structure of pay which matters more for firm value – for example, whether it vests in the short-term or long-term. Vivian Fang, Katharina Lewellen, and I find that, in quarters in which significant equity vests, CEOs cut R&D and capital expenditure in quarters in which significant equity vests. The electorate will be more impressed by a politician who proposes a headline-grabbing law to halve a CEO’s salary than a politician who extends the vesting horizon from three years to seven years, even though the latter will have a far greater impact on long-term value creation. Moreover, even shareholders didn’t take into account the effect of poorly-designed contracts on CEO actions; it’s not clear why the government should regulate pay rather than these actions themselves – surely the most direct route to curtailing them.

A second motivation to lower pay is to reduce inequality. However, attempts to curtail pay through regulation may backfire. Kevin J. Murphy describes how the entire history of executive compensation regulation is filled with unintended consequences. For example, the forced disclosure of perks in 1978 increased perks as CEOs could see what their peers were receiving; the 1984 law on golden parachutes – a response to a single contract at one firm — catalyzed the adoption of golden parachutes by alerting CEOs without them to their existence; and President Bill Clinton’s $1 million salary cap led to CEOs below the cap raising their salaries to above it, and those above merely reclassified salary as bonus.

Thus, while the motivation to reduce inequality is sound, a focus on pay ratios may have similar unintended consequences – and could even increase inequality. A CEO might reduce his company’s pay ratio by firing low-paid workers, converting them to part-time status, or increasing their cash salary but reducing their non-financial compensation (such as on-the-job training and superior working conditions). A cap could also lead boards to focus on the “optics” of pay (e.g. a low ratio) and ignore more important dimensions, such as performance targets being long-term rather than short-term.

So if capping the pay ratio wouldn’t work, what about putting workers on boards, or submitting CEO pay packages to an employee vote? There are reasons to be skeptical here as well. An employment contract is an extremely complex issue and cannot be whittled down to a simple number such as a pay ratio, which the vote might focus on. It covers topics such as the optimal vesting schedule, the appropriate mix of stock vs. options vs. salary vs. pensions vs. bonuses, whether industry performance be filtered out and, if so, how (indexed options? indexed stock? options on indexed stock? Stock with indexed performance vesting thresholds?) Confused? Well, so might employees be, should CEO pay contracts be put up for a vote.

Companies already have natural incentives to treat employees as valued partners to the business – one of my own studies showed that firms with high employee satisfaction beat their peers by 2-3%/yearEven if boards only cared about maximizing shareholder value, they should be consulting with employees and looking for ways to keep them happy. But there’s a big difference between consulting employees and putting them on the board. Firms do market research consulting customers, but don’t put them on the board. Indeed, Gary Gorton and Frank Schmid found that worker representation on German boards is associated with lower profitability and firm value.

Is the message to do nothing? Far from it. It’s to leave the decisions to major shareholders, who have the expertise and incentives to get these decisions right. After all, high CEO pay comes straight out of shareholder returns, and if the contract causes the CEO to take bad decisions – or demoralizes employees and customers – shareholders suffer the consequences. Unlike regulation, which is one-size-fits-all, shareholders can decide what the optimal pay package is for that particular firm.

And things are being done. We’ve indeed seen a substantial increase in shareholder power. 11 countries have passed say-on-pay legislation since 2002; Ricardo Correa and Uger Lel show in a forthcoming paper in theJournal of Financial Economics that such legislation has led to a significant reduction in pay and an increase in pay-performance sensitivity. We have also seen innovation in other dimensions of pay that are more important than ratios – for example, the lengthening of vesting horizons (to encourage the CEO to think for the long term) and paying executives with debt rather than just equity (to dissuade excessive risk-taking).

Moreover, when pay is inefficient, it is often a symptom of a more underlying corporate governance problem, brought on by conflicted boards and dispersed shareholders. Addressing pay via regulation will solve these symptoms; encouraging independent boards and large shareholders will. That will improve not only pay, but other governance issues.

What about equality? Steven N. Kaplan and Joshua Rauh showed that high CEO pay has actually not been a major cause of the rise in inequality – it’s risen much more slowly than pay in law, hedge funds, private equity, and venture capital. If inequality is truly the concern, it may be better addressed by a high rate of income tax and closing loopholes that tax investments at a lower rate. This will address inequality resulting from all occupations (including sports, entertainment, and trust funds); it’s not clear why CEOs should be singled out.

The bottom line is that, to the extent pay is a problem, it should be shareholders, not politicians or employees, who fix it.

Software is eating the world and the Corporate Boards as well

Software is eating the world and the Corporate Boards as well

  • Less than one in five directors fully understand how the industry dynamics of their companies are changing
  • Board members must increase their Digital Quotient to meaningfully engage senior management
  • We present four guiding principles to close the knowledge gap and drive organizational success

software board maltaway

“Software is eating the world,” veteran digital entrepreneur Marc Andreessen quipped a few years back. Today’s boards are getting the message. They have seen how leading digital players are threatening incumbents, and among the directors we work with, roughly one in three say that their business model will be disrupted in the next five years.

In a 2015 McKinsey survey, though, only 17 percent of directors said their boards were sponsoring digital initiatives, and in earlier McKinsey research, just 16 percent said they fully understood how the industry dynamics of their companies were changing.1In our experience, common responses from boards to the shifting environment include hiring a digital director or chief digital officer, making pilgrimages to Silicon Valley, and launching subcommittees on digital.

Valuable as such moves can be, they often are insufficient to bridge the literacy gap facing boards—which has real consequences. There’s a new class of problems, where seasoned directors’ experiences managing and monetizing traditional assets just doesn’t translate. It is a daunting task to keep up with the growth of new competitors (who are as likely to come from adjacent sectors as they are from one’s own industry), rapid-fire funding cycles in Silicon Valley and other technology hotbeds, the fluidity of technology, the digital experiences customers demand, and the rise of nontraditional risks. Many boards are left feeling outmatched and overwhelmed.

To serve as effective thought partners, boards must move beyond an arms-length relationship with digital issues (exhibit). Board members need better knowledge about the technology environment, its potential impact on different parts of the company and its value chain, and thus about how digital can undermine existing strategies and stimulate the need for new ones. They also need faster, more effective ways to engage the organization and operate as a governing body and, critically, new means of attracting digital talent. Indeed, some CEOs and board members we know argue that the far-reaching nature of today’s digital disruptions—which can necessitate long-term business-model changes with large, short-term costs—means boards must view themselves as the ultimate catalysts for digital transformation efforts. Otherwise, CEOs may be tempted to pass on to their successors the tackling of digital challenges.

At the very least, top-management teams need their boards to serve as strong digital sparring partners when they consider difficult questions such as investments in experimental initiatives that could reshape markets, or even whether the company is in the right business for the digital age. Here are four guiding principles for boosting the odds that boards will provide the digital engagement companies so badly need.

Close the insights gap

Few boards have enough combined digital expertise to have meaningful digital conversations with senior management. Only 116 directors on the boards of the Global 300 are “digital directors.”2The solution isn’t simply to recruit one or two directors from an influential technology company. For one thing, there aren’t enough of them to go around. More to the point, digital is so far-reaching—think e-commerce, mobile, security, the Internet of Things (IoT), and big data—that the knowledge and experience needed goes beyond one or two tech-savvy people.

To address these challenges, the nominating committee of one board created a matrix of the customer, market, and digital skills it felt it required to guide its key businesses over the next five to ten years. Doing so prompted the committee to look beyond well-fished pools of talent like Internet pure plays and known digital leaders and instead to consider adjacent sectors and businesses that had undergone significant digital transformation. The identification of strong new board members was one result. What’s more, the process of reflecting quite specifically on the digital skills that were most relevant to individual business lines helped the board engage at a deeper level, raising its collective understanding of technology and generating more productive conversations with management.

Special subcommittees and advisory councils can also narrow the insights gap. Today, only about 5 percent of corporate boards in North America have technology committees.3While that number is likely to grow considerably, tomorrow’s committees may well look different from today’s. For example, some boards have begun convening several subject-specific advisory councils on technology topics. At one consumer-products company, the board created what it called an advisory “ecosystem”—with councils focused on technology, finance, and customer categories—that has provided powerful, contextual learning for members. After brainstorming how IoT-connected systems could reshape the consumer experience, for example, the technology council landed on a radical notion: What would happen if the company organized the business around spaces such as the home, the car, and the office rather than product lines? While the board had no set plans to impose the structure on management, simply exploring the possibilities with board members opened up fresh avenues of discussion with the executive team on new business partners, as well as new apps and operating systems.

Understand how digital can upend business models

Many boards are ill equipped to fully understand the sources of upheaval pressuring their business models. Consider, for example, the design of satisfying, human-centered experiences: it’s fundamental to digital competition. Yet few board members spend enough time exploring how their companies are reshaping and monitoring those experiences, or reviewing management plans to improve them.

One way to find out is by kicking the tires. At one global consumer company, for instance, some board members put beta versions of new digital products and apps through the paces to gauge whether their features are compelling and the interface is smooth. Those board members gain hands-on insights and management gets well-informed feedback.

Board members also should push executives to explore and describe the organization’s stock of digital assets—data that are accumulating across businesses, the level of data-analytics prowess, and how managers are using both to glean insights. Most companies underappreciate the potential of pattern analysis, machine learning, and sophisticated analytics that can churn through terabytes of text, sound, images, and other data to produce well-targeted insights on everything from disease diagnoses to how prolonged drought conditions might affect an investment portfolio. Companies that best capture, process, and apply those insights stand to gain an edge.4

Digitization, meanwhile, is changing business models by removing cost and waste and by stepping up the organization’s pace. Cheap, scalable automation and new, lightweight IT architectures provide digital attackers the means to strip overhead expenses and operate at a fraction of incumbents’ costs. Boards must challenge executives to respond since traditional players’ high costs and low levels of agility encourage players from adjacent sectors to set up online marketplaces, disrupt established distributor networks, and sell directly to their customers.

The board of one electronic-parts manufacturer, for example, realized it was at risk of losing a significant share of the company’s customer base to a fast-growing, online industrial distributor unless it moved quickly to beef up its own direct e-commerce sales capabilities. The competitor was offering similar parts at lower prices, as well as offering more customer-friendly features such as instant online quotes and automated purchasing and inventory-management systems. That prompted the board to push the CEO, chief information officer, and others for metrics and reports that went beyond traditional peer comparisons. By looking closely at the cycle times and operating margins of digital leaders, boards can determine whether executives are aiming high enough and, if not, they can push back—for example, by not accepting run-of-the-mill cost cuts of 10 percent when their companies could capture new value of 50 percent or even more by meeting attackers head-on.

Engage more frequently and deeply on strategy and risk

Today’s strategic discussions with executives require a different rhythm, one that matches the quickening pace of disruption. A major cyberattack can erase a third of a company’s share value in a day, and a digital foe can pull the rug out from a thriving product category in six months. In this environment, meeting once or twice a year to review strategy no longer works. Regular check-ins are necessary to help senior company leaders negotiate the tension between short-term pressures from the financial markets and the longer-term imperative to launch sometimes costly digital initiatives.

One company fashioned what the board called a “tight–loose” structure, blending its normal sequence of formal meetings and management reporting with new, informal methods. Some directors now work in a tag team with a particular function and business leader, with whom they have a natural affinity in business background and interests. These relationships have helped directors to better understand events at ground level and to see how the culture and operating style is evolving with the company’s digital strategy. Over time, such understanding has also generated greater board-level visibility into areas where digitization could yield new strategic value, while putting the board on more solid footing in communicating new direction and initiatives to shareholders and analysts.

Boardroom dialogue shifts considerably when corporate boards start asking management questions such as, “What are the handful of signals that tell you that an innovation is catching on with customers? And how will you ramp up customer adoption and decrease the cost of customer acquisition when that happens?” By encouraging such discussions, boards clarify their expectations about what kind of cultural change is required and reduce the hand-wringing that often stalls digital transformation in established businesses. Such dialogue also can instill a sense of urgency as managers seek to answer tough questions through rapid idea iteration and input gathering from customers, which board members with diverse experiences can help interpret. At a consumer-products company, one director engages with sales and marketing executives monthly to check their progress against detailed key performance indicators (KPIs) that measure how fast a key customer’s segments are shifting to the company’s digital channels.

Risk discussions need rethinking, too. Disturbingly, in an era of continual cyberthreats, only about one in five directors in our experience feels confident that the necessary controls, metrics, and reporting are in place to address hacker incursions. One board subcommittee conducted an intensive daylong session with the company’s IT leadership to define an acceptable risk appetite for the organization. Using survey data, it discovered that anything beyond two minutes of customer downtime each month would significantly erode customer confidence. The board charged IT with developing better resilience and response strategies to stay within the threshold.

Robust tech tools, meanwhile, can help some directors get a better read on how to confront mounting marketplace risks arising from digital players. At one global bank, the board uses a digital dashboard that provides ready access to ten key operational KPIs, showing, for example, the percentage of the bank’s daily service transactions that are performed without human interaction. The dashboard provides important markers (beyond standard financial metrics) for directors to measure progress toward the digitized delivery of banking services often provided by emerging competitors.

Fine-tune the onboarding and fit of digital directors

In their push to enrich their ranks with tech talent, boards inevitably find that many digital directors are younger, have grown up in quite different organizational cultures, and may not have had much or even any board experience prior to their appointment. To ensure a good fit, searches must go beyond background and skills to encompass candidates’ temperament and ability to commit time. The latter is critical when board members are increasingly devoting two to three days a month of work, plus extra hours for conference calls, retreats, and other check-ins.

We have seen instances where companies choose as a board member a successful CEO from a digitally native company who thrives on chaos and plays the role of provocateur. However, in a board meeting with ten other senior leaders, a strong suit in edginess rarely pays off. New digital directors have to be able to influence change within the culture of the board and play well with others. There are alternatives, though. If a promising candidate can’t commit to a directorship or doesn’t meet all the board’s requirements, an advisory role can still provide the board with valuable access to specialized expertise.

Induction and onboarding processes need to bridge the digital–traditional gap, as well. One board was thrilled to lock in the appointment of a rising tech star who held senior-leadership positions at a number of prominent digital companies. The board created a special onboarding program for her that was slightly longer than the typical onboarding process and delved into some topics in greater depth, such as the legal and fiduciary requirements that come with serving on a public board. Now that the induction period is over, she and the board chairman still meet monthly so she can share her perspectives and knowledge as a voice of the customer, and he can offer his institutional insights. The welcoming, collaborative approach has made it possible for the new director to be an effective board participant from the start.

Organizations also need to think ahead about how the digital competencies of new and existing directors will fit emerging strategies. One company determined that amassing substantial big data assets would be critical to its strategy and acquired a Silicon Valley big data business. The company’s directors now attend sessions with the acquired company’s management team, allowing them to get a grounding in big data and analytics. These insights have proven valuable in board discussions on digital investments and acquisition targets.

Board members need to increase their digital quotient if they hope to govern in a way that gets executives thinking beyond today’s boundaries. Following the approaches we have outlined will no doubt put some new burdens on already stretched directors. However, the speed of digital progress confronting companies shows no sign of slowing, and the best boards will learn to engage executives more frequently, knowledgeably, and persuasively on the issues that matter most.

Better Board meeting for a NED

Better Board meeting for a NED

I sit on a board as a nonexecutive director and often feel uncomfortable about the amount of time available to raise questions and debate issues. In addition, I recently worked with a different board on how to add more value to the business. In this role I found myself counseling one of the directors to ask fewer questions and make fewer comments.

How many comments or questions should a board member raise in a board meeting? Before I became a director, I asked board chairs what qualities they most appreciate in a nonexecutive director. One said, “Someone who only makes one comment at each meeting. But it is a really important contribution.” Is this right? Should a nonexecutive expect to make one contribution per meeting, or one contribution per agenda item, or what?


The advice from the governance gurus is that board members should challenge executives whenever they are concerned, and should continue to challenge until they are satisfied. For example, the Guidance on Board Effectiveness issued by the UK’s Financial Reporting Council states, “An effective board should not necessarily be a comfortable place. Challenge, as well as teamwork, is an essential feature.”

But you can have too much of a good thing. Let’s look at how a typical meeting plays out.

A board meeting usually lasts about four hours, with 10 or so directors attending. Let’s assume that 30 of the 240 minutes are lost to warm-up discussions, breaks, and wrap-up. Let’s further suppose that presentations take up half of the remaining time. That leaves 105 minutes for discussion, challenges, and significant questions.

If each significant question or comment takes an average of five minutes of discussion (some may take 15 minutes, others only two), there is time to discuss 20 issues. This may seem to be quite a lot, but it is only two questions or comments per director. So the chair who advised me to go for one good comment at each meeting was not far from the mark.

Of course, if the meeting lasts the whole day or if the board has only six directors, then three or four comments per person are possible. If presentations take up three-quarters of the time or if comments result in 10-minute discussions, then there is time for each director to initiate only one discussion.

A board meeting usually lasts about four hours, with 10 or so directors attending. Let’s assume that 30 of the 240 minutes are lost to warm-up discussions, breaks, and wrap-up. Let’s further suppose that presentations take up half of the remaining time. That leaves 105 minutes for discussion, challenges, and significant questions.

If each significant question or comment takes an average of five minutes of discussion (some may take 15 minutes, others only two), there is time to discuss 20 issues. This may seem to be quite a lot, but it is only two questions or comments per director. So the chair who advised me to go for one good comment at each meeting was not far from the mark.

Of course, if the meeting lasts the whole day or if the board has only six directors, then three or four comments per person are possible. If presentations take up three-quarters of the time or if comments result in 10-minute discussions, then there is time for each director to initiate only one discussion.

What does this imply for board discussions? Three thoughts:

  • Directors need to be much more disciplined in identifying the one or two challenges or comments that they want to make at each board meeting, and more thoughtful about prolonging discussions initiated by other directors
  • Board papers should be sent out at least four working days in advance to give directors time to read, digest, and prioritize
  • If a director has more than two discussions in mind, the complete list should be submitted to the chair in advance so that they can decide which to address at the meeting and which to address in other ways

Board discussion time is one of the scarcest commodities a company has — often less than 10 hours per year. While making sure the time is used wisely is ultimately the chair’s responsibility, every director should maximize the value that is created from this resource.

Is TALENT management privileging “niceness” and non-confrontation

Every CEO claims to struggle with the challenge of getting the right “talent,” but what does this really mean? Their real concern is:  Do I have the people who will understand my agenda and be able to really change how work gets done, at pace? This is the wrong question.

Individuals can make a difference in an organization, but a social system — particularly in large organizations — is always stronger.

Fundamentally, organizations domesticate people—they condition people to work in certain ways, and they inadvertently perpetuate the status quo. People get tagged as “talented” when they fit in (or pretend to). This ends up exacerbating conformity and fear, and perpetuating the very problems that the CEO is hoping to solve.

Real change requires understanding three dilemmas about “talent management” systems:

  1. They are tribal.
  2. They reward compliance, not creativity.
  3. Most of them ignore the importance of context.


They are tribal.

the size of modern organizations, people are still very tribal — they maintain and seek out small groups of “like minded” people with whom they find comfort, and it’s through these tribes they define their work. Talent thus looks a lot more like currying favor than any deeply analytic meritocracy, even when it comes to senior team ascension. Too often, CEOs say they’re looking to promote talent but end up promoting familiarity.

Smart senior leaders understand this, and they tend to fight and work to get the exposure and familiarity to executives from their “tribes.”  Until senior leaders understand their complicity in this problem, and how the tribalism of their talent conversations contributes to it, their talent systems will continue to cripple them.

They reward compliance, not creativity.

While senior leaders promote and protect their “tribes,” once you get two steps outside of the C-suite, the problem becomes worse.  Talent identification becomes about minions. Leaders often promote and protect the people who make them look good; too often, there are also the people who don’t challenge leaders. “Minions,” if you have not seen the movie, are cute and dependable, but they’re not about to create your future.  I have worked with talent in dozens of organizations on multiple continents, and they’re typically bright, confident, articulate people.  I would propose, however, that they’re not vastly distinct from the masses that work around them.

 Most of them ignore the importance of context.

Some of the most storied “talent factories” in the world — companies like Exxon, General Electric, Goldman Sachs — say that they focus on the best people, but what they really mean is that they focus on people who thrive in their context, and in their social system.  All of these companies have a distinct “type” that they look for –which brings its own risks.  Becoming a talent factory isn’t about hiring or promoting the best people, it is about understanding the DNA of your social system, and building from that baseline.

Understanding your social system and the people who thrive in it is exponentially more valuable, particularly if you want to drive high performance. But let’s not confuse this with “talent.”

To start, spend your next “Talent Review” writing down the descriptors used to label individuals. Here’s an example from an executive team of a global company that was trying to drive stronger execution:

  • “I’ve heard he is not very popular”
  • “She has a very strong personality, and creates too much tension”
  • “How is his attitude these days? In the past, he was pretty negative and pushy?”
  • “He seems like a resister”
  • “He has a nice personality”
  • “____ was very impressed by him”

They realized that the talent that they needed were pushy, demanding and delivery-focused, that their system that had a bias for privileging “niceness” and non-confrontation. The organization, even at the senior-most levels, was inadvertently reinforcing the organization’s status quo.

This happens everywhere.  Organizations cultivate in their talent systems toxic ways of policing the status quo, and then they wonder why they can’t change.  Smart organizations, and truly aspirational CEOs, need to own this reality and spend their resources and energies differently.  Broadly, the talent lenses and approaches we use, drive us toward the wrong, backward looking, conclusions.

Before investing tens of millions of dollars in assessing and looking at individuals, organizations need to pause and understand the limitations of talent management, and build the approaches that help people understand and shape context for different levels of performance.

CEO’s Guide to Navigating Brexit

CEO’s Guide to Navigating Brexit

maltaway brexit

MALTAway advise you for Corporate and Assets Governance from a unique perspective offered in Malta inside EU and Commonwealth as well

The Leave campaign’s victory, with a margin of 3.8 percentage points, has likely ushered in a protracted phase of uncertainty for the UK, EU, and global economies. A systemic shock cutting across industries and borders, Brexit poses significant strategic challenges for business leaders as they navigate the fallout. Judging by our interactions with CEOs around the world to date, some of their burning questions are:

  • What are the elements of uncertainty created by Brexit?
  • How can leaders develop a specific view of the industry- and firm-level implications?
  • What are the first-response imperatives for corporate leaders?
  • What structural changes to the business environment are triggered by Brexit, and how do we adapt to them?

This is how we recommend CEOs approach these difficult questions:

Identify the sources of uncertainty

The uncertainties that come with Brexit can be ordered into four categories. While the overall directional impact is generally clear, it’s the magnitude, duration, and differential that are more critical to determine.

Political process. There are significant drivers of uncertainty domestically and abroad. At home, the UK faces dissolution pressures if Scotland seeks to salvage its EU membership, while the EU has every incentive to make Brexit a painful experience to deter other defectors, making the outcome of negotiations difficult to predict. These unknowns have the potential to influence the evolution of the financial, institutional, and real economies.

Financial economy. The directional impact on key prices was widely predicted — and strong corrections to the pound (-11% verses the dollar) and to equities (-13.6% FTSE250) were indeed recorded in the first two sessions after the vote. The Bank of England will likely lower policy rates, or even adopt negative interest rates. What drives uncertainty are the magnitude and duration of these corrections; as prices guide resource allocation, their volatility and uncertainty interferes with planning and investment decisions.

Trade regime. The reconstruction challenge for the UK’s trade regime is clear. The EU represents 47% of UK exports, facilitates an additional 13% through non-EU trade deals, and currently negotiates with countries worth an additional 21% of UK exports. While the UK would need only eight bilateral trade agreements to cover 80% of its current exports, there is a long tail of 18 additional countries worth more than $1 billion in UK exports and an additional 132 countries to cover all existing exports. Both internal and external factors drive uncertainty about the duration and outcome of the reconstruction challenge — for example, the UK’s ability to negotiate agreements, having outsourced this task to Brussels for 40 years, or trade partners’ willingness to engage with Britain in a constructively and timely manner.

Real economy. The transmission mechanism to the real economy is primarily via delayed or canceled investment decisions or the anticipatory redeployment of employment or production assets. Here, too, the directional impact has been analyzed credibly, with estimates ranging from 3%–9% of GDP loss. Here it is the speed, depth, and duration of these effects — on demand, consumption, and employment across industries — that drive uncertainty.

Determine the specific industry- and firm-level implications

Industries and individual companies vary widely in terms of the impact on the uncertainties outlined above, due to their differential dependence on UK and EU production, demand and trade, global trade, regulation, and integration into EU structures (e.g., R&D subsidies, EU norms and standards, etc.). Therefore each company needs to carry out (or take to the next level) its own specific impact analysis.

It is impossible to forecast precise impact with confidence, given that exit terms, timing, and knock-on implications are all uncertain. A scenario-based approach to planning, modeling, and preparing for multiple outcomes is therefore recommended. This can be done in four steps:

  1. Attach a “value” to each source of uncertainty — strong vs. light currency depreciation, high vs. low future EU market access — along with your perception of likelihood (plausible, likely, unlikely) to build an “uncertainty map.”
  2. From the map, combine various values to develop multiple scenarios. The scenarios should be made internally consistent by avoiding contradictions (e.g., by combining political uncertainty with lower volatility).
  3. Consider the industry- and firm-level sensitivities to these scenarios. The key questions are about the impact on your firm’s business model, operating model, EU institutional arrangements and financial structures, and performance.
  4. Use the scenarios and sensitivities that you’ve identified to test the resilience of your current plans, highlight risks, formulate response options, build capabilities, and reflect the results in strategies and initiatives and in risk management.

For example, a U.S. industrial conglomerate with a strong market presence in the UK and a spatially fragmented value chain may find its strategic sensitivity is highest to the UK’s potential failure to replicate the EU’s global trade access. Expecting growing protectionism, a plausible strategic response could be aggressively defragmenting its value chain and concentrating production in the UK (so as to counteract the rising cost of trade). In some cases companies will feel confident enough to bet on particular scenarios; in others they may wish to diversify measures to become scenario-agnostic or to create options and boost agility to be able to move decisively when matters become clearer.

Turn thoughts into action

In addition to initiating the strategic impact assessment outlined above, it is important that business leaders translate their insights into action. Immediate actions include:

  • Inform employees and stakeholders of the industry- and company-specific facts (e.g., liquidity, stability of existing trading arrangements, and so on). Create confidence by showing that issues are being carefully considered, and define the process.
  • Confirm that the impact will take time to play out. Emphasize that little is likely to change in the short term in legal and trading arrangements, although markets may be jittery until negotiation outcomes are clear.
  • Continually update the industry and company assessment as events unfold. Run scenarios. Design contingency plans and reflect any insights in your strategies for growth, geographical footprint, global supply chain, and risk management.
  • Don’t let a communication vacuum open up. Keep talking about progress against goals.

Adapt to the new post-Brexit business environment

Once a response to Brexit has been initiated, forward-looking business leaders will ask themselves, What’s the bigger picture? What structural changes does Brexit signal? How has the business environment changed and how must business practices be adapted for short-term survival and long-term advantage?

Brexit appears to be consistent with structural changes to the business environment that were already under way. While business has already become more sensitive to geopolitics, the politics of discontent and populism may prove to have an even bigger impact. Brexit highlights the plausibility of similar uncertainties unfolding in the U.S. and in other countries.

This calls for two conclusions as business leaders strive to make sense of the new environment. The first is a renewed emphasis on strategy under uncertainty, with a focus on flexibility, adaptiveness, and resilience. The second is that many businesses now need enhanced capabilities to effectively capture and translate the macroeconomic and political developments for industry- and firm-level implications. Conditions will likely be very different for different parts of any business, especially for large and global companies, making it even more imperative to select the right approach to strategy and execution for each segment.

Radical Board of Directors for Mad Time

Radical Board of Directors for Mad Time, re-balance the strategy-governance scaleradical board director

MALTAway is your way to Corporate & Assets Governance, World Class, MALTA, Worldwide

What’s a typical independent director’s worst nightmare? My guess is that while a poor balance sheet might cause restless sleep, it’s the thought of an incorrectly reported balance sheet that brings on night terrors. It’s not surprising. Remember the public shaming – and heavy sentences — heaped on Enron and Worldcom for their accounting (and more importantly, ethical) failures?

In the years that followed these and other corporate lapses, our networks of C-level executives report that many boards have become far more focused on minimizing risk than on seizing opportunity.  This is not surprising:  Growing regulation, increased investor focus on governance issues, and scary new categories of corporate risk (e.g. cybersecurity) create two notable challenges for the modern board.  First, directors face a real challenge in making sure that protection and alignment of key governance and risk management issues doesn’t crowd out equally important dialogue around strategy and operations.  And second, they need to ensure that – even with respect to strategy and operations – board scrutiny doesn’t result in an over-emphasis on conforming to benchmarks and industry norms.

I’m not against benchmarking and norming. In fact, since our business is a global leader in assembling rich data sets that allow companies to benchmark almost every imaginable driver of corporate performance, we’d argue that there is too little analytic rigor in most areas of corporate management – particularly those which involve teams and people. Most boards would benefit from richer data sets that compare their company to others.  But in an era where governance and risk agendas are driving board conservatism, there is real risk that these data sets will be used to drive conformity, not evaluate strategy.

The best companies do things differently by using data and benchmarks not to aspire to the median, but to ensure radical deviations that are consistent with core strategies.

Let’s take pay. While benchmarks are useful inputs for compensation decisions, they shouldn’t be a straitjacket. Applying them broadly without reference to your talent strategy could make it impossible to source or retain the people you need to achieve goals. If your strategy relies heavily on aggressive M&A, for example, do you really want a CFO who doesn’t command a salary higher than the norm?  Or if your success relies heavily on IP protection or patents, it may make sense for your general counsel’s pay to be the highest in the C-suite.

And what about tax rates? If you have a stated strategy of growing in the government sector, or a vocal commitment to social and civil society vital to your brand, it may make strategic sense to have an effective tax rate significantly higher than the norm. Letting your ETR slip to the benchmark could risk your customers’ trust. But a relatively unknown, unbranded intellectual property company – with far less to lose – might be much more aggressive in minimizing taxes.

Benchmarking and norming won’t always lead to the right decision. Company strategy – and what makes the organization distinctive – has to come first.

Now is the time for directors and executive committees alike to re-balance the strategy-governance scale. They need to ensure that the right decisions are being made and that every director can defend those decisions when investors come calling with strategies of their own.

The understandable growth of risk management functions and their ascendancy in influencing strategy is important, but only part of the story here. Something more basic is at play, highlighted by Larry Fink’s annual Blackrock shareholder letter, where he called for better partnership between corporate leaders and their boards in setting a viable long-term course together. While this may seem like something that should be table stakes for any competent C-Suite and board, anyone who has sat in on a “strategic planning session” knows how often these sessions get derailed into short-term, operational discussions focused on the current “fire.”

I think the reason this happens is a misunderstanding over what constitutes the biggest threat to a company’s future. Obviously, no one wants to miss a short-term forecast or sales goal. More costly, however, is diverting resources to overcorrect near-term headaches at the expense of the time and energy needed to plan for the long term. In fact, investors are far more likely to assert themselves when they sense a lack of a coherent long-term strategy rather than a single missed sales forecast.

To keep their leaders centered on this reality, the strategy team at a prominent software and technology firm does the legwork upfront to educate its executives on the nature of long-term, strategic planning. By developing a protocol that allowed executives to evaluate their own proposed agenda items against a checklist of strategic goals (one-year-plus time horizon, relevance to major strategic initiatives, cross-functional impact, etc.) the firm measured a 75% increase in time spent on relevant subject matter during long-term, strategic planning meetings. Our research found companies with effective long-term planning processes are three times more likely to perform in the top 20% of their industry.

While boards have an opportunity to partner with executive teams to position for the long-term success of a company, unfortunately data show that directors are often more persistently focused on short-term issues than even the most assertive investors. Forty-six percent of executives and directors surveyed by the think-tank Focusing Capital on the Long Term noted that the board was a major source of demands for short-term results, more than 2.5 times those who mentioned investors in the same manner.

For an organization’s governance model and its business strategy to be in lock step, CXOs need to help directors understand and meaningfully engage in setting the company’s strategic direction. This means the C-suite must be able to develop productive relationships with board members—even have the skills to ‘coach’ directors on how to manage conversations with shareholders. Directors in turn need to monitor the company’s operational heartbeat closely so they can make informed decisions about when to play it safe and when to dare to deviate.

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