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Scotiabank Digital Banking Lab

Publications & Working Papers

Popping the Bitcoin Bubble Releases Ethereum

By Prof. Michael R. King, co-Director, Scotiabank Digital Banking Lab at Ivey Business School, Western University
January 31, 2018

Cryptocurrency skeptics will be rejoicing at the popping of the Bitcoin bubble, with the electronic money dropping from US$20,000 per bitcoin (BTC) in mid-December to around half this amount by mid-January. Despite being caught up in the sell-off, I believe the second largest cryptocurrency, Ethereum, will rise out of the ashes because it offers something socially valuable and potentially game-changing.

Ethereum is the brainchild of Russian-Canadian programmer Vitalik Buterin, who dropped out of University of Waterloo in mid-2013 to focus full-time on Bitcoin. Later that year, this 19-year old came up with the idea for Ethereum, which he saw as an evolution that addressed the shortcomings of Bitcoin. In 2014, Buterin received the means to pursue his vision when he was chosen for a Thiel fellowship – a $100,000 two-year award offered by PayPal founder and tech billionaire, Peter Thiel. Buterin relocated to Zug, Switzerland, an area known as Crypto Valley due to its ecosystem of blockchain and cryptographic start-ups. Buterin then raised US$15 million in crowdfunding to hire coders and fund development, with core developers Gavin Wood and Jeffrey Wilcke.

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Interview with a Bitcoin Miner

By Prof. Michael R. King, co-Director of Scotiabank Digital Banking Lab, Ivey Business School
December 22, 2017

With Bitcoin reaching close to US$20,000 in 2017, many people are wondering what it takes to be a Bitcoin miner – the name given to participants in the Bitcoin network who verify transactions, maintain the blockchain ledger, and are rewarded randomly with new Bitcoin through the proof-of-work algorithm. To find out more, I attended a cryptocurrency MeetUp in Victoria, BC, where I spent a fascinating evening among Bitcoin enthusiasts. Among them, I met a genuine Bitcoin miner who explained how he got into mining. This individual – who prefers to remain (pseudo)anonymous of course – talked about his mining career and the advances in technology over a four year period from 2011 to 2015. By that point, he got out of the game before his monthly electricity bill surpassed the value of Bitcoins he was receiving. While mining may have become a big business run by pools of individuals or even corporations, learning about mining provides insights into the mindset and resources of this intriguing digital money.

King: When did you first get interested in mining Bitcoin (“BTC”)?

Miner: I first learned about Bitcoin while listening to a CBC radio story at work in July of 2011. I went home to research this new idea and stumbled across a webminer – basically a website that ran mining software on your computer. That site was going nowhere fast. In the meantime I downloaded the only Bitcoin wallet available at the time called Bitcoin, which is now called Bitcoin Core. This wallet included mining capabilities, which I explored, and I started solo mining using the Core client. After a few more weeks of research, I realized that the competition was already too fierce for solo mining and that pool mining was the only way forward. Pools were less than a year old at the time and I tried a few of them, but eventually settled on Slush, the world’s first Bitcoin mining pool founded in December 2010 by Marek Palatinus.[1] In this pool you needed to download the mining software, which I found through online searches of different Bitcoin forums. The pool mining software used my computer’s processing power and gave me around 35 million hashes per second (MH/s). As my share of the pool I started earning around one BTC every three to four days, or USD 5 to 15...

To read the rest of the interview, please download the article in PDF format.

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Bitcoin and the Rise of Decentralized Autonomous Organizations

2017.  Hsieh, Ying-Ying and Vergne, Jean-Philippe, Bitcoin and the Rise of Decentralized Autonomous Organizations (December 5, 2017). Available at SSRN: https://ssrn.com/abstract=3082911

Bitcoin represents the first real-world implementation of a “decentralized autonomous organization” (DAO) and offers a new paradigm for organization design. Imagine working for a global business organization whose routine tasks are powered by a software protocol instead of being governed by managers and employees. Task assignments and rewards are randomized by the algorithm. Information is not channeled through a hierarchy but recorded transparently and securely on an immutable public ledger called “blockchain”. Further, the organization decides on design and strategy changes through a democratic voting process involving a previously unseen class of stakeholders called “miners”. Agreements need to be reached at the organizational level for any proposed protocol changes to be approved and activated.

How do DAOs solve the universal problem of organizing with such novel solutions? What are the implications? We use Bitcoin as an example to shed light on how a DAO works in the cryptocurrency industry, where it provides a peer-to-peer, decentralized and disintermediated payment system that can compete against traditional financial institutions. We also invite commentaries from renowned organization scholars to share their views on this intriguing phenomenon.

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Financial Advice in Canada: A Way Forward

Chuck Grace, Amelia Young, and Andrew Sarta with Romina Maurino

The very mention of robo-advisors seems to strike fear in the heart of the financial services industry, and comes with a popular narrative that suggests these are actual robots that not only look like humans, but are here for their jobs. There’s also a sense that these “machines” require science-fiction grade technology, which will be impossible to regulate.

The goal of this paper is to take stock of the current situation in Canada with regard to the digitization of advice and start to define a way forward. We sought to move away from the misleading descriptor “robo-advice,” and toward a new, more actionable model. It was our working assumption that there was room for all sides to come together as the financial advice field evolved, and to create a digital structure that would make use of the best both humans and machines had to offer. To further the discussion around digital advice and its role within the wealth management industry, we also felt it was important to begin to build a framework for its execution.

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Buzz factor or innovation potential: What explains cryptocurrencies' returns?

2017. Buzz factor or innovation potential: What explains cryptocurrencies’ returns? PLoS ONE, 12(1): e0169556. doi:10.1371/journal.pone.0169556 (with S. Wang)

Cryptocurrencies have become increasingly popular since the introduction of bitcoin in 2009. In this paper, we identify factors associated with variations in cryptocurrencies’ market values. In the past, researchers argued that the “buzz” surrounding cryptocurrencies in online media explained their price variations. But this observation obfuscates the notion that cryptocurrencies, unlike fiat currencies, are technologies entailing a true innovation potential. By using, for the first time, a unique measure of innovation potential, we find that the latter is in fact the most important factor associated with increases in cryptocurrency returns. By contrast, we find that the buzz surrounding cryptocurrencies is negatively associated with returns after controlling for a variety of factors, such as supply growth and liquidity. Also interesting is our finding that a cryptocurrency’s association with fraudulent activity is not negatively associated with weekly returns—a result that further qualifies the media’s influence on cryptocurrencies. Finally, we find that an increase in supply is positively associated with weekly returns. Taken together, our findings show that cryptocurrencies do not behave like traditional currencies or commodities—unlike what most prior research has assumed—and depict an industry that is much more mature, and much less speculative, than has been implied by previous accounts.

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Categorical anarchy in the UK? British media’s classification of bitcoin and the limits of categorization

2017. Categorical anarchy in the U.K.? British media’s classification of bitcoin and the limits of categorization (with G. Swain). In Research in the Sociology of Organizations (From Categories to Categorization: Studies in Sociology, Organizations and Strategy at the Crossroads). Published online: 27 Mar 2017; 185-222

Bitcoin, introduced in 2009, is a complex entity whose evolving design and purpose are constantly redefined in a decentralized fashion. This makes bitcoin difficult to categorize, and indeed since 2009 bitcoin has been associated with 112 different labels in the British media alone (e.g., “private money”, “asset”, “commodity”) — most of which fail to adequately describe bitcoin. Contrary to expectations, the introduction of new labels meant to encapsulate bitcoin’s unique attributes is rare. By analyzing labels in 674 articles published in the U.K. between 2009 and 2015, we shed new light on the relationship between labeling and categorization, and explain the ongoing confusion faced by the media and their audiences when it comes to bitcoin. In particular, we identify classification inconsistencies at three levels (within clusters of labels, between labels and categories, and between label attributes), which hamper categorization based on attribute similarity, audience goals, and causal models (respectively). We contend that four contextual elements nurture this categorical anarchy: radical innovation, decentralization, nonintersection of knowledge domains, and absence of a superordinate category. We discuss implications for theory on categorization and innovation, and we conclude this paper with a call for more research on the socioeconomic revolution heralded by bitcoin and the blockchain.

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Bitcoin

2018. Bitcoin, in The Global Encyclopaedia of Informality, in Ledeneva A et al. (eds), The Global Encyclopaedia of Informality, London: UCL Press (with G. Swain)

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The internal and external governance of blockchain-based organizations: Evidence from cryptocurrencies

Forthcoming. The internal and external governance of blockchain-based organizations: Evidence from cryptocurrencies. In Campbell-Verduyn M (ed.), Bitcoin and Beyond: Blockchains and Global Governance. RIPE/Routledge Series in Global Political Economy (with YY Hsieh and S Wang)

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Media Naturalness and the Ability to Predict Generosity in a Give-Some – Get-Some Interaction

R E White, D J Neufeld & M Roghanizad

Are interactions using technology equivalent to interacting with another person face-to-face?  When it comes to assessing generosity and cooperativeness this research finds that interactions mediated by even high quality  video + audio are not as effective as face-to-face.  Completely replacing human interactions with technology may have a negative impact upon customer and other relationships.

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The cryptocurrency market: Survival of the fittest?

Y Hsieh & JP Vergne
Draft in preparation.

Independent of price fluctutations, some cryptocurrencies manage to thrive for years, whereas others disappear after a few months. What are the factors explaining cryptocurrency survival?