Frontier Dialogue #4
March 30, 2021

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Materials



The 4th session of the Frontier Dialogue was convened on the theme of possibilities brought by blockchain and decentralized finance technologies. Decentralized finance (DeFi) has grown at a staggering pace in recent years, while the corresponding issues of legal risk, enforceability, compliance and liability loom larger than ever. The goal of this event was to bring together leading minds to share frontier research, address critical issues, and provoke discussion related to the future of finance and economic record keeping.


The first speaker, Campbell Harvey, laid out a comprehensive picture of the problems with traditional finance that DeFi addresses. These include financial inclusion, inefficiency, transparency, lack of interoperability, among others. Harvey also presented on the key risks that come with the new technologies, including regulatory risk, custodial risk, and the risk of various types of attacks on such an open and transparent system.


Raphael Auer went on to discuss the economic possibilities presented by permissioned blockchain technology, as well as the complexities around how to sustain honest behavior among the validators within such a system. Auer argues that in a decentralized setup, the cost of being kicked out is an effective deterrent against bad behavior and doesn’t present validators with the temptations that centralized intermediaries face.


Hanna Halaburda compared and contrasted permissioned versus permissionless blockchains, the associated costs of using them, and their relative vulnerability to attack. She described how the market-determined price of the crypto correlates to transaction safety since it also determines how expensive it is for hackers to carry out an attack. This is relevant to crypto assets such as Bitcoin, which is powered by permissionless blockchain.


Zhiguo He examined proof-of-stake versus proof-of-work systems, and went on to probe just how enforcement works on a decentralized consensus mechanism. Contract theorists and computer scientists need to recognize, He argued, that getting everyone to identify and to punish wrongdoing doesn’t always work as expected and needs to involve deeper thinking at the level of consensus protocol design.


Wei Xiong discusses how conflicting interests between platforms and users have sparked the rise of cryptocurrencies and tokenization. However, decentralization often does not incentivize platform developers to improve the platform since they do not hold equity. Xiong argued that while decentralization does prevent abuses, it doesn’t stop bad actors from amassing of tokens and attempt to seize control of platforms.


Luohan Academy President Long Chen presented on the progress of China’s Ant Chain, one of the leading innovators in the blockchain space, that is working on creating the basic infrastructure for permissioned blockchain. Services on the Ant Chain include smart contracts, product tracing, and tracking court-admissible evidence. Chen sees permissioned blockchain as more promising in terms of achieving integration with the real economy and existing financial institutions.


Markus Brunnermeier laid out the trilemma for blockchain, where designers cannot achieve more than two out of three desirable qualities: resource efficiency, no rent extraction, and self-sufficiency (no outside trust). For example, a proof-of-stake system gives up self-sufficiency by involving an element of outside trust, and Bitcoin is powered by permissionless networks that use up tremendous quantities of energy. Brunnermeier also discussed some implications of increased tokenization and whether the incentives for interoperability truly exist.


William Cong presented on payments and yield-farming, what he sees as the most promising areas for DeFi. He also discussed the problems decentralized ledger technology is intended solve and how well it is doing, including on the reduction of concentrated market power, avoidance of single points of failure, and eliminating opacity and asymmetries of information.


In the Open Discussion session, Harvey and Halaburda elaborated on their thoughts about the co-existence of permissioned and permissionless blockchain, and what types of applications they are most suited for.


Auer and Harvey both discussed downside risks for DeFi when it becomes subjected to anti-terrorism and anti-money laundering regulations, since their innovations are built around a centralized backbone. Cong added that, although concerned, regulators are increasingly open to the democratization of finance. Meanwhile, he and Halaburda agreed that non-fungible token (NFT) markets are largely comparable to markets for baseball trading cards.

To round out the Dialogue, Chen and Holmström reframed the conversation, arguing that DeFi’s value lies in how it can improve the real economy. In his concluding remarks, Holmström raised questions about how real-world contracting will be changed by algorithms. Common problems in capitalism such as contract renegotiation and hold-up worries will need to be examined.


For more information, please visit Luohan Academy's youtube channel: Luohan Academy

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