Currency Stability Using Blockchain Technology

Bryan R. Routledge, Tepper School Associate Professor of Finance, speaks about his research on the role blockchain technology plays in our monetary system.

Video Transcript

What I think is most interesting about blockchain is it lets you sort of rebuild financial institutions from scratch. If you think about them trying to work as money, they don't work so well as money if the price is changing. So people are interested in trying to think about how to make protocols for Bitcoin or blockchain currencies more generally that allow for prices that don't move around with so much volatility.

With the paper "Currency Stability Using Blockchain Technology," co-authored with Ariel Zetlin-Jones, the insight is that in blockchain technology, you can use real-time information. So instead of pegging an exchange rate unconditionally at one for one, your exchange rate can move up and down as demand arises.

What you're trying to avoid is what's called a speculative attack, which is, "I know you're going to run out of currency." And so, if everybody thinks you're going to run out of currency, everybody sells, and you will indeed run out of currency. And so what you need is to come up with a mechanism that eliminates the individual incentive for each person to want to sell their cryptocurrency just because they think the price is changing.

The interesting thing in Ethereum or smart contracts is, you can write down these rules, post them, and they are, like a computer script, going to run automatically. And so the currency board operates with rules, as opposed to a monetary policy, that acts with discretion.

When you look at things like Bitcoin, you might go, "That's really dumb. I don't need that." But unpack some of those elements and repackage them, and then, suddenly, you have the next Amazon. And there has been this sea change shift in not just finance, but society more generally.