{Music}
 I'm really, really excited
 to introduce our next panel
which will be led by my esteemed
colleague, David Yermack,
 who's the head of the finance
 department here at NYU Stern
and who did some of
the pioneering research
  on blockchain and Bitcoin.
 So let me hand it
 over to you, David.
 (audience applauding)
 - Okay, good morning.
  We have three speakers in
  the panel this morning,
 and in addition to me, Yannis
 Bakos and Katya Malinova.
 The first speaker was
 intended to be my colleague,
Sabrina Howell.
 Sabrina had a baby one
 week ago, and we knew
 that this would happen but
 we're not entirely sure when,
 but since it was last Friday,
 she won't be speaking today.
 The paper, and I don't think
 we have the right topic here,
  but the paper is
  co-authored by me,
 so I will stand in for her.
 Okay, so I'll be speaking
 about a paper I've co-authored
with Sabrina and Marina
Niessner from Yale
  on initial coin offerings,
  and I want to begin
 by speaking about the Token
 Summit that was held in May
 of 2017, about a
 year and a half ago,
  and it actually took
  place right in this room.
 The people who ran
 this had no connection
 with the university, but
 sort of acted like they did.
 They rented a room, they put
 the university's name up,
 they tried very hard to get
 faculty to come speak at this,
including both Sabrina
and me, and to a person,
  we all refused because we
  thought that these tokens
 were completely fraudulent.
  Up until that point, there
  had been crypto assets
that were mined assets,
that were airdropped,
  that were created through
  a variety of ways,
 but this was really
 something new
 to just create these and sell
 them directly to the public.
 This is one of the few
 things I regret in my career,
  not taking part in
  the Token Summit,
  because not only did this
  turn out to be very real,
but it was the point of
departure, and we can look here
 at the monthly data, that if
 you pick up the story in May
 of 2017, that was
 really the first month
  that you saw crypto sales
  of what we now call ICOs
 of any real volume.
 These grew exponentially
 through the end of the year,
to the point that about
six billion was raised,
 and now in the first
 nine months of 2018,
there's been triple
that, more than triple,
 20 billion raised, and
 a couple of big spikes
 representing some very
 large offerings that closed
 at different points in time.
 So we have an innovation here
 that has very quickly gotten
 traction in the markets,
 and it is beginning to
 look like a substitute
or successor to venture capital.
 The worldwide venture
 capital industry,
 in its entirety, is
 about 150 billion,
 and when you've raised 20
 billion year to date in ICOs
 that tend to be focused
 really on a few industries,
 you see that venture capital
 is giving way to this
 as a new type of fundraising
 for entrepreneurs,
 and the design of these things
 is really quite interesting,
and this is really what
I wish to speak about
in my time this morning.
  So here's a ranking of
  the largest ICOs to date,
 and the amounts of capital
 being raised by entrepreneurs
 is just very, very impressive.
You never see initial public
offerings raise this much money
 unless it's
 something like Conoco
 or a very well-established
 company, but it's now possible
for entrepreneurs to raise money
in the hundreds of millions
  of dollars, and typically,
  these are quite liquid
  in that the people
  who invest in them
are able to turn around and
sell them, sometimes right away
 or often after very
 short vesting periods,
 which is quite different than
 traditional venture capital
 which tends to be
 locked up for years.
  Now the tokens have clear
  antecedents, I think,
in three different ways.
  They resemble in many
  ways social media tokens,
 and I think the most
 successful of these up to now
  has been the QQ coin that
  was successfully launched
 in China a few years
 ago by Tencent.
 They also resemble, in many
 ways, video game tokens,
 so there is a whole
 parallel universe,
 where probably none of you,
 but your kids may spend a lot
 of time here,
 playing fantasy games
 that have their own
 internal economies,
where you can win coins,
but most importantly,
 trade these coins, so there
 are now investment platforms
  such as this thing called
  MMO bucks, where external
 to the game, you can
 win virtual money,
  and then speculate
  in it and trade it
with other people and so forth.
One of these was acquired a
few years ago by Goldman Sachs,
 who knows a lot about
 foreign exchange
  and didn't see too
  many differences
 in how you would run this
 market versus a forex market.
I think the closest
analog to these, though,
 is in the world of
 professional sports.
  This is the Giants Stadium
  that is in the Meadowlands
  not very far from here,
 and when it was built
 a few years ago,
several hundred million
dollars was raised
  by individually selling
  the seats through a device
 that's called a
 personal seat license,
  and about half the teams
  in the NFL have done this
  in recent years, and what
  you're buying is the right
to be a customer for a
platform, in this case,
 a sports stadium where
 there is a clear limit
 on the capacity,
 the number of people
who can go to the game, for
instance, and you have the right
 to trade those seats
 in a secondary market,
 which is what's on the right.
 This thing called PSL Source,
 and what the team is doing
is really capitalizing the value
of future consumer surplus.
 In other words, you're raising
 money from your customers
 and they're willing to invest
 in this on the proposition
 that the enjoyment for being
 a customer into the future
  is basically worth more
  than the team is charging,
 and I think in sports,
 in particular, this
 solves a problem
 where you can't jack
 up ticket prices
 if the team makes the playoffs
  without risking public
  blow back and condemnation
in the press, but if you
can quietly sell this
as a capital asset in
advance to speculators,
  it's probably a way for
  the team to raise capital
 at a much lower cost than
 going to a bank and so forth.
 So I think what ICOs are doing
are using a very similar model.
 They are raising money
 from future customers
 and they're using
 smart contracts to put
 a cap on the number
of tokens, the number of
customers, in the sense,
 who will be able to use
 the platform in the future.
 So we've traced this
 back in history,
and skipping a few
steps such as Wimbledon
 and the Sydney Olympics, the
 earliest example we found
  is Royal Albert Hall,
  which about 150 years ago
 was built with the same model,
 with creating a scarce
 allocation of seats
to future customers and
then selling the right
 to be a customer in perpetuity
 to people who still today
are trading these in a secondary
market 150 years later.
 Apparently, there are even
 medieval churches in Germany
 that have used this
 business model.
 I don't know if you
 can resell the pews,
  but I think the innovation
  here is very interesting
  in the capital markets,
  that you're raising money
  not from debt and equity,
  but from future customers,
but like many things in finance,
 it turns out it was
 probably invented
  by the British two
  or 300 years ago.
 Now, in our study,
 we look at a sample
 of 453 ICOs, and we
 require you not only
 to have successfully raised
 money but to have traded
for at least 90 days in
the secondary market.
 So unapologetically,
we are looking at the
top of the distribution,
  the people who have
  raised most of the capital
 and gotten most of
 the attention, so
 this is quarterly data
 about investment in
 blockchain startups,
 and you see venture
 capital almost exclusively,
 which is the red
 bar, up until 2016,
 when ICOs begin to peak out.
 The total raised each
 quarter in light blue
is the uptake of ICOs, but it's
really in the second quarter
 of last year, right after that
 Token Summit in this room,
that this market just exploded.
  So with the 90-day
  trading exclusion,
  we don't capture
  every one of these
  but we get the large
  majority, so the dark blue
  is the amount of capital
  represented in our sample.
 It begins to tail off at
 the end of the sample period
simply because we cut
off the data collection
  at a certain date, but if
  we ran the study forward,
 we would sweep in
 all of those as well.
 So some of the data
 that gives you a sense
of what the market looks
like, many of these ICOs
  are actually split
  into two pieces,
 where they have
 the public auction,
 but not until there's
 been a pre-sale,
  where selected customers,
who are sometimes called
the Bitcoin whales,
 these tend to be well known
 venture capital investors,
but they will get often
a preferential price
 and agree to somewhat
 different conditions
than the public is
able to participate at.
  So this happens about
  45% of the time, and 34%,
 about one in three, have what
 is called dynamic pricing
 in the auctions, meaning that
 the price changes constantly
based either on what price
people were paying a minute ago
 or the total volume
 raised, or really,
  any function that
  you wish to use.
This is completely unregulated,
so you can do things
 in this market that you cannot
 do in a US sale of securities
in the regular markets.
 It's quite interesting
 to see what people do.
It's almost like an experiment,
 like what if you would
 abolish the securities laws,
 what would people do instead?
 Mostly these are sold
 for other crypto,
 and they add to more than 100%
 because you sometimes have
 a choice of Ether, Bitcoin,
  relatively few except real
  money, such as US dollars,
 which is taken about
 10% of the time.
 I think our most interesting
 results are connected
 to the disclosure that these
 coin issuers are doing.
There is great fear on
the part of regulators,
  that essentially,
  these will exist
 without consumer protection
 and that you won't benefit
 from the disclosure
 that you would get
 in a typical
 securities offering.
 On the other hand, we've
 had an intellectual argument
 going back, really,
 to 1933 and 1934,
that the securities laws
may be not only unneeded
but even overkill,
that if you had a world
  of just voluntary
  disclosure, first,
 people would disclose because
 it's in their interest
 to communicate with investors,
 and you would get a greater
 diversity of disclosure
  that is much more
  closely connected
  to each individual company
  based on its industry,
and ownership, and
economics, and so forth,
  and we find exactly that.
The first thing to note
  is that there's just a
  huge amount of disclosure.
 Almost everybody in our sample
 communicates with the market,
and the variety of
channels is quite rich.
 There's a lot of social
 media, Twitter and Telegram.
 About 81%, four out of five,
  file what they call white
  papers that look a lot
 like a prospectus,
 but the white papers
 disclose individually quite a
 bit of different information
 for each one, and some of the
 most interesting disclosure
 is to post the code
 underlying the token itself.
  Typically, these are smart
  contracts on Ethereum,
 and to simply post
 the code on GitHub,
  in terms of due diligence
  for an investor,
 there's really no substitute
 for actually reading the code,
 if you're going to
 buy a crypto asset.
 So this is probably something
 that the SEC would not require
 if it were regulating
 this market.
 This is really quite
 different, and we were struck
 not only by the detail
 of the disclosure
 but the analysis that we do.
 These are regression
 results that we are studying
 in terms of the after
 market liquidity
 as a measure of the
 success of the tokens.
It's closely connected to
whether you have a white paper,
 whether you post
 the code on GitHub,
 and also to more
 traditional economic methods
  like do you have vesting
  schedules for the insiders
and that if they have
an allocation of tokens,
 and they usually do, are they
 restricted from selling them
  into the market, at least
  for a period of time?
 So I think the closer you look
 at this market, first of all,
it seems to be extremely
rational that if you take steps
 to reassure the public
 and give guarantees
 of your own commitment
 to the success,
 that clearly is reflected in
 the after market liquidity
 and your ability to attract
 investors, and arguably,
there's more disclosure going on
 that's more informative here
 than you get in the IPOs
 of equity securities, which
 we were really struck by.
 So the idea that this market
 may be fraudulent and risky,
I think every market has its
own baseline of fraud and risk,
 but in many ways, this
 looks some quite compelling
  as a way to raise capital,
  and very interesting
for investors to participate in.
 So two other quick results.
 We looked at the background
 of the founders themselves.
 We read LinkedIn for several
 hundred coin issuers.
Turned out 97% were male,
which is the biggest gender gap
I have ever seen in any
kind of finance study,
and even CEOs of public
companies and so forth
 don't skew quite this extreme,
 but the ones who are best
 at launching these
 tokens are the ones
  who are already
  successful entrepreneurs.
  A good example is
  the Brave browser,
 where the people
 who brought Netscape
 to the market many years ago
 are also behind this browser.
 And it's much better to have
 entrepreneurship experience
  than to have experience
  in finance or cryptography
 or computer science, at least
 in terms of the response
 of investors, and we find that
 the most successful tokens
 are the ones that are these
 so-called utility tokens.
 So these are not simply the
 securitization of other assets
 such as Tether or some
 of the gold tokens
 that you're seeing.
 These are tokens that are
 really focused on customers
  getting access to a scarce
  platform, and I think
  in informing the debate
  where the SEC is obsessed
 with regulating
 these as securities
 and saying that they
 are not anything
other than speculative
instruments in disguise,
  you would point to
  a result like this
  where it's really the, the
  utility value of the token
  seems to be what is
  attracting the speculators
  and the investors.
 So the conclusion here
 is that really something
 quite interesting is going on,
  and I think against all
  expectations, this market
is continuing to thrive,
it is a very innovative
 and new way to raise capital,
 and I think it's something
  that is likely to be with
  us well into the future
 and is going to demand
 integration into the fabric
  of the capital markets
  sooner rather than later.
So, thank you very much,
 and I will now move
 to the next paper.
 Okay, so the second paper will
 be presented by my colleague,
Yannis Bakos, and if you would.
 (audience applauding)
 - Thank you.
 (audience applauding)
 Thank you very much, David.
 What I want to talk about is
 about a particular application
 of this fascinating new
 world that David described,
 and David saw the
 slide in the beginning
where he had the 10
more successful tokens,
 and for counting about six or
 seven of them were platforms,
and as he mentioned, one of the
most successful applications
 of tokens is issuing
 them by platforms
  that typically are new
  platforms that are trying
to establish themselves.
 So what I will talk
 about is some work
 that looks at how platforms
 can use tokens as a way
 to promote adoption,
 and this is joint work
  with my colleague,
  Hanna Halaburda,
 and I have some motivation
 but you got a whole 15 minutes
  of much better explanation
  for how this environment
has become popular, the
exponential growth that we have.
  One possibility is
  what we're seeing
is we're seeing a lot
of hype, one possibility
 is the reason why
 IPOs are so successful
  is that they give you the
  opportunity to do things
 without following all
 of the regulations.
 There's a possibility
 we have a big bubble,
 but if that is the
 case, at some point,
 this is going to deflate,
 and then the question becomes
how much real value do we have?
  Can ICOs, can tokens help
  companies create value
  that they couldn't create
  otherwise, and so the work
 that we'll talk about is
 in this stream of research,
  and in particular, in the
  context of a platform.
 Now, platforms create value
  by bringing together many
  different types of users.
It could be friends on
Facebook, it could be borrowers
and lenders in the lending club,
 it could be drivers
 and riders in Uber.
 The key thing here
 is that, typically,
platforms have very
strong network effects,
  which means that platforms
  become much more valuable
as they can attract per
team or participants.
  I mean, obviously, I don't
  want to be in Facebook
  unless my friends
  are in Facebook,
 and once my friends
 are in Facebook,
  then Facebook becomes
  much more valuable to me,
  and this network effect is
  something that economists
  have studied for decades,
  and one of the results
  that is very common when
  you look in the literature
  and you analyze platforms
 is what we call the
 coordination problem.
So essentially, the
chicken-and-egg problem.
 It's the challenge in
 bootstrapping the platform.
  The fact that nobody wants
  to be on the platform
 unless everybody else
 is on the platform
means that the platform
can have a problem
 when it is a new platform in
 trying to establish itself,
and this is actually especially
true if there is a cost
in joining the platform.
If you must incur a cost
in joining the platform,
you are not going to do
it unless you believe
that the platform is successful.
 Now typically, the way
 platforms solve this problem
 is by subsidizing early users.
Like I'm actually, I've
been around long enough
to have received $20 to
open a PayPal account,
  plus $10 for every
  colleague or every friend
 that I recommended to PayPal.
 That was quite
 expensive for PayPal.
I think I ended up
getting about 150, $200
 back in 2001 or 1999.
 I never got an incentive from
 Uber but I did get a month
  of 30% off from Lyft and a
  whole bunch of free rides,
 and this is typical.
 As a platform, you want to
 offer incentives to the users
  and what you do is this
  way you establish yourself
 and you make money
 from the later users
 that come in the platform
 as part of the second wave.
 Subsidies require capital,
 and capital may be available
to companies like Uber,
 and it was available back
 in, for PayPal back in 1999,
 but for a lot of new
 platforms, it may be difficult
  to raise capital and offer
  subsidies, and especially,
 if they're perceived as
 being risky, and what we find
 and what the question we
 address is whether platforms
can actually use
tokens, an ICO, as a way
  to incentivize users to
  converse on the platform,
 and therefore is a way to
 make the platform successful,
 because a lot of the
 strategies in platform
is trying to establish yourself
 as a self-fulfilling prophecy
 that you are the place
 where everybody will converge,
 so if you can convince your
 users that you're successful,
 you become successful.
So can you actually get
your users to join you
 by giving them a token
 instead of a subsidy,
  and when would you
  want to do that?
 And we find that this
 is actually true,
that if you issued
tokens, this allows you
  to either reduce the
  subsidy that is necessary,
  or even better, instead
  of subsidizing your users,
 you can make money from them
and you can essentially
make it a lot easier
  to finance the development
  and the establishment
of the platform.
Now, depending on what
is your cost of capital,
 tokens could be a
 lot more attractive
than other alternatives,
because your other alternatives
 are typically, they're
 raising VC funding,
basically, so in
equity, and more rarely,
  you can maybe access the
  debt markets and get debt,
so depending or what is
your cost of capital,
 it could be the tokens
 are the way to go,
and not surprisingly,
this is especially true
when your cost of capital is
high, when your cost of capital
 is moderate or low,
 actually turns out
 you could make more
 money in the long run
by issuing subsidies or
by attracting your users
rather than giving them
tokens, and the reason for that
 is that when you issue
 tokens, essentially,
 what you are doing is you
 are, especially in the case
  of utility tokens
  which is typical
  in what the platform
  would do, is essentially,
 you are pre-selling
 your future services,
  and you need to compensate
  the users for the fact
 that they are taking a risk.
 So you will typically need,
 the more risky you are,
  the more you will need
  to compensate your users,
  and in effect,
  what you are doing
 is you are giving up future
 benefits, future profits,
  for the return that you're
  going to get upfront,
 which will allow you
 to create the platform
and launch the platform.
 And we, actually, we do this
 with some economic modeling.
 We study this question, and
 we have a two-period model,
 so that we can capture the
 dynamics of the early adopters
 and the second wave
 of later adopters,
  and so we have a platform.
 We look at early
 users and late users,
 and we have a situation where
 we have a coordination problem
 in both periods,
 which basically means
 that we're looking
 at a situation where
 most of the value
 from the platform comes from
 the network of other users,
 and therefore, the platform
 is not going to be able
to convince those users to join,
 unless everybody believes
 that everybody else will join,
or alternatively, unless
the users are bribed
or subsidized in order to join.
So first period, users
arrive, we look at two,
 we compare two possibilities.
One possibility is that
the platform subsidizes,
  or sets a price for users,
  and this could be
  a negative price,
 which is what you would do if
 you are offering a subsidy.
 Almost always what
 happens in these cases
 is your early price
 is discounted.
 That's how you get
 your users to join,
 and you hope to make up the
 discount from the later users.
Once we've established yourself,
  you'll be able to raise
  your price, and as I said,
 this discount
 could actually mean
that you go below zero,
you pay your users,
as Uber or PayPal were
doing at the beginning.
 The other possibility is that
 the platform sells tokens,
  so you do an ICO, and you
  let users buy your token,
  and then what you hope is
  users have an incentive
to make the platform successful.
They're going to
converge on the platform
 because the tokens will have
 more value in the future
 if the platform is successful,
 and you can see what happens
 in the first period, and then
 you have the second period,
 where the second wave
 of adopters come in,
  some of the users from the
  first period will leave,
 and what these users will do,
 they will trade their tokens
  to the new arrivals, and
  depending on the setting,
 we study either the
 platform now has a new price
 for the second period.
 In the second period, your
 price will never be negative
  so you will always
  try to make money,
  and you will make again
  as much money as you can,
 depending on how
 successful the platform was
in the first period, and
depending on how much
  it can convince, the new
  users that it will succeed
 in the second period as well.
 The other possibility
 is that the platform
 still sells tokens.
It sells tokens to the new
arrivals or anybody that arrived
in the first period
and didn't buy a token,
 they can buy a token
 in the second period.
  So this is the setting
  that we study, and again,
let me repeat that the
key feature, of course,
 is that users that bought the
 token in the first period,
 they always have the option
 of trading the token,
 and essentially, realizing the
 return in the second period
because token prices will go up
 if the platform is successful.
  So what we find is
  by issuing tokens,
  the platform can make more
  money in the first period,
so when the platform
tries to launch itself,
it needs to offer lower
subsidies and, actually,
 it can make money by selling
 its tokens, essentially,
 by selling the pre-selling,
 the future services,
 and the reason this
 works is that users
  that buy the early token,
  they know that their token
 or they expect that token to
 appreciate, and so in a way,
they're investing in the
success of the platform,
 so you can think of
 them that even though
this is a utility
token, there is a little
  of an equity component in
  the sense that the users
become vested in the
success of the platform,
 where the return is not going
 to be a formal appreciation
of equity, but this
could be an appreciation
 of the utility token.
Without the token, the platform
needs to subsidize users
  in the first period,
  which means that you need
to spend more money in the
first period, but you make it up
 in the second period.
 It turns out that once you
 are successful, you don't need
 to compete with the users
 that have bought our tokens
 in the first period.
 You can enjoy the full
 value of your success.
 You can price,
 basically, and extract
  as much value as you can.
 So our first result is that
 the second period effect
 actually outweighs the
 first period effect,
which means that if you
face no cost of capital,
if you can do either and
it won't cost you more
 to subsidize users
 in the first period,
 you make more money
 by offering a subsidy.
 Hold off on the token.
 However, if you have a
 high cost of capital,
 or if capital is not available
 to you as it is not available
 to a lot of these
 aspiring platforms,
then you make more
money by issuing tokens,
 and the best strategy that you
 can follow is to issue tokens
 in the first period and then
 also issue tokens later,
  and it turns out actually
  that the token strategy
 is more attractive, in a
 way, the more risky you are,
 so the less you can establish
 yourself as being inevitable,
 the more you want to issue
 tokens, and that makes sense
  because if you can
  establish yourself
as being the inevitable winner,
 then users basically
 are pretty sure
 that you will actually succeed
 and they don't perceive you
  as risky, and you
  can raise capital,
but if you are a risky platform
upfront, then it turns out
that, again, users
will need a big subsidy
 in order to decide to adopt
 you, and in that case,
you may be better off by
issuing tokens, and by the way,
  I've been telling you a
  story, we do have a model
 with a lot of Greek
 letters and diagrams.
 I'm not going to bother you
 with that, but to conclude,
 kind of will summarize
 what we find, again,
tokens provide the
mechanism for a platform
 to incentivize users to adopt
 it, and a key aspect here
 is the fact that
 tokens are tradable.
  The fact that early users,
  that they buy the tokens,
 can trade them later,
 and participate
 in the success of platform.
If you have an option to do
either, what happens with tokens
is you get more money
early, but in some ways,
 you're giving up future sales,
 you're selling your
 future at a discount.
 So in some situations, if
 you have low cost of capital,
 it would make sense to
 subsidize the early adopters,
 but if your cost
 of capital is high,
 then you don't want
 to offer subsidies.
We just give them cheap tokens,
 and the key, actually,
 finding out of this
  is that for a platform
  that is facing a high cost
of capital, it could not be
able perhaps to establish itself
 without tokens, so
 what tokens enable,
 they enable the
 creation of platforms
  that could not be
  sustainable without them,
  so in that sense,
 they do what economies call
 create more economic surplus,
  and that's why we think
  the whole token ecosystem
 can actually create
 a lot of value
 and it's a very
 interesting innovation
  that we are staying on top
  of and we keep studying.
 So I will stop here.
 Thank you very much.
 (audience applauding)
 - Thank you, Yannis.
 I'm surprised to hear you
 didn't get the Uber discount,
 and I'll invite you.
  I think everyone
  else in the roo--
- [Yannis] I started
using Uber way too early
 to get the discount.
 - Talk to me afterwards
 'cause I can still get you in.
 Oh. (chuckles)
 Okay, our third presentation
 will be by Katya Malinova
 of the University of
 Toronto, and the title
 is Market Design with
 Blockchain Technology.
 (audience applauding)
  - Well, thank you, David.
  Thank you, the
  organizers, for having me.
 I should say that I
 have moved (chuckles)
 to DeGroote School of Business
 at McMaster, but indeed,
  I'm still on leave from
  the University of Toronto,
and my colleague, Andreas Park,
is at the University of Toronto.
  So as David, as Yannis
  talked about, block-based,
blockchain-based trading
is now a reality,
 and the question that
 we ask in this paper
 is what's the impact
 of blockchain design
 on blockchain-traded assets
on trading
blockchain-based assets?
 And accumulated from my
 research in market structure,
 my main question was,
 well, what's different
about trading
blockchain-based assets
 from the trading perspective,
 not the valuation
  or investment perspective,
  and one of them
 is that multiple trading
 protocols are now possible.
You can still trade them
in a limit or a book,
you can trade them peer-to-peer.
  In peer-to-peer,
  it's here differs
  from the over-the-counter
  markets that many of us
are used to when there is dealer
 and an intermediary involved,
  and I cannot just
  go and find you.
With tokens, I can go and trade
with any of you right away,
 and I can find you
 right away as well,
 so we don't have to go through
 the brokerage to do this.
 The second feature
 is that by default,
 this trading is
 extremely transparent.
If you go on Etherscan, you
could actually see the addresses
for any transaction that
traded with each other.
 So you could be able,
 you might be able
  to identify frequent
  traders and you will see,
 you will see the IDs
 that trade frequently,
  and it's not just
  the transactions
 but you can also
 aggregate these trades
 and see the holdings.
 So you can sort of see
 the whales or traders
 that trade a lot, or rather,
 hold large positions.
 And so this brought
 us to two answers
  to our original question,
  what's different?
 Well, first, we
 get frictionless,
 peer-to-peer trading,
and this is, of course, the
nature of blockchain technology
like Internet allowed us
to transfer information.
Now we could transfer ownership,
 including ownership
 of contracts.
  And the second is that the
  informational environment
 for trading these
 assets, securities,
 tokens, utility tokens
  is dramatically different
  from that that we know
 from equity markets
 or bond markets
  or any securities markets.
 Of course, here, there
 is one distinction
 that when I say
 wallets or addresses,
 they're not the same
 as traders, and again,
  this would be a difference
to traditional,
over-the-counter market
where you probably would
know the counterparty
  that you're trading with.
And that brought us to the
question that we try to address
 in this research paper, and
 it's a theoretical paper.
 How does the design
 of the technology,
how does the design of
the ledger transparency
and the usage of the identifiers
  with possible
  peer-to-peer interaction,
 how does that affect
 trading behavior,
and how does that affect
economic outcomes?
And we're agnostic in this paper
as to whether we think
this is a utility token
 or security token, but it's
 probably, what we had in mind
  when writing it
  as security token
 more so than the utility token
 so that you actually
 traded frequently
 and not just I sold it
 to you and I'm done.
But there's now a lot of
literature on the topic
 that I will skip in
 the interest of time,
 including by people
 in this room,
and in terms of the
model, again, as I said,
  it's a theoretical model
  and it's a trading-based,
theoretical model so
we have a risky assets,
 we're gonna have
 two large investors.
One is gonna be hit by liquidity
shock so they have to trade
and the other has a possibility
of absorbing the shock
 of trading at zero cost, and
 we have some small traders
 that are distributed
 so the peers
 that you could also
 trade with, again,
 differently to the
 over counter market,
 and we have an intermediary
 that is able to,
that you're able to trade with,
 but the intermediary's
 risk-averse,
and so every time you
go to the intermediary,
 it's an inefficient
 transfer of risk, and also,
 you pay the cost to the
 intermediary, so the question
  that we have is, well,
  how do the costs compare?
 Well, there are direct costs
 for trading, and when we,
 we're assuming in the paper
 that it's quite costly for you
 to trade with small investors,
 small traders, as a trader,
  and the reason for that
  is we say data processing
but it doesn't just have
to be data processing.
For me to trade with you
with so many platforms,
and for me to find you,
I have to actually go,
and because there is no broker,
I can't just hold an account
 at a brokerage and trade in
 multiple different platforms.
 I actually have to go
 and open an account
 on every single one of
 these platforms for me
  to trade with you,
  and that's costly.
 Includes also capital transfer
 often, and just generally,
when I trade and I
have many transactions,
  you could also think of
  this as a transaction cost
 because the more
 transactions I have,
  the larger the validation
  costs that I have,
the mining cost, so it's
a cost per transaction,
 not so much per value,
 and if I'm trading
  with a large trader, the
  result's an indirect cost
  because the person
  may front-run me,
 by going to the intermediary
 and raising the public,
  raising the price.
  And so when we're
  thinking about it,
you're thinking of three
different possibilities
 of sort of designing
 the addresses
 or designing the blockchain,
 so one is our benchmark.
  When we presume that
  everything is transparent,
so as I showed you an Etherscan,
you can see the address
 that you're trading
 with and you can see
 all the past transactions,
 and however, I can't just go
 and generate multiple search
 addresses, and why can't I?
 And one is because as a
 private blockchain designer,
 you decided to prevent
 me and you do the KYC,
 know your customer,
 and you say that's it,
 you're allocated just
 a single address.
Another possibility,
as a contract designer,
  a token designer,
  that you decided
 that you're gonna
 restrict who is able
to trade your contracts.
 Why would you do that?
  Well, one example why
  you might want to do this
  is if you want to restrict
  trading your tokens
  just to created investors.
You'd need to know which
addresses, which wallets
these accredited investors have.
So there is a possibility
outside of the public blockchain
 and outside of trading
 Bitcoin and Ether
  that you are able to
  actually restrict trading.
 So in the benchmark
 model, again,
 everybody knows and
 sees everything.
 We're not restricting
 transparency, just
 the number of IDs,
and the options for the
large trader are two.
  You can trade with
  small investors
  or you can trade
  with a large one.
  If you trade with
  the small ones,
 you have this complexity cost.
If you trade with a large
ones, they might front-run you,
and if we only trade once,
then actually, I wouldn't trade
 with a large investor,
 because if we only trade once,
 they are gonna front-run me
  and they're gonna extract
  the entire surplus.
  I'm not gonna get
  anything from it.
 However, for trade repeatedly,
 because we're large traders
and we know tomorrow, I'll come,
today, you'll front-run me,
 tomorrow I'll come back to you
 and I'll wanna trade
 with you again,
  or you may have to trade,
 and you have to come
 and trade with me,
  and I won't because
  you've front-run me today,
so in theoretical
terms, we're modeling it
 as a repeated game
 and you're punished
 by the grim trigger strategy,
 so there is a theory to that
 but the bottom line is when
 we interact repeatedly,
 social norms are
 gonna start to work,
  and the large traders will
  trade with each other,
so we will avoid trading
with an intermediary.
  We will avoid their
  inefficient risk transfer
 to the intermediary.
 We will avoid paying the
 extra cost so this model is,
  the benchmark model is
  actually best for welfare,
 pretty much by design.
 However, we recognize
 that people may want
to hide their trading intentions
and they may want to hide
their IDs, and one way to do it
 is just to say we
 have the same model
  but we don't show
  you who trades.
  We don't show you the IDs.
 Well, in this case,
 because I don't know
which of you is a large trader.
 If I just randomly approach
 some of you, chances are,
 I'm not gonna find the large
 trader, so in equilibrium,
 I trade with small investors
and I trade with an
intermediary as a large trader,
  and turns out, this is the
  most inefficient setting,
 so if you wanted to
 restrict transparency,
that shouldn't be the
way to go because this,
  even though it
  seems very natural
 that you just take a normal
 setting, a regular setting,
 and you put a privacy screen,
 the problem is that may in,
 that disallows the large
 investors to find each other,
and that creates
problems for liquidity,
and if it creates
problems for liquidity,
 that's gonna create problem
 for welfare as well,
so another way to think
of achieving privacy
 is what was suggested
 by Vitalik Buterin,
  one discussed in Ethereum,
  is just allow people
 to create as many
 addresses as they want
 and try to hide by creating
 multiple addresses.
 I'm not talking whether it's
 technologically possible,
  but even if you were to
  just put a privacy screen,
 still, you should be
 thinking of putting multiple,
 multiple addresses,
 so in this case,
 if you have multiple
 addresses, a lot of,
 a lot of the
 results in our paper
 depend on the
 probabilities of acceptance
 and the probability that if
 I come to trade with you,
 what are the chances that I'm
 gonna find a counterparty?
 The problem with putting a
 privacy screen in a single ID
  is I cannot find
  that counterparty.
  Now, when I have, allow
  you to have multiple IDs,
 large trades, multiple IDs,
I'm much more likely to
find that large trader,
 and whether or not
 it's beneficial or not
  is gonna depend on whether
  or not that large trader
 trades with me or not.
Now, as I'm almost out of time,
  I'm gonna skip the
  technical details,
 except that they're not
 getting skipped. (chuckles)
  And I'm gonna proceed with
  a couple observations.
 One is that when we
 have an intermediary,
  every time we have
  an intermediary,
  the market is potentially
  socially inefficient.
  When we have large
  traders interact
 with small investors
 peer-to-peer,
that's gonna impose transaction
costs on large investors,
 so what we would like to do
  is we would like to design
  a system that would ensure
 that our large traders
 are able to find
 and trade with large traders,
 and if we're comparing their
 pack designs, for this reason,
 when we have a privacy screen
 with a single ID restriction
 that large traders can
 just have a single ID,
 that's gonna be welfare
 reducing, and in the system,
 when the large traders
 don't interact,
  it doesn't really matter,
  but another comment
that I'd like to make
is often, in our model,
 in order to prevent large
 traders from front-running,
  I'd have to pay concession
  to the large trader,
 to say, well, if we
 interact infrequently,
you don't know when you're gonna
get hit by liquidity shock,
 so I'll pay you today
 a little bit extra,
still less than through
the intermediary
 to prevent you
 from front-running.
  Well, in a system
  with multiple IDs,
 because I don't know
 who the large one is,
 I'm gonna have to
 pay this concession,
 not just to the large
 trader, but also to the IDs
 of the small traders, and
 so there are configurations
 when welfare efficient
 is to do one thing
 and large traders are gonna
 prefer something else.
 So in summary, back-office
 designs do have front-office,
 do have trading implications.
 We should think
 about it carefully,
 and what our model tells
 us that the public solution
  to privacy might actually
  be the most efficient one.
 Thank you very much.
 (audience applauding)
