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 is 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:
- some actors have better access to data than others;
- data is of poor quality (or even “fake”); contains implicit bias; and/or is not validated and thus not trusted;
- only easily accessible data are shared and integrated (“open washing”) while important data remain carefully hidden or without resources for relevant research and analysis; and more generally that
- even in an era of big and open data, information too often remains stove-piped, siloed, and generally difficult to access.
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:
– At the individual level: too often someone who is trying to open a bank account (or sign up for new cell phone service) is unable to provide all the requisite information, such as credit history, proof of address or other confirmatory and trusted attributes of identity. As such, information asymmetries are in effect limiting this individual’s access to financial and communications services.
– At the corporate level, a vast body of literature in economics has shown how uncertainty over the quality and trustworthiness of data can impose transaction costs, limit the development of markets for goods and services, or shut them down altogether. This is the well-known “market for lemons” problem made famous in a 1970 paper of the same name by George Akerlof.
– At the societal or governance level, information asymmetries don’t just affect the efficiency of markets or social inequality. They can also incentivize unwanted behaviors that cause substantial public harm. Tyrants and corrupt politicians thrive on limiting their citizens’ access to information (e.g., information related to bank accounts, investment patterns or disbursement of public funds). Likewise, criminals, operate and succeed in the information-scarce corners of the underground economy.
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….(Full Essay)