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Information Asymmetries, Blockchain Technologies, and Social Change

Reflections on the potential (and challenges) of Distributed Ledgers for “Market for Lemons” Conditions

We live in a data age, and it has become common to extol the transformative power of data and information. It is now conventional to assume that many of our most pressing public problems — everything from climate change to terrorism to mass migration — are amenable to a “data fix.”

The truth, though, is a little more complicated. While there is no doubt that data — when analyzed and used responsibly — holds tremendous potential, many factors affect whether, and to what extent, that potential will ultimately be fulfilled.

Our ability to address complex public problems using data depends vitally on how our respective data ecosystems are designed (as well as ongoing questions of representation in, power over, and stewardship of these ecosystems).

Flaws in our data ecosystem that prevent us from addressing problems; may also be responsible for many societal failures and inequalities result from the fact that:

Several observers have pointed to the relationship between these information asymmetries and, for example, corruption, financial exclusion, global pandemics, forced mass migration, human rights abuses, and electoral fraud.

Consider the transaction costs, power inequities and other obstacles that result from such information asymmetries, namely:

Blockchain technologies and Information Asymmetries

This is where blockchain comes in. At their core, blockchain technologies are a new type of disclosure mechanism that have the potential to address some of the information asymmetries listed above. There are many types of blockchain technologies, and while I use the blanket term ‘blockchain’ in the below for simplicity’s sake, the nuances between different types of blockchain technologies can greatly impact the character and likelihood of success of a given initiative.

By leveraging a shared and verified database of ledgers stored in a distributed manner, blockchain seeks to redesign information ecosystems in a more transparent, immutable, and trusted manner. Solving information asymmetries may be the real potential of blockchain, and this — much more than the current hype over virtual currencies — is the real reason to assess its potential.

It is important to emphasize, of course, that blockchain’s potential remains just that for the moment — only potential. Considerable hype surrounds the emerging technology, and much remains to be done (and many obstacles overcome) if it is to achieve the enthusiasts’ vision of “radical transparency.”

At the same time, the following examples and pilots show the various countries and sectors where it is beginning to gain traction — reducing fraud and waste, combating corruption and criminal activity, and generally increasing transparency and reducing information asymmetries.

Three ways Blockchain Technologies address Information Asymmetries

These and other examples highlight that blockchain technologies can broadly address information asymmetries in three ways:

Blockchain Technologies and Traditional Means of Addressing Information Asymmetries

To date, information asymmetries needed to be overcome through a variety of institutional and ‘signalling’ means — such as the enforcement of liability and traceability provisions and/or disclosure requirements or monitoring by well-known and trusted institutions; the establishment of industry standards or professional norms; reputation-based mechanisms; or even “outcome-contingent” contracts (where the buyer does not pay until the outcome of the service is known). Recent developments toward “open data” or “open contracting” as part of the move toward “open government” can also be portrayed as efforts to prevent or address information (and power) asymmetries.

These institutional solutions, however, are dependent not just upon strong and trusted societal intermediaries but also upon an individual’s ability to access those intermediaries, or leverage the data made available, which explains why information asymmetries affect less developed countries and already excluded people more.

Whether blockchain technologies will provide a distributed, more egalitarian and democratic alternative to these institutional solutions remains to be seen as the presence of these same trust providing mechanisms may in fact be conditional for blockchain to be successfully implemented. Similarly, recent developments toward more private and permission-based blockchains may actually create new or reinforce existing information asymmetries instead of dismantling them (as we have seen with certain identity and smart contracting initiatives — and with ICO token offerings).

To monitor the potential of blockchain for social change — by tackling information asymmetries — The GovLab at NYU, an action-oriented think tank, is compiling a database of blockchain examples from around the world, and welcomes additions sent to blockchange@thegovlab.org.

(Thanks to Andrew Young, Raul Zambrano, and Anna Levy for substantive comments to the above)

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