System/Daniel Dale

A lab at MIT is exploring a pilot program for a cryptocurrency backed by farmers for use in commodity markets.

New technologies that make it possible to reinvent our financial system have exploded over the past decade.


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ethereum and other cryptocurrencies are proof that there’s a market for alternatives to the big, powerful players. And yet, it’s unclear how these cryptocurrencies will affect the economic landscape. Problems like bubbles, financial crashes and inflation aren’t going away any time soon. (Ahem, note recent events.)

But in the future, things could be different. These digital currencies and their supporting infrastructure hold great promise for deepening our understanding of the monetary circuit. With newfound clarity, we can build tools for minimizing financial risk; we can also learn to identify and act on early-warning signals, thus improving system stability. In addition, this new level of transparency could broaden participation in the economy and reduce the concentration of wealth.

A crypto alternative

How might this work? Leading cryptocurrencies, with bitcoin being perhaps the most famous, or infamous, example, have considerable logistical limitations. An alternative is needed.

For the past three years, our lab at the Massachusetts Institute of Technology (MIT) has worked on creating a new global currency, Digital Tradecoin, that combines the most recent technologies with the very old idea of a gold coin having intrinsic value. The currency will be backed by alliances of diverse players and anchored to a basket of real-world assets such as crops, energy and minerals, or perhaps by a portfolio of national currencies and bonds. These traits help stabilize its value and make it easier for the public to trust it. After all, a currency requires both efficient trade systems and trust.

This is where bitcoin falls short. For starters, it’s slow and clunky. Its infrastructure can handle about seven transactions per second, compared with the 2,000 on average handled by Visa

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It’s an energy drain, too. The computer power required to create each digital token, a process known as “mining,” consumes at least as much electricity as the average American household burns through in two years.

Bitcoin is also not as free and libertarian as it’s often portrayed. The system was set up to spread authority among many miners; but because a small number of groups banded together into giant pools, a few players now dominate. Put simply, it’s not the peer-to-peer network it was designed to be.

Another problem is that bitcoin is not useful in day-to-day life. Bitcoin’s price against the U.S. dollar (and other government-issued legal tender) is exceedingly volatile, which makes it hard to spend. And because bitcoin isn’t backed by assets or a government guarantee, it’s essentially a speculative currency, which is a polite way of saying it’s not real money.

Blockchain-ledger combination

It’s important to point out that bitcoin’s digital token is not the ingenious invention here; that distinction goes to the “distributed ledger,” a communal database managed by multiple contributors that serves as a shared, digital bookkeeping system. Its underlying data structure, called a blockchain, is held in a series of encrypted blocks. A variety of “proving” mechanisms, which involve both humans and computers, helps keep those blocks secure.

Conceptually, blockchains and distributed ledgers aren’t new. What is new, however, is linking them together into a tamper-resistant computer system that can be applied to a broad spectrum of practical problems.

Enter Tradecoin. The principles behind Tradecoin are profoundly different from cryptocurrencies like bitcoin or ethereum, which aren’t linked to real-world assets or alliances. Tradecoin also avoids the energy-intensive process of mining by using a preapproved network of diverse and trusted “validators.” The result: a fast, scalable, reliable and environmentally friendly financial instrument. (Tradecoin is described in greater detail in a recent article that Alexander Lipton and I wrote for Scientific American.)

Tradecoin is likely safer than today’s currencies because it can be created to make the details of the monetary circuit visible for supervision. This allows for distributed accounting, which means we can more reliably forecast risk. This kind of transparency is impossible today because the details of transactions and contracts are restricted. But if such a system had been in place in 2008, it could have recognized the concentration of traders in mortgage-backed credit-default obligations and waved a red warning flag of the consequences for home values.

Pilot programs

We’re working to make Tradecoin a reality. We’re building “trust network” software systems, also the backbone for Tradecoin, for European Union nations and U.S. financial companies to use as pilot programs. We’re also exploring pilots for two Tradecoin currencies: one that’s intended for international commerce and backed by an alliance of small countries, and another that’s backed by farmers for use in commodity markets.

Today, for the first time ever, there exists the possibility of worldwide digital currencies that are largely immune to the self-serving policies of powerful central banks. As a result, major currencies like the dollar might become less dominant, or perhaps the U.S. financial system might become better behaved. The hope is that these systems, backed by broad alliances of diverse participants, can bring more transparency, accountability and equity to the world.

Alex “Sandy” Pentland is the Toshiba Professor of Media Arts & Science at MIT. He also directs MIT’s Human Dynamics Laboratory and the MIT Media Lab Entrepreneurship Program.

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