Navigating the Next Wave of Blockchain Innovation: Smart Contracts

Blockchain is a decentralized ledger system that stores data in encrypted, time-stamped blocks. Though best known as the technology on which Bitcoin is founded, its capabilities extend far beyond cryptocurrencies to potential applications in cloud computing, auditing, health care, and trade.

Lin William Cong, professor of finance at the University of Chicago Booth School of Business, first began to follow blockchain as a doctoral student at Stanford, based close to Silicon Valley. His research on financial innovation includes the study of smart contracts — tamperproof digital transactions conducted on blockchain platforms that could make certain processes infinitely quicker and more efficient.

MIT Sloan Management Review spoke to Cong about the new economics underpinning blockchain and how smart contracts could revolutionize trade finance and other fields. Contributing editor Frieda Klotz conducted the interview, and what follows is an edited and condensed version of their conversation.

MIT Sloan Management Review: How do you define blockchain?

Cong: There’s a general lack of clarity and confusion about blockchain. It’s the technology behind Bitcoin and many other cryptocurrencies — so many people know of it in relation to digital cash. But it’s not defined by these cryptocurrencies.

Blockchain brings a whole new dynamic into play. It provides decentralized consensus through a ledger system allowing the agents within the ecosystem to participate in it. It can be used across a range of functions — cloud computation, financial transactions, and all sorts of digital records. It also facilitates what are known as smart contracts, which are automated contracts that can be speedier and more secure than those that use paper documentation.

In what way does blockchain allow for a new economics to come into play?

Cong: That’s primarily because of decentralization. Let’s take Bitcoin as an example. Once a protocol is introduced in the Bitcoin network, anyone who accepts it can interact according to its rules. It’s basically a peer-to-peer interaction with no centralized party running it. A fundamental network effect is at play when people use bitcoin tokens. The more people using Bitcoin, the more stores accept it, the more utility a person derives from holding bitcoins.

The same decentralization operates across blockchain technologies. In decentralized cloud computing, for instance, when more users are on a platform, additional spare power is generated for computational tasks.