October 05, 2021
Graduate Students Help Blockchain System Determine Next Steps
Supporting local enterprises has long been a priority among community-oriented individuals, but the economic turmoil caused by the COVID-19 pandemic has cast a greater sense of urgency over how individuals and localities can protect their neighborhood institutions during downturns.
One such bottom-up funding system designed to address this issue is blockchain platform BoLT, “Building on Local Trust.” It is an exchange system designed to create liquidity and increase capital for small businesses by enabling consumers to make loans to local merchants and then trade these loans among themselves before redeeming them at other local merchants. In other words, customers can invest in the businesses they care about while purchasing the products and services they want.
To implement BoLT in any community, however, a central question must be addressed: How should the system manage consumers’ portfolios of merchant credits? To help answer this, Seth Goldstein—the architect behind BoLT—turned to the Tepper School of Business.
“I thought that Tepper students would bring a knowledge set to the problem that I don't have,” said Goldstein. “It seemed like a good match—they would get to learn about some new technology, I would get to work with them on aspects of it that I'm not an expert in, but that they're training to be experts in.”
“Students bring a certain amount of energy — a fresh look — and they're smart. We bring a problem that is real and working on that problem together can be hugely beneficial for both parties.”
Associate Professor, Computer Science Department, Carnegie Mellon University
Ariel Zetlin-Jones, Associate Professor of Economics, thought timing was ideal for working with a blockchain client and BoLT was a perfect fit for his project course aspiration. “We thought it was a really good investment to try to understand how to develop a lending platform to improve our local community when in the midst of a hardship like a pandemic.”
MBA teams addressed three key areas for their coursework:
- Provide a transparent, analytical solution for how BoLT should price and manage consumers' portfolios of merchant credit.
- Provide background research explaining the likely regulatory burdens the BoLT system will face and how different design choices made by BoLT during development will impact the nature of regulation the developed application will face.
- Discuss with BoLT its design and development, identifying economic bottlenecks in the proposed application, and research potential solutions.
Students began by using the gift card model to provide a framework, imagining the BoLT currency, or “bolts,” as digital gift cards that are redeemable in six months and carry 10 percent annual interest. Simply put, if an individual were to buy $20 worth of bolts from their favorite local bakery, in six months they could purchase $21 worth of baked goods. Meanwhile, the bakery receives funding for its business.
“Markets for major corporations’ gift cards already exist,” explained Zetlin-Jones. “So analyzing data from these markets seemed like a natural starting point to understand central issues for a new kind of gift card economy. One key question students examined was, which cards circulate closer to par versus others? This evidence matters because if I buy a gift card for $100 and then can only sell it for $50, I'm probably less willing to buy that brand’s gift card than a card I can sell for $99. The next key issue was how to apply this evidence at a local level, or with mom-and-pop coffee shops and members of our community. Can lessons from corporate gift cards inform us on how to create local gift cards that retain their value?”
To zero in on these issues, one student team worked exclusively on researching regulation while one team focused on using publicly available data from websites where gift cards are traded. The third team looked more broadly at previous settings where individuals, companies, and communities had established a local community currency, or gift card setting, and whether individual companies or community boards managed these.
“The goal of their project was not to tell BoLT, ‘This is the right way to design a gift card.' There was no direct solution. Instead, there was, ‘In order to make a decision, you need this background research and knowledge and our students are going to provide all of that for you.’”
Associate Professor of Economics
Ultimately, the students’ final presentation resembled a framework for moving forward rather than a cut-and-dry solution, which Zetlin-Jones thought was appropriate given the nature of the project. “Anytime companies issue liabilities, or ‘IOUs,’ to individual people, they’re subject to certain sets of regulations, and the specific regulations that matter depend on critical features of the IOUs issued,” he said. Thanks to this project, BoLT has a clearer understanding of which regulations matter most for BoLT IOUs.
For an enterprise like BoLT, receiving insights from dedicated teams of MBA students helped set the course for next steps. “It definitely made us think about the way in which we might deploy it. It made us think a little bit about some decisions related to regulatory issues,” said Goldstein. “I think they provided the sort of background information that we might not have found so easily.”
Zetlin-Jones noted that part of what made this project so beneficial to students was that it demonstrated the open-ended nature of entrepreneurship and how to engage with multiple possibilities. “The goal of their project was not to tell BoLT, ‘This is the right way to design a gift card,’” he said. “There was no direct solution. Instead, there was, ‘In order to make a decision, you need this background research and knowledge and our students are going to provide all of that for you.’ From there, it's up to BoLT to actually decide what they think is the most fruitful approach.”
“Students bring a certain amount of energy—a fresh look—and they're smart,” added Goldstein. “We bring a problem that is real and working on that problem together can be hugely beneficial for both parties.”
This project was funded in part by the Ripple University Blockchain Research Initiative. To learn about the work Tepper School of Business faculty and students are doing in the space, visit the Tepper Blockchain Initiative.