On January 19, 2023, presenter Vivian Fang gave the lecture “Cryptocurrency, Blockchain, and Their Governance Implications”
The Q&A from Vivian’s lecture is below.
[1] Can you explain the difference of Proof of Work and Proof of Stake?
Proof of Work (PoW) and Proof of Stake (PoS) are both consensus mechanisms in decentralized networks. The difference lies in how they choose nodes to generate new tokens, verify new transactions, and update the blockchain. With PoW, nodes race on computing power to solve a difficult mathematical puzzle. With PoS, nodes are algorithmically chosen based on the tokens they have locked up as a form of collateral. Either way, the winning node gets to append a new block to the blockchain containing information of the latest verified transactions and is paid with new tokens as well as transaction fees, but PoS requires much less energy and no specialized equipment.
[2] The Walmart/IBM example relies on good data entered into the blockchain. How should companies organize good data input and authentify corrections on the blockchain in a decentralized way?
Indeed. Many enterprise applications of blockchain require the use of “oracles,” who fetch real-world data and feed it to the blockchain for smart contracts to use. An blockchain adopting company, in this case Walmart, needs to put in place an oracle mechanism that can securely and reliably deliver off-chain data to the blockchain, which calls for adequate internal control to ensure data integrity.
[3] Defi Lending would seem better suited to non-consumer loans, especially among parties of roughly equal bargaining power; whereas for consumer loans the intermediaries are purposefully intended to play a consumer protection role. Might you address this? Are there similar analogs for decentralized governance? Perhaps this is coming up, but I decided to send now so as not to forget my question 🙂
Yes, there is no consumer protection in DeFi lending in a traditional sense. The idea is that we can just trust the smart contract that matches peer-to-peer lenders and borrowers, and credit risk can be managed by overcollateralizing loans. It is, however, noteworthy that the confidence in consumer protection with centralized lending does not stem from the existence of intermediaries per se, but the fact that they are highly regulated. The perceived risk of DeFi lending platforms is also partly due to them operating outside current regulatory frameworks.
[4] About the environmental impact, what if all the cryptos shift toward PoS? ETH reduced the electricity consumption by 99% by merging in PoS. Why BTC cannot do that?
BTC would not be BTC if it switches from PoW to PoS. There is no question that such a switch saves on energy use, but it also perceivably goes against decentralization, which is the doctrine BTC was created to symbolize and uphold. Many folks consider PoS anti-democratic because it directly grants power to those with the most money, undermining democracy. You may also want to look up how Satoshi Nakamoto defended Bitcoin mining, which should give you a peek into its creator’s ideology.
[5] Could you please share the source of the list of the failed companies who attempted to create decentralized cash? Thank you!
“Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction” by Narayanan et al. (2016)
[6] Do you have any observations on regulatory initiatives in the European Union? The Market in Crypto Assets Regulation?
Among others, markets in crypto-assets (MiCA) attempts to define and regulate “EMTs” (i.e., electronic money tokens that maintain a stable value by referencing to the value of one official currency) and “ARTs” (i.e., asset-referenced tokens that maintain a stable value by referencing to the value of one official currency or a combination of several official currencies). So, it seems that MiCA has a focus on stablecoins, which is not surprising because stablecoins closely resemble “CBDC” (i.e., central bank digital currency) and hit too close to home.
[7] How was the FBI able to track down the owner of the bitcoin in the gas pipeline hack?
Bitcoin transactions are pseudonymous but not anonymous. This is an important distinction. Like everyone else, authorities can observe all transactions in and out a Bitcoin address. They can therefore analyze the BTC addresses that are used for transacting. The traceability of BTC transactions depends on whether someone’s transaction activity on the Bitcoin blockchain can be linked to their identity. Companies like Chainalysis and federal agencies like Europol specialize in tracing and analyzing blockchain activity.
[8] How do we improve the corporate governance models in crypto firms or decentralized organizations in 21st century?
I think an optimal corporate governance structure should be a hybrid model that strives to combine the efficiency of centralization and the agency free and information transparency spirit of decentralization.
[9] What do you think would happen to Bitcoin when all Bitcoins are minted, will the miners have enough incentives to hold the network alive?
Currently, miners get paid with both block rewards and transaction fees. Bitcoin has a finite supply of 21 million. When all Bitcoins are mined, which is projected to happen in 2140, miners will no longer get block rewards but will probably push transaction fees higher to make up for the earnings loss.
[10] There is growing distrust in the crypto space due to events like FTX. How do you see trust being earned back by society? Specifically those that are not knowledgeable on crypto.
Crypto exchanges are rushing to provide “proof of reserves,” which is a type of voluntary information verification that seeks to demonstrate an entity’s solvency to cover customer deposits. Whether this is adequate to restore investor confidence is yet to be seen. I also think improving crypto literacy and clarifying regulatory frameworks for cryptocurrencies will greatly help.
[11] In the world of no authoritative guidance on accounting and auditing for cryptocurrency, what do you think about the role of auditors?
Currently, auditors play a minimal role in the crypto space. For public companies, CPA firms simply perform their regular audits treating crypto holdings as intangible assets, which will change after the FASB settles on the use of fair value accounting for crypto assets. We also see a few smaller auditing firms perform proof of reserves services.
[12] What do you think about the future of centralized finance intermediaries, especially banks? Do you think they will move more towards decentralization or will we still have a place for traditional banking transactions?
My personal view is that DeFi will not replace centralized finance intermediaries. DeFi has a steep learning curve and is also perceived risky due to the lack of regulations so I believe that there will always be a place for traditional banking services. That being said, banks could very well incorporate the blockchain technology in their business to streamline paperwork and improve operational efficiency.
[13] Should we regulate how much crypto a firm can hold? E.g., microstrategy? What is your take on this?
No. Regulating the amount of crypto (or any asset) a firm can hold is neither feasible nor consistent with free market.
Vivian Fang is the Honeywell Professor of Accounting at the Carlson School of Management, University of Minnesota. Professor Fang’s recent work has studied issues related to managerial myopia, corporate disclosure, financial fraud, and cryptocurrency. Her research won several national and international awards and has been featured in numerous media outlets. She is a research member of the European Corporate Governance Institute (ECGI) and serves on the editorial boards of Management Science, Journal of Financial and Quantitative Analysis, and Contemporary Accounting Research. Professor Fang has been teaching a course on cryptocurrency and blockchain since 2018. She is an expert on crypto accounting and her comments on crypto related issues frequently appear on local and national media.
For further information on the webinar please contact Professor Jun Yang, Director of the Institute for Corporate Governance at icg@indiana.edu.
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