Nothing empowers a skilled worker like the option to walk out and take a better offer


The obsolescence I have in mind was anticipated by Silicon Valley’s favourite economist, Ronald Coase. Back in 1937, a young Coase wrote “The Nature of the Firm”, calling attention to something strange:

while corporations competed within a competitive marketplace, corporations themselves were not markets.

They were hierarchies. If you work for a company, you don’t allocate your time to the highest bidder. You do what your boss tells you; she does what her boss tells her. A few companies dabble with internal marketplaces, but mostly they are islands of command-and-control surrounded by a sea of market transactions.
Coase pointed out that the border between hierarchy and market is a choice. Corporations could extend their hierarchy by merging with a supplier. Or they could rely more on markets, spinning off subsidiaries or outsourcing functions from cleaning and catering to IT and human resources. Different companies make different choices and the ones that choose efficiently will survive.
But the choice between hierarchy and market also depends on the technology deployed to co-ordinate activity. Different technologies favour different ways of doing things.
GigBot will talk to your alarm clock; $10 or $10,000, just name the price that would tempt you from your lie-in.
Nothing empowers a worker like the ability to walk out and take a better offer; in principle the gig economy offers exactly that. Indeed both scenarios may come true simultaneously, with one type of gig for the lucky ones, and another for ordinary folk.
If we are to take the best advantage of a true gig economy, we need to prepare for more radical change

MALTAway for your GIG Governance

by: Tim Harford – thanks for the relevance of this content

Are we misunderstanding the endgame of the annoyingly named “gig economy”? At the behest of the UK government, Matthew Taylor’s review of modern working practices was published this week. The title could easily have graced a report from the 1930s, and the review is in many ways a conservative document, seeking to be “up to date” while preserving “enduring principles of fairness”. Mr Taylor, chief executive of the RSA and a former policy adviser to the Blair government, wants to tweak the system. One proposal is to sharpen up the status of people who are neither employees nor freelancers, calling them “dependent contractors” and giving them some employment rights. In the US, economists such as Alan Krueger — formerly the chairman of Barack Obama’s Council of Economic Advisers — proposed similar reforms. There is nothing wrong with this; incremental reform is often wise. Quaint ideas such as the employer-employee relationship are not yet obsolete. Yet they might yet become so, at least in some industries. If they do, I am not sure we will be ready. The obsolescence I have in mind was anticipated by Silicon Valley’s favourite economist, Ronald Coase. Back in 1937, a young Coase wrote “The Nature of the Firm”, calling attention to something strange: while corporations competed within a competitive marketplace, corporations themselves were not markets. They were hierarchies. If you work for a company, you don’t allocate your time to the highest bidder. You do what your boss tells you; she does what her boss tells her. A few companies dabble with internal marketplaces, but mostly they are islands of command-and-control surrounded by a sea of market transactions. Coase pointed out that the border between hierarchy and market is a choice. Corporations could extend their hierarchy by merging with a supplier. Or they could rely more on markets, spinning off subsidiaries or outsourcing functions from cleaning and catering to IT and human resources. Different companies make different choices and the ones that choose efficiently will survive. So what is the efficient choice? That depends on the nature of the job to be done. A carmaker may well want to have the engine manufacturer in-house, but will happily buy bulbs for the headlights from the cheapest bidder. Related article UK tries to tackle ‘gig economy’ conundrum New report assesses how to protect workers without stifling technological change But the choice between hierarchy and market also depends on the technology deployed to co-ordinate activity. Different technologies favour different ways of doing things. The bar code made life easier for big-box retailers. While eBay favoured the little guy, connecting buyers and sellers of niche products. Smartphones have allowed companies such as Uber and Deliveroo to take critical middle-management functions — motivating staff, evaluating and rewarding performance, scheduling and co-ordination — and replace them with an algorithm. But gig workers could install their own software, telling it where they like to work, what they like to do, when they’re available, unavailable, or open to persuasion. My app — call it GigBot — could talk to the Lyft app and the TaskRabbit app and the Deliveroo app, and interrupt me only when an offer deserves attention. Not every job can be broken down into microtasks that can be rented out by the minute, but we might be surprised at how many can. Remember that old line from supermodel Linda Evangelista, “We don’t wake up for less than $10,000 a day”? GigBot will talk to your alarm clock; $10 or $10,000, just name the price that would tempt you from your lie-in. It is easy to imagine a dystopian scenario in which a few companies hook us in like slot-machine addicts, grind us in circles like cogs, and pimp us around for pennies. But it is not too hard to imagine a world in which skilled workers wrest back control using open-source software agents, join electronic guilds or unions and enjoy a serious income alongside unprecedented autonomy. Where now for the UK’s gig economy? Play video Nothing empowers a worker like the ability to walk out and take a better offer; in principle the gig economy offers exactly that. Indeed both scenarios may come true simultaneously, with one type of gig for the lucky ones, and another for ordinary folk. If we are to take the best advantage of a true gig economy, we need to prepare for more radical change. Governments have been content to use corporations as delivery mechanisms for benefits that include pensions, parental leave, sick leave, holidays and sometimes healthcare — not to mention the minimum wage. This isn’t unreasonable; even a well-paid freelancer may be unable to buy decent private insurance or healthcare. Many of us struggle to save for a pension. But if freelancers really do start to dominate economic activity — if — the idea of providing benefits mostly through employers will break down. We will need governments to provide essential benefits, perhaps minimalist, perhaps generous, to all citizens. Above that safety net, we need portable benefits — mentioned warmly but briefly by Mr Taylor — so that even a 10-minute gig helps to fill a pension pot or earn time towards a holiday. Traditional corporate jobs have been socially useful, but if you push any model too far from reality, it will snap.

The Real Cost of an MBA and US ranking

The Real Cost of an MBA

To figure out the true price of a business degree, you have to factor in the opportunity cost.


After working for eight years in accounting and finance, most of it at PwC, Tully Brown knew it was time to deepen his business skills. So he did what a lot of young professionals in his shoes do: He went for an MBA.

For Brown, who enrolled at Emory University’s Goizueta Business School in 2015, the biggest cost wasn’t tuition, fees, and housing. It was the six-figure job he gave up to attend school full-time. “Being a numbers guy, I actually modeled it out,” he says. “I looked at what would happen, because there was the possibility I’d end up leaving and making the same that I did before going in. I decided it was worth the risk.”

The typical incoming MBA student at Emory earns $67,000 the year prior to enrollment. Multiply that by the length of a two-year MBA program, then add to it Emory’s cost of attendance, and you get $296,536. Using the forgone salaries reported by thousands of recent graduates as part of Bloomberg Businessweek’s annual ranking of the top full-time MBA programs, we were able to create a similar “real” cost figure for several of the schools on our list. Stanford Graduate School of Business had the highest full-freight cost, more than $434,000, because those in its MBA program earned more when they enrolled.

Each year, we rank business schools by polling students on topics such as academics, career services, and campus climate. We also ask employers about the skills they seek in MBA hires and which schools best prepare their graduates. Starting in 2015, we began surveying alumni, asking them how well their degrees had delivered on the promise of a fulfilling and profitable career.

For the second year in a row, Harvard Business School came out on top—and this time by a wider margin. HBS was rated No. 1 by the more than 1,000 corporate recruiters we surveyed and No. 3 among alumni. Competition for the No. 2 spot overall was particularly close this year, with Stanford edging out Duke University’s Fuqua School of Business by less than one index point.

Unlike undergraduate students who are often giving up low-paying jobs to return to school, MBA students are typically in their late 20s or early 30s and leaving well-paid positions. That makes calculating the opportunity cost even more significant for MBA seekers. Because Bloomberg Businessweek surveys B-school alumni on the salaries they drew before enrolling in a full-time MBA program, we were able to calculate the true cost of the degree. Our formula isn’t perfect. It includes the loss of two years’ worth of wages, even though some students don’t go a full 24 months without working, and some have well-paid internships during the summer break. In addition, we weren’t able to factor in financial aid or scholarships.

Schools’ cost-of-attendance breakdowns don’t reflect the income students give up during their time in school. B-school officials say MBA applicants should definitely add that cost to tuition and other expenses when calculating a projected return on their investment. It’s “a large number, there is no doubt about it,” says Douglas Skinner, interim dean of the University of Chicago Booth School of Business, noting that some students may need to take out loans to also cover the lost wages. Still, Skinner stressed that prospective students need to understand that the knowledge obtained through the degree will help boost their earning power not just immediately after graduation but throughout their careers.

That’s why Brown says he didn’t mind leaving a well-paying job at a community bank in Atlanta to enroll at Emory. “It’s hard to know in 10 years whether I get something I want because I have an MBA,” says the 33-year-old who took out $53,000 in student loans, partly so he wouldn’t have to miss out on student networking opportunities like international trips. “But I decided I wouldn’t want to wonder in 10 years if not having the MBA was holding me back—because then it might be too late to do it.”

Although Brown chose the one-year, or fast-track, MBA at Emory, he still went without income for about 15 months. As he’d hoped, he landed a job at an investment bank, where he’s earning more than he did before.

Data from our surveys show that the typical graduate at the schools we ranked earned a positive return on her investment. Alums of the 87 schools ranked this year earned a median $50,000 prior to starting an MBA program and saw that salary rise 80 percent upon graduation. And six to eight years on, the median salary hovered around $145,000.

Students who enroll in MBA programs are usually further along in their lives and therefore more likely to be married. That can make the degree even more pricey. Spouses who quit their jobs and move to such places as Hanover, N.H. (home of Dartmouth College) or New Haven (Yale) to accompany an MBA student may face poor employment prospects.

That was the case for James Mansour, a recent graduate of Texas A&M University’s Mays Business School, and his wife. They relocated from the Washington, D.C., area, where he worked as a consultant and she as a dental hygienist, pulling in a combined $160,000 a year. After the move the couple learned that they were expecting a child and that she’d have to get relicensed to work in Texas. Fortunately, the couple was able to get by on savings by cutting out vacations, dining out, and shopping. Mansour, who graduated in December, now works at Delta Air Lines in Atlanta, and has a higher salary than he did before he went for his degree.

The typical 2016 MBA graduate from Dartmouth College’s Tuck School of Business earned $80,000 before enrollment. So if a student were to forgo that income for two years and pay the full cost of attendance, his or her real cost would amount to $360,100. Matthew Slaughter, dean of Tuck, says that while most graduates receive a large earnings boost after graduating, that isn’t always the case in the short term. “For a lot of programs like ours, there are a lot of people career-switching,” he says. “So that might entail giving up industry- or company-specific capital to really build capital in a totally different area that’s more satisfying.”

Katherine Earle graduated from Stanford’s MBA program this spring. She walked away from a well-paying position in the technology sector to go back to school. Still, she says she’s confident she made the right choice. “I’m already making more now,” says Earle, “and that increase will hopefully continue to compound itself, partly because of the inherent value of the degree but more likely because I had the opportunity to study my personal strengths and weaknesses and career interests at school.”

Bank digital credit risk management

Bank digital credit risk management

To withstand new regulatory pressures, investor expectations, and innovative competitors, banks need to reset their value focus and digitize their credit risk processes.

External and internal pressures are requiring banks to reevaluate the cost efficiency and sustainability of their risk-management models and processes. Some of the pressure comes, directly or indirectly, from regulators; some from investors and new competitors; and some from the banks’ own customers.

The impact is being felt on the bottom line. In 2012, the share of risk and compliance in total banking costs was about 10 percent; in the coming year the cost is expected to rise to around 15 percent. Overall, return on equity in banking globally remains below the cost of capital, due to additional capital requirements, fines, and lagging cost efficiency. All of this puts sustained pressure on risk management, as banks are finding it increasingly difficult to mitigate risk through incremental improvements in risk-management processes.

To expand despite the new pressures, banks need to digitize their credit processes. Lending continues to be a key source of bank revenue across the retail, small and medium-size enterprise (SME), and corporate segments. Digital transformation in credit risk management brings greater transparency to risk profiles. With a firmer grip on risk, banks may expand their business, through more targeted risk-based pricing, faster client service without sacrifice in risk levels, and more effective management of existing portfolios.

Incumbents under pressure

Five fundamental pressures that relate directly to risk management are being exerted on banks’ current business model: customer expectations for digitally managed services; regulatory expectations of a high-performing risk function; the growing importance of strong data management and advanced analytics; new digital attackers disrupting traditional business models; and increasing pressure on costs and returns, especially from financial-technology (fintech) companies (Exhibit 1).

Customer expectations. Traditionally reliant on physical distribution, banks are finding it difficult to meet changing customer needs for speed and simplicity, such as fast online credit approvals.

Regulatory and supervisory road map. Regulators are expecting the risk function to take a more active role in the context of new, digitized business models. New regulations are being put in place to address cyberrisk, automation of controls, and issues relating to risk-data aggregation. Directives pertaining to the Comprehensive Capital Analysis and Review, BCBS 239, and asset-quality reviews specify requirements for data management and the accuracy and timeliness of the data used in stress testing.1

Data management and analytics. Rising customer use of digital-banking services and the increased data this generates create new opportunities and risks. First, banks can integrate new data sources and make them available for risk modeling. This can enhance the visibility of changing risk profiles—from individuals to segments to the bank as a whole. Second, as they collect customers’ personal and financial data, banks are mandated to address privacy concerns and especially protect against security breaches.

Fintech companies and other innovative attackers. The digitally savvy segments have responded to innovative offerings from new nontraditional competitors, especially fintech companies and digital-only banks. These start-ups are extending innovation throughout the digital-banking space, creating a competitive threat to traditional banks but also potentially valuable opportunities for partnerships (Exhibit 2).

Pressure on cost and returns. The new competitors are beginning to threaten incumbents’ revenues and their cost models. Without the traditional burden of banking operations, branch networks, and legacy IT systems, fintech companies can operate at much lower cost-to-income ratios—below 40 percent.

Fighting back

Banks are beginning to respond to these trends, albeit slowly. Over the past several years, leading banks have begun to digitize core processes to increase efficiency—in particular, risk-related processes, where the largest share of banks’ costs are typically concentrated. Most banks started with retail credit processes, where the potential efficiency gains are most significant. Digital approaches can be more easily adopted from well-established online retailers: mobile applications, for example, can be developed to enable the origination of tailored personal loans possible instantaneously at the point of sale. More recently, banks have begun to capture efficiency gains in the SME and commercial-banking segments by digitizing key steps of credit processes, such as the automation of credit decision engines.

The automation of credit processes and the digitization of the key steps in the credit value chain can yield cost savings of up to 50 percent. The benefits of digitizing credit risk go well beyond even these improvements. Digitization can also protect bank revenue, potentially reducing leakage by 5 to 10 percent.

To give an example, by putting in place real-time credit decision making in the front line, banks reduce the risk of losing creditworthy clients to competitors as a result of slow approval processes. Additionally, banks can generate credit leads by integrating into their suite of products new digital offerings from third parties and fintech companies, such as unsecured lending platforms for business. Finally, credit risk costs can be further reduced through the integration of new data sources and the application of advanced-analytics techniques. These improvements generate richer insights for better risk decisions and ensure more effective and forward-looking credit risk monitoring. The use of machine-learning techniques, for example, can help banks improve the predictability of credit early-warning systems by up to 25 percent (Exhibit 3).

Good progress has been made, but it is only a beginning. Many risk-related processes remain beyond the digital capabilities of most banks. Significant effort has been expended on the digital credit risk interface, but the translation of existing credit processes into the online world falls far short of customer expectations for simple digital management of their finances.

There is plenty of room for digital improvement in client-facing processes, but banks also need to go deeper into the credit risk value chain to find opportunities to create value through digitization. The systematic mapping and analysis of the entire credit risk work flow is the best way to begin capturing such opportunities. The key steps—from setting risk appetite and limits to collection and restructuring—can be mapped in detail to reveal digitization opportunities. The potential for revenue improvement, cost reduction, and credit risk mitigation for each step should be weighed against implementation cost to identify high-value areas for digitization (Exhibit 4).

Some improvement opportunities will cut across client segments, while others will be segment specific. In origination, for example, most banks will probably find that several segments benefit from a digitally connected, paperless credit underwriting process (with live access to customer data). At the stage of credit monitoring and early warning, furthermore, advanced analytics and fully leveraged internal and external data could improve risk models for identifying issues across different segments. Back-office and loan-administration tools such as straight-through processing and automated collateral valuation are also cross-cutting improvements, as are the automation and interactivity of risk reporting.

On the other hand, in credit analysis and decision making, banks will likely find that instant credit decisions are mostly relevant in the retail and SME segments, while the corporate and institutional segments would benefit more from smarter work-flow solutions. The application of geospatial data, combined with advanced analytics, for example, can yield a high-performing asset-valuation model for mortgages in the retail segment. For collection and restructuring, automated propensity models will match customers in the retail and SME segments with specific actions, while for the corporate segment banks will likely need to develop debt restructuring-simulation tools, with a digital interface to identify and assess optimal strategies in a more efficient and structured way.

How digital credit creates value

Several leading banks have implemented digital credit initiatives that already created significant value. These are a few compelling cases:

  1. Sales and planning. One financial institution’s journey to an interactive front line involved the construction of a digital workbench for relationship managers (RMs). The challenges to optimal frontline performance were numerous and included the lack of systematic skill building, customer-relationship-management (CRM) systems with a fragmented overview of clients, and difficulty gathering relevant client and industry data. Onboarding, credit, and after-sales processes required many hours of paperwork, drawing frontline attention away from new client meetings. By engaging RMs with the IT solutions providers, the bank’s transformation team created a complete set of frontline tools for a single digital platform, including best-practice CRM approaches and product-specialist availability. The front line soon increased client interactions four to six times while cutting administrative and preparation time in half.
  2. The mortgage process. This presents a large opportunity for capturing digital value. One European bank achieved significant revenue uplift, cost reduction, and risk mitigation by fully automating mortgage-loan decisions. Much higher data quality was obtained through exchange-to-exchange systems and work-flow tools. Manual errors were eliminated as systems were automated and integrated, and top management obtained transparency through real-time data processing, monitoring, and reporting. Decisions were improved and errors of judgment reduced through rule-based decision making, automated valuation of collateral, and machine-learning algorithms. The bank’s automated real-estate valuation model uses publicly known sale prices to derive the amount of real-estate collateral available as a credit risk mitigant. The model, verified and continuously updated with new data, attained the same level of accuracy as a professional appraiser. Recognized by the regulator, it is saving the bank considerable time and expense in making credit decisions on actions ranging from underwriting to capital calculation and allocation. Losses were further minimized by automated monitoring of customers and optimized restructuring solutions. The digital engine moved decision making from 5 percent automated to 70 percent, reducing decision time from days to seconds.
  3. Insights and analysis. By making machine learning a part of the effort to digitize credit risk processes, banks can capture nearer-term gains while building a key capability for the overall transformation. Machine learning can be applied in early-warning systems (EWS), for example. Here it can enable deeper insights to emerge from large, complex data sets, without the fixed limits of standardized statistical analysis. At one financial institution, a machine learning–enhanced EWS enabled automated reporting, portfolio monitoring, and recommendations for potential actions, including an optimal approach for each case in workout and recovery. Debtor finances and recovery approaches are evaluated, while qualitative factors are automatically assessed, based on the incorporation of large volumes of nontraditional (but legally obtained) data. Expert judgment is embedded using advanced-analytics algorithms. In the SME segment, this institution achieved an improvement of 70 to 90 percent in its model’s ability accurately to predict late payments six or more months prior to delinquency.

The approach: Working on two levels

While the potential value in the digital enablement of credit risk management can be significant for early movers, a complete transformation may be required to achieve the bank’s target ambitions. This would involve building new capabilities across the organization and close collaboration among the risk function, operations, and the businesses. Given the complexity of the effort, banks should embark on this journey by prioritizing the areas where digitization can unlock the most value in a reasonable amount of time: significant impact from applying digital levers can be tangible in weeks.

Rather than designing a master plan in advance, banks can in this context develop a digital approach to one area of credit risk management based on existing technology and business value. Each bank may develop initiatives based on their specific priorities. Banks that most need to increase regulatory compliance and the quality of their execution may begin with initiatives in process reengineering to reduce the number of manual processes or to build a fully digital credit risk engine. Those looking to improve customer value from greater speed and efficiency might implement such initiatives as a state-of-the-art digital credit-underwriting interface, a digitally enabled sales force, data-driven pricing, or straight-through credit decision processing. Banks needing to mitigate risk through better decision making may develop initiatives to automate and integrate early-warning and recovery tools and create an automated, flexible risk-reporting mechanism (a “digital-risk cockpit”).

A credit risk transformation thus requires banks to work on two levels. First, look for initiatives that are within easy technological reach and that will also advance the core business priorities. Launching initiatives that bring in savings quickly will help the transformation effort become self-funding over time. Once a first wave of savings is captured, investments can be made in building the digital capabilities and developing the foundation for the overall transformation. Based on what has been learned in early-wave initiatives, moreover, new initiatives can be designed and rolled out in further waves. Typical first-wave initiatives digitize underwriting processes, including frontline decision making and reporting. Risk reporting is another likely candidate for early digitization, since digitization reduces production time and leads to faster decision making.

Building digital capabilities: Talent, IT, data, and culture

The experience of specific initiatives will help shape digital capabilities for the long term. These will be needed to support the overall digital transformation of credit risk management and keep the analytics and technology current. To begin, banks can examine their current capabilities and assess gaps based on the needs of the transformation. The talent focus in risk and across the organization will likely shift as a result toward a greater emphasis on IT expertise and quantitative analytics.

In addition to enhancing their talent profiles, banks will have to shift the direction of their IT architecture. The target will likely be two-speed IT, a model in which the bank’s IT architecture is divided into two segments. Accordingly, the bank’s core (often legacy) IT systems constitute a slower and reliable back end, while a flexible and agile front end faces customers. Without a two-speed capability, the agility needed for digital credit risk management would not be attainable.

Along with the supporting IT architecture and analytics talent, improved data infrastructure is an essential digital capability for the credit risk-management transformation. The uses of data are disparate throughout the bank and will continually change. For big data–analytics projects, great quantities of data are needed, but how they should be structured is not usually apparent at the outset. The construction of separate data sets for each use, furthermore, creates as many data silos within the organization as there are projects.

For these reasons, some leading companies are moving toward utilizing a “data lake”—an enterprise-wide platform that stores all data in the original unstructured form. This approach can improve organizational agility, but it requires that each project has the capability to structure the data and understand data biases. All types of data infrastructure also pose security risks, moreover, which can be addressed only by IT experts. Finally, the reconfiguration of the data infrastructure needs to be done using methods that carefully respect legal privacy barriers and meet all regulatory requirements.

Last, building and maintaining a strong digital-risk culture will be of critical importance in ensuring the success of the risk function of the future. A shift in culture and mind-set is needed among employees, top executives, and regulators, as they acclimate themselves to the new digital credit environment. Here, machines and automation have a much greater role, while human capabilities are developed to support the continual improvement of the risk culture. The focus shifts from executing a risk process to managing true control systems that continuously detect, assess, and mitigate risks.

Toward a flexible digital-risk end state

From data input and management to decision making, from customer contact to execution, the initiatives should build step by step toward a seamless and interactive digital-risk function. The initiative-first approach builds in the capability of agile adaptation to changes in customer demand or the competitive and regulatory environments. The digital opportunities and the way banks address them, in other words, will continually evolve, and the digital end state must support such changes while maintaining enhanced risk-management and client-service capabilities.

The digital transformation of existing credit risk tools, processes, and systems can address rising costs, regulatory complexity, and new customer preferences. The digital enablement of credit risk management means the automation of processes, a better customer experience, sounder decision making, and rapid delivery. Digital-risk management will be the norm in the industry in five years, and banks that act now can attain enduring competitive advantage.

High CEO Pay = Lower Stock Returns

High CEO Pay = Lower Stock Returns

boardmember alberto balatti ceo compensation

For any issue regarding your Board, Compensation Committee, or “C”suite ask to MALTAway

“Companies that awarded their Chief Executive Officers (CEOs) higher equity incentives had below-median returns.” This is how MSCI started a report on CEO compensation.
The idea of awarding CEOs equity in the companies they oversee was originally pitched as a way to align the interests of corporate executives with those of shareholders. If the stock fared well, shareholders would benefit and CEOs would be rewarded for driving up the stock price. Yet this has not been the case for many companies.
“If the total summary pay figures were effective in incentivizing superior future performance, we would expect to see a strong correlation between higher pay figures and 10-year TSRs (total shareholder returns). However, we found very little statistical evidence to support this; in fact, we found a small but consistently negative relationship, a possible indicator that superior performance may have been linked to lower rather than higher pay awards,” wrote Ric Marshall and Linda-Eling Lee of MSCI’s ESG (environmental, social and governance) research team.
During the period of 2005 through 2014, shareholders of companies with the lowest CEO pay realized 39% greater total returns than shareholders of companies with the highest CEO pay. Put another way, investing $1.00 in the companies whose CEO compensation ranked in the bottom 20% would have grown into $3.67. Investing the same $1.00 in the highest CEO-paying quintile of companies would have only turned your investment into just under $2.65. When Marshall and Lee analyzed companies by their sector allocation, the same inverse relationship appeared: higher CEO pay meant lower shareholder returns.
Given this, it would seem logical that shareholders would use “Say on Pay” votes to express their displeasure. The exact opposite has occurred, with approval rates exceeding 90% for many companies. Setting aside issues about the proportion of shareholders either not voting their shares or simply going along with the board of directors’ recommendations, there is a hurdle to figuring out exactly how much the CEOs are getting paid. An investor looking at a proxy filing (SEC filing DEF 14A) has to combine data from several different tables to calculate the CEO’s compensation.
Even compiling the data mandated to be disclosed isn’t enough to grasp the full picture. Marshall and Lee point to the lack of cumulative realized pay—what the CEOs actual take home from stock and option grants—in SEC filings. They also point out that shareholders don’t know how much compensation CEOs have realized over the course of their tenure or how the cumulative compensation compares to stock performance.
Making matters worse is that the compensation committees often base CEO compensation on what other companies are paying their executives. It’s akin to what’s happened in the world of sports, where salaries have soared as athletes use their peers’ compensation to negotiate better deals. These contracts are often announced by the media with no analysis about how much extra ticket sales, television viewership or merchandise sales the high-priced player will bring. Texas Rangers fans have found this out with Prince Fielder, who is due $96 million through the 2020 season according to CBS Sports. The first baseman is incurring his second injury-shortened season in three years and questions are now being legitimately being raised about how well he’ll play when he returns in 2017.
Ironically, the same day MSCI released its report, The Wall Street Journal published an article discussing how companies are trying to woo individual investors to vote. Railroad operator CSX (CSX) is going as far as to plant a tree for every shareholder who votes. The reason? According to the article, individual investors overwhelmingly side with the company’s management and can be a helpful swing vote in close corporate elections.
Companies should not count on our support. We shareholders are owners. It’s up to us to look out for financial interests, which can mean disagreeing with the board of directors’ proxy recommendations as well as voting against Say on Pay proposals.

BREXIT wrap up and actions

BREXIT wrap up and actions

maltaway brexit

After a heated political campaign, voters in the United Kingdom decided by a slim margin, on June 23, to exit the European Union, leading to a change in government. Now that a new prime minister has taken over, the next big question looms: How will the UK and EU negotiate their split?

I have spent almost 20 years researching, teaching, writing about, and advising companies and governments on how to negotiate when things seem impossible. In this article I offer an analysis of the negotiation landscape facing UK and EU negotiators, along with advice on how they might navigate the process more effectively. For the record, I have not (at the time of this writing) been asked by either side to advise on the negotiations.

I structure the analysis in much the same way as I would approach any complex deal where I was asked to lead (or advise on) the negotiations. I examine important elements of the process, the key interests and issues to be negotiated, the leverage each side has, some of the barriers to reaching a deal, potential outcomes, and strategic options on both sides of the table.

You can learn more about the history and factors leading up to the British referendum here and here.


What Is the Brexit Process?

The clock only starts when Article 50 is formally invoked by the UK.

It’s important to remember that the British referendum is not legally binding: The UK government must initiate “Brexit” by invoking Article 50 of the Treaty on European Union. There seems to be an emerging consensus that Members of Parliament will respect the wishes of voters if called to vote on the matter, despite the fact that most MPs were against leaving the EU. Moreover, Theresa May, the new UK prime minister, has made it clear that “Brexit means Brexit,” and that she intends to oversee the process.

Once Article 50 is invoked, the EU and the UK have two years in which to negotiate a withdrawal agreement and the UK’s future relationship with the EU. Any agreement being accepted by the EU requires the assent of a “qualified majority,” which means that 72% of the member states, representing at least 65% of the population of the EU, must vote in favor of the agreement.

If an agreement is reached, the treaties that currently govern the relationship between the EU and the UK (as a member state) will expire. If no agreement is reached, the treaties will automatically expire two years from when Article 50 was invoked.

Because the clock only starts when Article 50 is formally invoked by the UK, there has been some wrangling over when it should occur. There is an option of extending negotiations beyond the two-year time limit, but it requires the consent of all countries in the EU.

Two other points of process are worth mentioning. The first is that many parties within the EU are involved, and because a member state has never exited before, the internal process on the EU’s side of the table is itself being negotiated. The key groups are the European Council, the European Parliament, and the European Commission. (See here to learn more about these three institutions, and here for more information on the role they are expected to play in the negotiations.)

The second issue is more crucial. If the agreement reached between the EU and the UK is broad enough in scope to be considered a “mixed agreement” — which it certainly will be if the parties negotiate not only trade but also security and foreign policy issues — then the agreement will need to be ratified by the parliament of every member state, which means every EU country would have a veto. From a negotiation perspective, this not only increases the amount of time needed to reach a comprehensive agreement but also lessens the likelihood of a deal.


What Are the Major Issues?

The EU is based on the idea of a single market, characterized by four freedoms. They are the free movement, across borders, of goods, services, capital, and people.
Protestors demonstrating against Britain’s proposed membership of the European Economic Community, January 22, 1972. The UK joined the EEC the following year.

Let’s start with some context. The European Union is based on the idea of a single market, characterized by four freedoms. They are the free movement, across borders, of goods, services, capital, and people.

There are three consequences of this arrangement that are of particular relevance to Brexit negotiators: free trade between EU member states (think “tariff free”); businesses in the member states being subject to EU regulations; and citizens of any member state being able to move to another member state to live or work there. All of these were important factors leading up to the Brexit vote, and they are central to the negotiations that will take place between the UK and the EU.

Trade and immigration. Two of the most important issues are trade and immigration. It is worth considering them together because doing so helps to highlight a key conflict in the negotiations. Simply put, the UK wants to keep the trade relationship with EU members as it is today (free trade) but significantly change the rules surrounding the free movement of people between the EU and the UK. Roughly half of the immigrants to the UK come from the EU, and polls conducted in the run-up to the referendum suggest that over 50% of those who supported Brexit considered immigration their biggest concern.

David Davis, who was appointed Secretary of State for Exiting the European Union by PM May, believes both of these goals are achievable: “The ideal outcome (and in my view the most likely, after a lot of wrangling) is continued tariff-free access. Once the European nations realize that we are not going to budge on control of our borders, they will want to talk, in their own interest.”

Unfortunately, this is not at all how the EU sees it. Donald Tusk, president of the European Council, has made clear that for the UK to have access to the single market “requires acceptance of all four EU freedoms — including freedom of movement. There can be no single market à la carte.” Other EU leaders have made similar pronouncements. How much wiggle room there is, and what kinds of concessions might be made on trade and immigration, remains to be seen (and negotiated).

Money paid to the EU. The UK pays more into the EU budget than it gets back in rebates and other payments to sectors of the UK economy. Leave campaigners and supporters argued that the money saved through Brexit could be used elsewhere (e.g., to enhance the UK’s National Health Service). Here, we see the same conflict: From the EU perspective, if the UK wishes to have continued access to the single market, it will be required to pay dues.

There is clear precedent for this stance. Norway, which is not a member of the EU, pays into the EU budget in order to have access to the single market. The precise amount that the UK would pay will have to be negotiated.

Regulations. Leave supporters complained about onerous regulations imposed by the EU, including environmental standards, product safety rules, and minimum working conditions for employees. Although Brexit would put an end to EU-imposed regulations, there are two important factors to keep in mind. First, many (perhaps most) regulations will continue because they or similar ones are important for the UK, even if the EU is not imposing them. The UK will not, for example, abolish all product safety or environmental regulations after Brexit. Second, the EU could continue to impose certain regulations after Brexit in exchange for the UK’s access to the single market. Again, this is consistent with the Norway precedent, although UK negotiators will want to avoid regulatory influence from the EU.

Free movement of people. Much of the Leave campaign’s rhetoric was aimed at stemming the tide of immigrants from Europe, but barriers to free movement of people would hurt both sides in the negotiation. Millions of UK citizens live and work in Europe, and even the loudest proponents of Brexit want them to retain their rights. Former mayor of London Boris Johnson, a leading voice in the Leave camp who now has been appointed foreign secretary, promised as much in anopinion piece he wrote following the referendum: “British people will still be able to go and work in the EU; to live; to travel; to study; to buy homes and to settle down. As the German equivalent of the CBI — the BDI — has very sensibly reminded us, there will continue to be free trade, and access to the single market….The only change — and it will not come in any great rush — is that the UK will extricate itself from the EU’s extraordinary and opaque system of legislation.”

The desire to address the anxiety of the British people is understandable. What is difficult to understand is how the foreign secretary intends to secure the rights of British citizens to free movement without offering reciprocal rights to citizens of other EU member states (or, for that matter, without offering any concessions at all).

Financial services. A particular concern for the UK in these negotiations is the fate of London’s financial services sector. It plays an outsize role in the broader EU financial industry, where it has a trade surplus of almost £20 billion with the rest of Europe. (The threat to this important sector of the UK economy is explained in some detail here and here.) How far the UK is willing to go (or be lobbied to go) to protect the sector — or, put differently, how much the EU is able to extract in exchange for concessions to City — is an open question.


What Leverage Does the EU Have?

Because the EU needs to deter future exits, threats to walk away even from economically attractive deals become credible.
Euro stars on the glass doors of the main portal to the Palais de l’Europe, the European Parliament in Strasbourg.

There are four important sources of leverage for the EU.

The economics of trade. Leave supporters have made the argument that the UK will be negotiating from a position of strength because the EU exports more to the UK (around £290 billion) than the UK exports to the EU (around £220 billion).

The argument is a flawed assessment of the actual state of economic leverage. The key is to look beyond absolute numbers and consider the percentage of total exports they represent for each party. While the UK exports a lower nominal amount to the EU, these exports represent about 44% of total UK exports. In contrast, exports to the UK are only about 10% of total EU exports. By this measure, a “no deal” (or a deal that hurts trade, to be more precise) is much worse for the UK than it is for the EU.

This doesn’t mean that a good deal is impossible for the UK to achieve, but it does mean that putting too much weight on this political talking point would be unwise for negotiators.

The need to deter future exits. If the only players in this story were the UK and a firmly united EU, the UK would have more room to demand concessions. But the EU is not monolithic. One of the biggest concerns of EU negotiators will be the risk of setting a costly precedent. This deal will be closely watched by nationalist parties in other countries. If the UK is able to negotiate terms that give it a better deal than it had when it was a member state, that could encourage additional exits, which could jeopardize the union’s very existence.

As a consequence, there may be several agreements that the EU is tempted to accept on purely economic grounds (preferring them to “no deal”) but that are off the table because they could incentivize other defections from the EU. Because the EU needs to deter future exits, threats to walk away even from economically attractive deals become credible. This gives the UK leverage, albeit at the cost of making “no deal” more likely. As Martin Schulz, president of the European Parliament, has stated, “There is no intention to ensure that the UK receives a bad deal, but it is clear that there can be no better deal with the EU than EU membership. The EU moreover must look out for its members’ interests and uphold its founding principles. The single market, for example, entails four freedoms (capital, goods, services, persons) and not three, or three and a half.”

Too many veto players. As mentioned previously, any final deal will require agreement from a qualified majority of EU member states, or unanimity in the event of a mixed agreement. This potentially gives veto power to many small coalitions of member states — or to every individual state if there is a mixed agreement. It narrows the zone of possible agreement but also allows the EU to credibly say that the UK will have to make significant concessions to bring enough EU votes on board.

The psychology of precedents. Although it’s a smaller factor than those listed above, the psychology of deal making is currently working against the UK. All of the precedents in place — Norway, Switzerland, and even Canada — instantiate the European claim that there can be no “sweetheart deal,” and that it is not possible to get access to the European market without serious conditions and contributions.


What Leverage Does the UK Have?

A number of the most influential countries in the EU are the ones that are most dependent on trade with the UK.
British businessman and politician Oliver Smedley (1911–1989) leaving to demonstrate in Rome as part of his Keep Britain Out campaign to oppose British membership of the EEC, 1967.

UK negotiators also have at least four sources of leverage, although I do not wish to imply that this means both sides have equal leverage (as I discuss below).

Economic impact on the EU. Albeit less than what the UK stands to lose, the EU would lose financially in the event of a deal that is bad for trade (e.g., high tariffs). While this might not be sufficient leverage on its own, it does help to chip away at the problem for the UK.

Influence over key players. It is important to note that EU-level data masksconsiderable heterogeneity that exists across EU nations with regards to the balance of trade with the UK. Notably, a number of the most influential countries in the EU (such as Germany) are the ones that are most dependent on trade with the UK.

How these relationships are managed and how they can be used to influence the Brexit negotiations with the EU will be crucial considerations for the UK. I disagree with those who think the UK’s leverage vis-à-vis Germany is all that matters, and that this one trade deficit ensures a good UK-EU deal — but it certainly will play a role in the negotiations.

Security concerns. If the only issues on the table are trade and immigration, the EU arguably is in a strong position. But if the UK can make a strong case that a bad deal with the EU would threaten cooperation on other matters (e.g., security), that could help tip the scales. Such a threat ought not to be credible: In my view, two centuries of UK history show that every time the British have moved further away from Europe, they eventually have regretted the decision — and have had to return when things unraveled on the continent.

Everyone loses when the UK and EU drift apart on matters of security. And yet there are reasons that Europeans should take the threat to strategic cooperation seriously. The recent referendum shows a strong isolationist attitude in the UK, and the EU might want to consider the degree to which relationships might deteriorate if the eventual deal is perceived as one-sided (or punitive) by the British people.

Timing of invoking Article 50. The number of European leaders who are urging the UK to invoke Article 50 without delay is long and comprehensive, including European heads of state, the EU president, the European Commission president, and the European Parliament president. Meanwhile, the UK governments seem to be in no rush to pull the trigger, not least because there appears to be no negotiation strategy currently in place.

Only the UK can invoke Article 50. When everyone wants something that only you can provide, you have leverage. This raises the possibility of the UK agreeing to invoke Article 50 sooner in exchange for concessions. Given the order of events (Article 50 will be invoked before substantive negotiations get under way), any concessions demanded from the EU likely would have to focus on the process of eventual negotiations (timetables, sequencing, etc.) or on an agreement on principles that would frame the negotiation. This does not mean that the UK should invoke Article 50 before it’s prepared, but it does suggest that there may be some scope for a trade.

There are risks to using this point of leverage, however. If the EU decides to punish delays (or threats of delays) to the process, things could escalate and get ugly. The EU has the option of invoking Article 7 of the Treaty on European Union, which would take away the UK’s voting rights in the EU on the premise that the UK has committed a “serious and persistent breach” (or is at “clear risk of a serious breach”) of EU values, as specified in Article 2. Arguably, the values listed in Article 2 would not be breached simply because the UK is dragging its feet on Article 50, but such is the nature of escalation: Both sides could get into a death spiral of unhealthy and unreasonable tit-for-tat.


A Key Barrier: False Promises

The EU might come to the conclusion that since any deal is going to fall short of the extreme promises made in the UK, it is not worth giving any special concessions at all. The UK government will have to find a way to sell a lesser deal, or end up with no deal at all.

From a leverage perspective, one factor cuts both ways. The Leave campaigners, in their enthusiasm for Brexit, seem to have promised more than they can plausibly deliver. And, in many cases, they appear to have done so with little regard for facts, data, or statistics. To name a few examples, the amount of money going to the EU was overstated; the ability to limit contributions to the EU following Brexit was exaggerated; the impact of immigrants on the economy wasmisstated; the ability to control immigration after a deal was inflated; and how much the National Health Service would benefit from a Brexit windfall was so inaccurate that the promise was walked back literally the day after the Brexit vote.

Almost none of what was promised is actually possible — especially given the EU’s leverage and other constraints — which means the UK government will have to find a way to sell a lesser deal, or end up with no deal at all. But remember: Constraints can be a source of leverage. UK negotiators might be able to credibly say that they can’t possibly go back to their supporters with significantly less than what they promised on the eve of the referendum. In other words, the EU will need to make more concessions to avoid no deal.

But the situation is a double-edged sword: The EU might come to the conclusion that since any deal is going to fall short of the extreme promises made in the UK, it is not worth giving any special concessions at all.


Two Looming Strategic Issues for the UK

Could the different parts of the UK (England, Wales, Scotland, and Northern Ireland) each negotiate a different relationship with the EU? And will the UK leave the EU customs union?
Map of England in the ninth century from A Short History of the English People, by John Richard Green, published by Macmillan and Co., 1911.

The problem of Scotland. While a majority of all voters in the United Kingdom voted to leave the EU, a majority of voters in Scotland voted to remain. This is a problem for the government in England, which lives under a constant latent threat that Scotland might vote to leave the UK. A referendum in 2014 resulted in a majority of Scottish voters choosing to stay within the UK, but a second referendum is now being openly discussed.

While Scotland cannot legally veto UK’s exit from the EU, it can exercise leverage over PM May, who is faced with the delicate task of trying to keep the UK together. When it comes to Brexit negotiations, Nicola Sturgeon, first minister of Scotland, has made clear that she wants to ensure “Scotland is playing a very full part…including having the ability to put forward options for Scotland that would respect how Scotland voted.” To this end, she has suggested the possibility that the different parts of the UK (England, Wales, Scotland, and Northern Ireland) might each negotiate a different relationship with the EU.

The leaders of Wales, Northern Ireland, and Scotland recently have called for each of their devolved parliaments to be allowed to vote on any Brexit agreement. Even if nothing comes of this legally, the threat of a break-up over Brexit creates a problem for UK negotiators and further limits the set of deals that everyone can live with. Managing these relationships ought to be a first order of business for the UK.

Whether to leave the EU customs union. In order for the UK to negotiate its own trade deals with non-EU countries, it has to leave the EU customs union, which requires all members to accept the same rules when it comes to trading goods (though not services) with outsiders. (Learn more about the difference between a customs union and a free trade area here.)

Although it might seem obvious that Brexit would entail leaving the customs union, the two do not go hand in hand. Turkey, for example, is part of the EU customs union without being part of the EU. Leaving the customs union would make it harder and more costly for the UK to export goods to the EU, especially for goods that are made partially outside the UK.

Another problem is that leaving the customs union would raise serious concerns in some parts of the UK that already are against Brexit — most notably Northern Ireland, which would have to erect a customs barriers on the border with Ireland, something few would like to see. The issue will need to be decided soon, and iscurrently being debated. Some Leave supporters seem confident that the freedom to negotiate trade deals is worth the costs, while others are less convinced.

It remains to be seen how well the UK can actually negotiate non-EU trade deals. On the one hand, it will be able to negotiate without the constraints imposed by the demands of other EU countries; on the other hand, the UK’s economy is much smaller than the EU’s, so it has less to offer (meaning less leverage) in these negotiations.


What Are the Possible Outcomes?

The possibilities are many, from the Norway model to a unique UK deal to the chance that Brexit might not happen at all.
May 1, 1975: Government documents about to be published for the British Common Market Referendum vote on June 5.

There’s an infinite number of potential outcomes in a negotiation like this one, but it’s useful to keep in mind a few salient possibilities.

No deal = WTO rules. If no agreement is reached within two years and the EU treaties expire, the default is that the UK and EU would trade according to World Trade Organization rules. Notably, these rules cover only trade, not the many other issues the two sides need to negotiate. The problem (i.e., cost) of the WTO outcome is that trade barriers, such as tariffs, would emerge where none existed before, hurting all sides, but especially the UK.

The Norway model. There already is a model in place for European countries that do not wish to join the EU but want access to the single market. Norway accesses the market through the European Economic Area. In exchange, Norway agrees to many conditions, including the free movement of people, most EU regulations, and financial contributions to the EU.

In other words, using the Norway model would mean the UK would accept roughly the same conditions as those prior to Brexit but with an additional cost: losing a vote in the EU halls of power.

The Norway model does allow for a bit of wiggle room to opt out of certain EU policies. The question would be how much wiggle room the UK would be allowed.

Other national models. Other models to follow include those used by Switzerlandand Canada. Switzerland, instead of negotiating a treaty with the EU, has negotiated separate relationships with each member state (using over 100 bilateral treaties cobbled together over decades). The Swiss are also subject to some EU policies and contribute to the EU, but not to the same degree as Norway. Canada has an even more remote relationship with the EU. It includes trade agreements, and while it allows for certain carve-outs and exceptions, it comes with its own constraints.

Neither of these models are great for the UK, and both would take longer to structure and implement than a Norway-style deal, but negotiators would be wise to look at these options carefully. They may find precedents they can point to that allow them to legitimize some of the concessions they need.

A unique UK deal. A one-of-a-kind deal is what the UK government will push for, but it would be foolhardy to think that any UK deal will ignore precedents or allow London to get all of what it wants without significant concessions in other areas.

A partial deal. Any extension to the negotiations beyond the two-year time period will require unanimous consent from the 27 EU nations remaining. Because divisions and disagreements regarding how things are shaping up are likely to emerge during the two years, the possibility that one or more countries would cite domestic pressure to vote against an extension — or use the threat of a veto to demand excessive concessions — should not be ignored. The UK and EU negotiators would be wise to wrap up whatever portions of a broader agreement they can before having things go to a vote on extending talks. Although there are costs to negotiating a deal piecemeal (e.g., trading across issues is difficult), in this case it would be wise to think carefully about whether and how to partition the full set of issues into those that are crucial to finalize before the risk of deadline pressure and those that should remain open until there is a full, final agreement.

Not following through on Brexit after all. Currently this option is not on the table — but once you consider each side’s leverage and how difficult it will be to achieve a “good” deal (especially for the UK), negotiators might want to keep this option alive (albeit unspoken) as they assess their bargaining power and craft their strategy.


Who Has the Greater Leverage?

A “no deal” scenario is still possible.

Analytically speaking, this is a trick question. On the one hand, when you look at the alternatives to reaching a deal, it seems that the EU has significantly more leverage than the UK because it is bigger economically and because it can credibly threaten to veto any deal that would make the exit option attractive to other member states.

The real problem, however, is that when you think about the interests and constraints of both sides, it becomes hard to envision any deal that all parties can accept — unless UK negotiators are able to go back to their constituents and sell a deal that falls well short of what was initially promised. This has a few implications:

  • A “no deal” scenario is very possible.
  • If a deal is going to happen, it will require tremendous creativity as well as sensitivity to the needs of the other side. Both sides will have to make as many concessions as they possibly can. The UK will have to ask for what it wants in ways that allow the EU to make concessions without setting dangerous precedents. The EU will have to make symbolic concessions that allow UK negotiators to sell the deal internally to a potentially disappointed audience. A unique UK deal is possible, but it is unlikely to meet the aspirations of Leave voters.
  • Given the fact that a “no deal” is possible and that a deal might disappoint UK voters anyway, might there not be a path toward reversing Brexit? There may come a time when the only outcome that allows all parties to declare victory entails no Brexit. EU negotiators obviously would be happy. PM May could say she tried but would not accept the EU’s likely terms (or the dismantling of the UK). Leave campaigners in the government could resign in protest — or gain in popularity for opposing the outcome.


In Conclusion

Smart negotiators know that the goal is not to “win” but to achieve their objectives.

In writing this analysis, I have tried my best not to take sides, nor to make unnecessary predictions. This is in part because there are limitations to doing a truly comprehensive or definitive analysis in a situation where all of the facts are not in the public domain. It is also because there are many paths forward and the outcome will be determined by how each side plays the hand it has been dealt.

The worst mistake either side could make right now is to take aggressive unilateral steps to improve its bargaining position without taking into accounthow this might cause the other side to escalate further. While EU leaders have seemingly ruled out any talks, however informal, before Article 50 is invoked, I find it hard to believe that back-channel conversations are not under way. (And if they are not, they should be.) Even if no substantive aspects of the negotiation are discussed, these conversations are opportunities to shape expectations, coordinate on process, build rapport, and create trust before deal making shifts to the media spotlight. These early moves could pay huge dividends when substantive deal making gets started — or reveal the need to revisit currently unpopular options (e.g., reversing Brexit).

As I write about in Negotiating the Impossible, if there is one lesson we can learn from some of the worst conflicts and deadlocks in history, it is that even seemingly impossible situations can be handled well if negotiators stay cool, prepare systematically, strategize with an eye on all relevant factors, have empathy for the needs and constraints of the other side, and understand that the goal is not to “win” but to achieve their objectives.

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.

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            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.

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              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?

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          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.

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            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?

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          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.

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            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.

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      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.

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      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.

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

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      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.

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

CEO’s Guide to Navigating Brexit

CEO’s Guide to Navigating Brexit

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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.

New Crypto tech: risks, opportunities, solutions

New Crypto tech: risks, opportunities, solutions with Colored Coin

By Anton Golub, Likke Corp

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The financial system architecture has grown organically over the last decades – individual steps of settlement of financial transactions have been computerized, but the workflow remained unchanged as if processing of transactions is still done manually. That implies the delivery and settlement of transactions is batch-based and occurs with a time delay of two or more days. Every financial institution has its own bookkeeping system and is an island from an audit point of view, where verification of trades is cumbersome and prone to errors. This regime contributes to a high degree of fragmentation and uncertainty, multiplication of risk factors, high transaction costs for financial assets, lack of liquidity and transparency, presenting a nightmare for participants of financial markets.

The new technology of Blockchain is a genius invention that will introduce a new level of transparency to the financial markets. The Blockchain is an universally accessible distributed ledger – a decentralized notary service that ensures immediate global consensus about completed transactions and asset ownership. Like the Internet, the ledger is not controlled by a single entity, but an emergent phenomenon consisting of many participants. Blockchain is a seminal discovery and addresses a core of issue of no-trust problem and prevents double spending. It is still in early days and the community that invented it has hardly grasped the scope of the innovation, how its discovery will change the financial system. But the genie has been released out of the bottle and it cannot be stopped…

Blockchain makes it possible for every financial instrument to be a listed security in the form of a digital token, the so-called Colored Coin. Colored Coins follow the idea of ”coloring” a specific Bitcoin – the issuer guarantees to hand out the underlying assets to whoever returns the Colored Coin. For example the FED could issue a Colored Coin in the same way as it prints paper money; it would take a fraction of a Bitcoin and then insert the ”I Owe You” statement of the FED, like a regular bank note. The same mechanism can be used for any financial claim. Colored coins are different in nature to crypto-currencies, because they have a specific issuer and are backed by a real financial asset. Exchange, bookkeeping and risk management of Colored Coins is straightforward for traditional financial institutions since every Colored Coin can contain International Securities Identification Number (ISIN), thus Colored Coins can be treated as any other financial instrument, fully compatible with existing back-office systems. Financial institutions will be able to conduct business with Colored Coins on the Blockchain without incurring additional costs of integration.

Colored Coins address many of the risk management issues that regulators and financial institutions are faced in today’s financial system. Since every transaction of Colored Coins is recorded on the Blockchain, the public ledger becomes a valuable source of trading data. While it is not possible to identify the traders, any observer can deduct quantity and prices from the public data visible in the Blockchain. Unlike in traditional financial markets, the Blockchain includes detailed position data – by tracking tick-by-tick transaction data from Blockchain, we can infer how market participants build and close positions. We can map the size of positions and infer what positions have been established at the various price levels – and what profits and losses different groups of traders and investors are incurring. The position information indicates which groups of traders and investors are most likely to run into losses. We can then create “weather maps” of the positions that traders have established and the circumstances that would force them to close their positions, causing a cascade of further price moves. This is especially relevant for markets with highly leveraged traders where a small price move can cause a cascade of margin calls that further move the price, leading to instability, lack of liquidity and increased volatility. Finally, we can use position information to show the Blockchain provides predictive information for future price movement. Regulators will welcome the innovations provided by the Blockchain and we anticipate that position information of the Blockchain will become part of standard risk management toolbox in the near future.

Lykke is a movement to build a global marketplace atop the Blockchain for all assets and instruments. Our marketplace will use distributed ledger technology to offer immediate settlement and direct ownership. The ultimate goal of Lykke is to enable every person in the world to have market access and issue his or her own currencies. If we succeed, we can establish human rights for market access and issuance of means of payment. The distributed ledger technology offers a unique opportunity to rewire the existing financial system and create a highly efficient one. All our software is open source. Our goal is to build the most efficient marketplace possible.

Median Compensation figures in US

Median Compensation figures in US

A study from credit-repair looked at the median income of Americans over the past 60 years.

Findings revealed that the highest median income is held by 35- to 44-year-olds, followed by 45- to 54-year-olds.

But the study also found that age isn’t the only thing that affects how much you earn in the US. Turns out race and gender play a role, too.

The data shows that the greatest disparity between median income is among the different race groups.

In three out of the five age groups, Asians outperform all other races through age 54.

Meanwhile, on the gender front, men still made more than women in every age group.

See more of’sdings in the infographics below:

age earnCourtesy of

creditrepairCourtesy of

A trust, collaboration, sharing MACHINE: the Impact of the Blockchain Goes Beyond Financial Services

The Impact of the Blockchain Goes Beyond Financial Services, a trust, collaboration, sharing MACHINE

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

The technology most likely to change the next decade of business is not the social web, big data, the cloud, robotics, or even artificial intelligence. It’s the blockchain, the technology behind digital currencies like Bitcoin.

Blockchain technology is complex, but the idea is simple. At its most basic, blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone, where not just information but anything of value – money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes – can be moved and stored securely and privately. On the blockchain, trust is established, not by powerful intermediaries like banks, governments and technology companies, but through mass collaboration and clever code. Blockchains ensure integrity and trust between strangers. They make it difficult to cheat.

In other words, it’s the first native digital medium for value, just as the internet was the first native digital medium for information. And this has big implications for business and the corporation.

Much of the hype around blockchains has focused on their potential to fundamentally change the financial services industry – by dropping the cost and complexity of financial transactions, making the world’s unbanked a viable new market, and improving transparency and regulation. Indeed, it is already having a big impact on that sector. However, our two-year research project, involving hundreds of interviews with blockchain experts, provides strong evidence that the blockchain could transform business, government, and society in perhaps even more profound ways.

In the early days of the web, many management thinkers, present company included, speculated that the internet would reduce companies’ internal and external transaction costs, especially the cost of search, coordination, and communication. Surprisingly, however, the internet had only a peripheral impact on corporate architecture, falling short in materially dropping many transaction costs in business.

As we enter the second generation of the internet, which focuses on value as well as information, blockchains may radically drop many transaction costs. For example, a global searchable database of all transactions would dramatically lower the costs of search. Smart contracts (software programs that self-execute complex instructions) on blockchains will plummet the costs of contracting, enforcing contracts, and making payments. Autonomous agents (bundles of smart contracts acting like rich applications) on the blockchain hold the promise of eliminating agency and coordinating costs, and can perhaps even lead to highly distributed enterprises with little or no management.

Consider the music industry, where intermediaries capture nearly all the value and artists get paid last. Now, companies like Mycelia, founded by Grammy-winning artist Imogen Heap, have developed intelligent songs with smart contracts built in, which enable artists to sell directly to consumers without going through a label, financial intermediary, or technology company. This means that royalties and licensing agreements execute automatically and instantly—and artists get paid first. Spotify, Apple, Sony Music and other massive media companies stand to lose or gain depending on how quickly they embrace this technology.

Blockchain technology can also take networked business models to a new level by supporting a whole host of breakthrough applications: native payment systems that run without banks, credit card companies, and other intermediaries will cut cost and time from transactions. Reputation systems built on social and economic capital and controlled by individuals, rather than by intermediaries like rating agencies and credit rating services, will change the dynamic between consumers and companies. Trustless transactions, where two or more people need not know nor trust each other to do business, will be feasible. There are staggering implications beyond financial services.

While we’re only starting to see the possibilities of the blockchain, we expect these areas to be the first to experience a profound impact:

Solving the problem of IP in a digital age.

During the first generation of the internet, many creators of intellectual property were not properly compensated. Musicians, playwrights, journalists, photographers, artists, fashion designers, scientists, architects, and engineers were not only beholden to record labels, publishers, galleries, film studios, universities, and large corporations (vestiges of the pre-digital age) —these inventors now also had to deal with digital piracy that became possible on the web.

Blockchain technology provides a new platform for creators of intellectual property to get the value they create. Consider the digital registry of artwork, including the certificates of authenticity, condition, and ownership. A new startup, Ascribe, which runs on the blockchain, lets artists themselves upload digital art, watermark it as the definitive version, and transfer it, so similar to bitcoin, it moves from one person’s collection to another’s. The technology solves the intellectual property world’s equivalent of the double-spend problem better than existing digital rights management systems; and artists could decide whether, when, and where they wanted to deploy it.

Creating a better sharing economy.

Most so-called sharing economy companies are really service aggregators. They aggregate the willingness of suppliers to sell their excess capacity (cars, equipment, vacant rooms, handyman skills) through a centralized platform and then resell them to users, all while collecting a cut off the top and valuable data for further commercial exploitation.

Blockchain technology can provide the suppliers of these services a means to collaborate that delivers a greater share of the value to them.  Just about everything Uber does could be done by smart agents on a blockchain. The blockchain’s trust protocol allows for cooperatives, or autonomous associations, to be formed and controlled by people who come together to meet common needs. All revenues for services, except for overhead, would go to members, who also control the platform and make decisions.

Opening up manufacturing.

3D printing is proving to be another revolutionary technology that is moving manufacturing closer to users and bringing new life to mass customization. But today, makers still need centralized platforms to sell their wares and have trouble protecting the IP of their creations. With blockchain, data and rights holders could store metadata about any substance, from human cells to powered aluminum, on the blockchain, in turn opening up the limits of corporate manufacturing while also protecting intellectual property. New markets could enable buyers and sellers to contract more easily in an open market.

The so-called Internet of Things will need blockchains to manage ultimately trillions of daily transactions.  Traditional financial services companies cannot manage micropayments and settle payments, such as when a factory light purchases power from a public power auction. The Internet of Everything needs a Ledger of Everything.

Changing enterprise collaboration.

Today, collaboration tools are changing the nature of knowledge work and management inside organizations.  But there are clear limitations to today’s suites of tools, as we still need central intermediaries to establish trust and coordinate much of the capability. This creates an opportunity for blockchain-based systems. For example, if every employee had their own elaborate profile, which they owned and controlled, employees and companies would be able to keep their data, rather than give it to large social network companies. If current development projects, such asEnigma, being run out of MIT, are any evidence, blockchain social networks will have dramatically richer and more customizable functionality, where data is protected and consumers empowered, compared to incumbents. Existing vendors will either face disruption or embrace blockchain technologies to deliver much deeper capability to their customers.

In the mid-1990s, smart managers worked hard to understand the internet and how it would affect their businesses. Today, blockchain technology is ushering in the second generation of the Internet, and if companies don’t want to get left behind, they’ll need to dodge the Innovator’s dilemma and disrupt from within.

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