Methods: Case Study; Extensive Literature Review, Interviews and Additional Desk Research
With support from Raul Zambrano, Joyce Zhang, Michelle Winowatan, Juliet McMurren, and Olivia Clark
Advisory Group: Andrew Hoppin, Arun Sundarajan, Audrey Tan, Cara Lapointe, Carlos Santiso, and Marta Piekarska
Peer Reviewers: Alexey Musatov, Camilo Urbano, Christos Tsolkas, Kaliya Young, Manuel Vicente Zometa, and Marco Konopacki
We live in a data age, and it has become common to extol the transformative power of data and information. It is now conventional wisdom 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 data ecosystems are designed (including how questions over representation, power and data stewardship are addressed). Design shortcomings may prevent us from addressing complex public problems and may also be responsible for many societal failures and inequalities. Information asymmetries are among the most common, and most persistent, of these shortcomings. They manifest when:
Consider, for instance, examples of some of the transaction costs, power inequities and other obstacles that may result from information asymmetries:
At the individual level, someone who is trying access services, for example opening a bank account, or signing up for new cell phone service, is often unable to provide all the requisite information, such as credit history, proof of address or other confirmatory and trusted attributes of identity. Information asymmetries are in effect limiting this individual’s access to financial and communications services.
At the corporate level, a vast body of literature2 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” problem3 made famous in a 1970 paper of the same name by George Akerlof.
At the government or societal 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.
These problems are now becoming more widely recognized. Several observers have for example pointed to the relationship between information asymmetries and corruption4, financial exclusion5, global pandemics6, forced mass migration7, human rights abuses8, and electoral fraud9. In many ways, in virtually all parts of the world, the potential of our data economy and society is being severely limited by design shortcomings that cause or in some cases exacerbate existing information asymmetries. We need a solution—a better way to handle information.
This is where blockchain comes in. At their core, blockchain technologies offer new capacity for increasing the immutability, integrity, and resilience of information capture and disclosure mechanisms, fostering the potential to address some of the information asymmetries described above. 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 turn out to be the real contribution of blockchain, and this—much more than the current enthusiasm 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 to overcome if blockchain is to achieve the enthusiasts’ vision of “radical transparency10.”
To date, information asymmetries needed to be overcome through a variety of institutional and ‘signalling’11 means. These include the enforcement of liability and traceability provisions12 and/or disclosure requirements or monitoring13 by well-known and trusted institutions; the establishment of industry standards or professional norms; reputation-based mechanisms14; or even “outcome-contingent” contracts15 (where the buyer does not pay until the outcome of the service is known). Recent developments toward “open data16” or “open contracting17” as part of the move toward “open government18” 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. This in large part explains why information asymmetries tend to affect less developed countries19, and already marginalized populations, more. Such groups simply have a harder time accessing and leveraging traditional methods to mitigate information asymmetries.
Blockchain technologies may offer a more distributed, more egalitarian and democratic alternative to these institutional solutions. In doing so, they may serve as mechanisms not just to reduce information asymmetries, but also to address powerful and deeply entrenched social and economic inequalities. At the moment, however, this remains mere potential, and it is entirely possible that blockchain may itself ultimately rely on the same types of institutions and trust-providing mechanisms20 (i.e., in the form of new information-verification intermediaries). 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 identity21 and smart contracting22 initiatives). Thus, while the potential is clear, the jury is still out on what blockchain’s actual impact will be.
This Field Report seeks to collect and organize what is known about blockchain and its capacity for creating positive social change by addressing information asymmetries, especially in the field of identity. The report is intended to contribute to a more sophisticated exploration and dialogue regarding the promise and practice of Blockchain to achieve social change. Even as the technology continues to develop rapidly, big questions remain about its potential and actual applicability. This document marks the first of a wider set of conversations and examinations that the GovLab hopes to facilitate as the technology (and our understanding of it) continue evolving. As such, we would be delighted to hear from you if you have any ideas on how we can expand and improve the current state of insights into blockchain and its potential for social impact.
Originally published at: Stefaan Verhulst, “Information Asymmetries, Blockchain Technologies, and Social Change,” Medium, July 24, 2018, https://medium.com/\@sverhulst/information-asymmetries-blockchain-technologies-and-social-change-148459b5ab1a. ↩
“Secrets and agents.” The Economist, July 23, 2016. https://www.economist.com/economics-brief/2016/07/23/secrets-and-agents ↩
George A. Akerlof. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” The Quarterly Journal of Economics, August 1970. https://www.jstor.org/stable/1879431?seq=1#page_scan_tab_contents ↩
Melanie Manion. “Corruption by Design: Bribery in Chinese Enterprise Licensing.” The Journal of Law, Economics, and Organization, April 1996. https://academic.oup.com/jleo/article/12/1/167/896197 ↩
George Okello Candiya Bongomin, et al. “Financial intermediation and financial inclusion of poor households: Mediating role of social networks in rural Uganda.” Cogent Economics & Finance, 2017. https://www.tandfonline.com/doi/pdf/10.1080/23322039.2017.1362184 ↩
Harvey Rubin. “Future Global Shocks: Pandemics.” Organisation for Economic Co-operation and Development, 2011. https://www.oecd.org/gov/risk/46889985.pdf ↩
Kelly M. Greenhill. “Weapons of Mass Migration: Forced Displacement, Coercion, and Foreign Policy.” Cornell University Press, 2010. http://www.cornellpress.cornell.edu/book/?GCOI=80140100627270 ↩
Yonatan Lupu. “Best Evidence: The Role of Information in Domestic Judicial Enforcement of International Human Rights Agreements.” Department of Political Science, University of California-San Diego, 2013. https://pdfs.semanticscholar.org/b8cb/cfa41b4fc07927db8d0393f8e722ad3128a0.pdf ↩
Nadia Heninger. “Computational Complexity and Information Asymmetry in Election Audits with Low-Entropy Randomness.” Princeton University. https://www.cis.upenn.edu/~nadiah/papers/election-auditing/election-auditing.pdf ↩
Marshall Brown. “Will Blockchain Unchain The World?” Forbes, November 16, 2017. https://www.forbes.com/sites/marshallbrown/2017/11/16/will-blockchain-unchain-the-world/#2fe52864224f ↩
Tamilla Mavlanova, et al. “Signaling theory and information asymmetry in online commerce.” Information and Management, July 2012. https://www.sciencedirect.com/science/article/pii/S0378720612000444 ↩
Jill E. Hobbs. “Information asymmetry and the role of traceability systems.” Agribusiness, October 4, 2004. https://onlinelibrary.wiley.com/doi/abs/10.1002/agr.20020 ↩
Ferdinand A. Gul and Han Qiu. “Legal Protection, Corporate Governance and Information Asymmetry in Emerging Financial Markets.” February 8, 2002. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=298169 ↩
Gerald Bloom, et al. “Markets, information asymmetry and health care: Towards new social contracts.” Social Science and Medicine, May 2008. https://www.sciencedirect.com/science/article/pii/S0277953608000592 ↩
“Contingent contract.” Wikipedia. https://en.wikipedia.org/wiki/Contingent_contract ↩
“Open Data’s Impact.” The Governance Lab. http://odimpact.org/ ↩
Open Contracting Partnership. https://www.open-contracting.org/ ↩
“Opening Governance.” The Governance Lab. http://opening-governance.org/ ↩
Lawrence Lessig. “Thinking Through Law and Code, Again.” COALA's Blockchain Workshops, 2015. https://www.youtube.com/watch?v=pcYJTIbhYF0 ↩
Dominika Latusek and Alexandra Gerbasi. “Trust and Technology in a Ubiquitous Modern Environment: Theoretical and Methodological Perspectives.” IGI Global, 2010. https://www.igi-global.com/book/trust-technology-ubiquitous-modern-environment/37347#table-of-contents ↩
Ananya Bhattacharya. “Blockchain is helping build a new Indian city, but it’s no cure for corruption.” Quartz, July 17, 2018. https://qz.com/india/1325423/indias-andhra-state-is-using-blockchain-to-build-capital-amaravati/ ↩
Primavera De Filippi and Samer Hassan. “Blockchain Technology as a Regulatory Technology: From Code is Law to Law is Code.” First Monday, University of Illinois at Chicago Library, 2016. https://arxiv.org/abs/1801.02507 ↩