Monday, September 18th, 2017
We are thrilled to welcome Dr Laleah Fernandez to our research team at the Quello Center. Laleah joined us in early September as the Quello Postdoctoral Research Fellow and hit the ground running as we finalize contracts for some new and exciting research projects. As an MSU alumna who earned her Ph.D. in Media and Information Studies, her M.A. in Advertising and her B.A in Journalism, Laleah is a true Spartan and a great asset to the Center.
With her strong background in policy work and media research, Laleah will play a key role in the Rocket Fiber project on access to the Internet in Detroit, as well as the Google search project. She will also be developing strategies for better connecting the Quello Center with the state policy communities of greatest relevance to our work.
Previous to coming to the Quello Center, Laleah was an Assistant Professor in the Department of Information and Computing Science at the University of Wisconsin – Green Bay. Her research interests include network analysis and the role of new and emerging media in community-level and global mobilization efforts. Laleah has published research and reviews in the areas of advertising, economic development, mobilization, and science communication.
We are excited to have her on board, and we look forward to working with her! Welcome, Laleah!
Wednesday, August 30th, 2017
After what was arguably an Annus Horribills for MSU in several respects, the new academic year begins with news that bodes well for the new academic year. It could herald a real Annus Mirabilis.
Namely, Michigan State University (MSU) is doing a terrific job at what a public university is supposed to do.
First, it is educating a huge number of Michigan students. Its enrollment is over 50,000 students, and this year saw MSU’s largest class in its history – 8,000 first-year students, plus 1,550 transfer students (Lansing State Journal 8/28/17). And most (72%) are Michigan students, with MSU being the top destination for public high school graduates in Michigan.
Second, it is a diverse class. For example, we have the largest intake of African-American students of any Big Ten university. 610 African-American students in the first year cohort. MSU is contradicting worrisome trends in diversity across the US.
Thirdly, students are getting jobs. MSU has been tenth in the nation in its job placement rate http://www.onlineschoolscenter.com/30-colleges-impressive-job-placement-rates-career-services/ It has since risen to third. Incredible.
Add to this news that MSU was named at one of the world’s 50 powerhouse universities by the Times Higher Education supplement. This means it is one of the top 50 universities in the nation that is likely to challenge the Ivy League universities in the coming years.
So the new academic year is looking good for MSU Spartans.
Saturday, August 26th, 2017
Last month, prolific telecomm researcher Susan Crawford wrote about the multi-billion dollar market for business data services (BDS). This market consists of “middle mile” networks used to connect consumers and businesses across cities and neighborhoods. As I explained in a 2016 Quello Center presentation concerning this market (previously referred to as “special access”), these connections, which are owned by “local exchange carriers,” are used, for example, by large businesses to facilitate intranet communication, by cell-phone providers to funnel voice and data traffic between towers, and by banks to connect to their ATMs. Incumbent local exchange carriers (ILECs) also wholesale business data services to rival, competitive local exchange carriers (CLECs), who compete with them head on.
Professor Crawford’s concern, and that of others before her, is that unregulated ILECs will exploit their monopoly power to keep prices high and competition out. As Crawford notes, following a massive data collection to analyze the BDS market, in 2016, the Commission appeared on the cusp of extending regulation in this market, but reversed course following the 2017 change in leadership (see 2017 Commission Order here). In particular, the FCC provided that there would be no new regulation of packet-based BDS, and that the continuation of currently regulated TDM-based services would be determined by a market test that Crawford called “unbelievably counterfactual [and] low.”
The regulation in question is price-cap regulation of ILECs’ wholesale and retail prices, which, in markets deemed not to be sufficiently competitive, constraints the prices that ILECs charge for various regulated business-data services that they offer. As my former FCC colleague, Omar Nayeem, and I show in a recent theoretical working paper motivated by the FCC’s BDS proceeding and set to be presented at next month’s TPRC conference, while the case for price-cap regulation appears rather strong, Chairman Pai is justified in his evident concern about the potential deleterious effect of regulation on competition.
In our work, Omar and I study a setting in which an ILEC sells business data services in the (enterprise) “retail” market as well as to a potential CLEC, who purchases access to ILEC networks and/or facilities and resells it in the retail market. Our interest is in the static welfare and dynamic investment ramifications of price-cap regulation in this market relative to what would happen without price-cap regulation.
Static Welfare Results: In our static analysis, we consider profits and consumer-surplus levels that would prevail if the FCC capped the ILEC downstream (retail) and wholesale prices for BDS at marginal cost as well as those that would prevail without price-cap regulation. Our interest is not on a comparison of these two scenarios—ILEC profits are obviously lower and consumer surplus higher following price-cap regulation—but rather how the relevant regulatory regime affects competition and incentives by ILECs to foreclose potential entrants.
To our surprise, we discovered that, when price-cap regulation is not in place in such a market, CLEC entry, at least in theory, leads to what Chen and Riordan (2008) have dubbed “price-increasing competition.” That is, the ILEC ends up setting higher prices following CLEC entry than it would as a monopolist. This occurs because the ILEC can exploit its control over the wholesale price of BDS to force the CLEC to set a high retail price, which mitigates the negative impact of entry on the ILEC’s retail sales. In addition, when the wholesale price is high, the incumbent incurs a greater opportunity cost of lowering its price through lost unit sales to the entrant. Thus, the entrant’s reliance on the incumbent in the upstream market undoes the typical effect of entry, which normally is a disciplining force on the incumbent’s retail price.
Naturally, the price-increasing competition that follows wholesale entry can lead consumers to be worse off than they might be under an ILEC monopoly. By forbidding price-increasing competition, price-cap regulation ensures that consumers are better off (because of their increased choice) following entry than they would be under a price-capped ILEC monopoly. Importantly, we find that price caps should not raise any concerns about foreclosure. In particular, the ILEC does not have an incentive to foreclose the CLEC when it is price-cap-regulated unless it also has that incentive in the absence of price caps. The intuition for this finding is rather straightforward: when ILEC retail prices are capped at marginal cost, the only way it can now earn positive economic profit is by selling to the CLEC at wholesale to save on any downstream retailing costs.
Dynamic Investment Results: Though Omar and I investigate the impact of price-cap regulation on both ILEC and CLEC investment incentives, for brevity (as if this blog post weren’t already long enough), I discuss here the impact of price caps on CLEC investments to self-provision. In other words, Omar and I ask the following question: might there be situations under which the CLEC would choose to invest in its own duplicative network facilities to obviate its reliance on wholesale BDS when the ILEC is not price-capped, but choose to continue to rely on wholesale BDS under price caps? Conversely, what about the other way around?
The answer is ex-ante unclear. Under regulation, the ILEC’s initial downstream price is relatively low (equal to marginal cost) and does not drop following self-provisioning (whereas it would drop without price caps as the ILEC responds to its competitor by lowering its price). This means that, under regulation, self-provisioning does not elicit a major competitive response from the ILEC, giving the CLEC a stronger incentive to do so. However, under regulation, the initial wholesale price is low as well (also equal to marginal cost), so that self-provisioning does not lead to as much of a marginal cost reduction as it would in the scenario without price-caps, in which the wholesale price is initially high. What we find is that the latter effect dominates under most reasonable values of the relevant parameters.
If the CLEC has a sufficiently low fixed cost of self-provisioning, it will do so regardless of the presence of price-cap regulation, whereas, if that fixed cost is sufficiently high, the CLEC will remain a wholesale entrant regardless of the regulatory regime. The significance of our finding is that, under most parameter specifications, there is an intermediate range of fixed costs of self-provisioning whereby a CLEC might invest in the scenario without regulation, but would not do so under price-caps.
The idea that regulation might forestall investment is far from new in telecommunications. In the debate over net neutrality, opponents frequently touted the likely deleterious effect of net neutrality on broadband investment. Similarly, in various proceedings involving roaming by wireless service providers, opponents of FCC roaming regulations were concerned with attempts by rivals to “piggy-back” on their networks.
What we find is that this concern is relevant in the context of price-cap regulation as well. However, whether this concern justifies FCC actions to reduce the scope of price-cap regulation is an empirical question we leave for future researchers. In our work, Omar and I found that price-caps have positive social effects, both static and dynamic (though the latter are not discussed in this post). These benefits must be weighed against the concern about forestalling entrant investment.
 Unlike more recent packet-based technologies, time-division multiplexing (TDM) transmits signals by means of synchronized switches at each end of the transmission line.
 Most of the analysis in this work was performed while I was at the Quello Center and Omar was an economist at the FCC. In particular, the analysis was begun during the Wheeler administration and completed during the Pai administration, and represents the opinions of the authors, not the FCC or any of its Commissioners.
 Indeed, our theoretical framework applies more broadly to markets where firms supply their rivals (i.e., energy, water and sewage, etc.).
Wednesday, August 23rd, 2017
Dr. Bianca (Bibi) Reisdorf, Quello Assistant Director and Assistant Professor in Media and Information, has been invited to present her research findings on race and digital inequalities at the TPRC Capitol Hill Briefing on Thursday, September 7, 2017. Each year, the TPRC (The 45th Research Conference on Communications, Information, and Internet Policy) panel invites four conference presenters to discuss how their research affects policies at a briefing on Capitol Hill on the day prior to the main conference.
This year’s discussion will be moderated by Dr. Carleen Maitland (Pennsylvania State University), who is also the current chair of the TPRC. Speakers include Professor Michelle P. Connolly (Duke University), who will discuss U.S. Spectrum; Dr. Jonathan Cave (University of Warwick), who will present on Privacy andSecurity; and Professor Philip M. Napoli (Duke University), who will present his work on the First Amendment and Fake News. Dr. Reisdorf will present findings from her work with Dr. Colin Rhinesmith, who is an Assistant Professor at Simmons College, and a Faculty Associate at the Berkman Klein Center for Internet & Society at Harvard University. In their paper, titled Race and Digital Inequality: Policy Implications, they combined quantitative data analyses using Pew data, American Community Survey data, and FCC Form 477 data with qualitative data from a Benton Foundation study on digital inclusion initiatives in several cities across the US. The combination of these rich data sources brought forward deeper insights into what is keeping some of the economically hardest-hit communities offline and how policy can help increase digital equity. For example, quantitative analyses of data on Kansas City, MO, and Kansas City, KS, emphasized existing digital inequalities along factors such as race, income, and education, and showed that fewer fixed broadband providers offer their services in poor urban neighborhoods. The qualitative case study of digital inclusion initiatives across these neighborhoods, however, showed that local, well-designed digital equity programs have a positive impact in mitigating these inequalities. While federal policies can help to provide more infrastructure and service to hard-hit neighborhoods through programs such as Lifeline, local organizations and policymakers can provide context-specific on-the-ground support that builds on the resources and assets already available in the communities to allow meaningful broadband adoption.
The TPRC Capitol Hill Briefing takes place at the 2075 Rayburn House Office Building on Thursday, September 7, 2017, from 3:30-5:00 P.M. and is open to the public. Please register at https://www.eventbrite.com/e/telecom-policy-congressional-briefing-2017-tickets-36809648650 if you would like to attend this talk.
Saturday, August 19th, 2017
Faculty and staff of the Quello Center will be actively engaged in this year’s Telecommunication Policy Research Conference (TPRC). The following papers on the schedule for the 45th TPRC Research Conference on Communications, Information, and Internet Policy, at George Mason University in Arlington, Virginia:
“Social Shaping of the Politics of Internet Search and Networking: Moving Beyond Filter Bubbles, Echo Chambers, and Fake News,” by William H. Dutton and Bianca C. Reisdorf (presenter), Quello Center, Michigan State University; Elizabeth Dubois, Department of Communication, University of Ottawa; and Grant Blank, Oxford Internet Institute, University of Oxford.
“Race and Digital Inequality: Policy Implications,” by C.H. Rhinesmith, Simmons College (presenter), and B.C. Reisdorf, Quello Center.
“Price-Cap Regulation of Firms That Supply Their Rivals,” Omar A. Nayeem, Deloitte Tax; and Aleksandr Yankelevich, Quello Center (presenter).
“Cyber Security Capacity: Does it Matter?” by William H. Dutton, Quello Center; Sadie Creese, Computer Science, Oxford University; Ruth Shillair, Quello Center (presenter), Maria Bada, Oxford Martin, University of Oxford; Taylor Roberts US Dept of Management and Budget.
“Regulating the Open Internet: Past Developments and Emerging Challenges,” by Kendall J. Koning, Department of Media and Information, Michigan State University (presenter); and Aleksandr Yankelevich, Quello Center.
We hope you can join the conference and provide feedback on our papers.
Sunday, August 13th, 2017
James H. Quello
A Biographical and Historical Note
Compiled by Lauren Lincoln-Chavez for the James Quello Archive
James Henry Quello (April 21,1914-January 24, 2010) was born in Larium, Michigan, a northern Italian copper mining colony. In the 1920’s, the Quello family relocated to Detroit, where Quello’s father opened a grocery store in Highland Park, later working for Ford Motor Company as a factory worker and foreman. In a neighborhood dominated by the Klu Klux Klan, James H. Quello experienced discrimination and racial violence due to his Italian-American heritage. He describes his early years as where he “start[ed] becoming a strong believer in self-defense in school and in life.” After prohibition was repealed, the Quello family returned to Larium, opening a thriving saloon across from the police station.
As a college student at Michigan State University, Quello served in the ROTC and pursued journalism with the intention of becoming a newspaperman. He worked multiple positions for MSU’s college newspaper, including columnist and editor, and served as a newscaster on WKAR; a 500-watt college radio station. He graduated with a Bachelors of Art from the College of Arts and Letters in 1935 and was awarded an honorary Doctor of Humanities degree in 1977 from Michigan State University. In 1975, he received an honorary Doctor of Public Service from Northern Michigan University.
A World War II hero, James H. Quello served as a Lieutenant and Lieutenant Colonel, earning several commendations for his service. He survived amphibious landings in Africa, Sicily, Italy, and France, and assault crossings on the Rhine and Danube in Germany. In addition to serving as Lieutenant of the infantry, Quello was paid to write articles for service papers. At the summons of Lieutenant Colonel Sandlin, he witnessed the horrors of the Dachau concentration camp before it was deemed off limits. At the end of the war, Quello was assigned to Camp Blanding, Florida, to train an infantry battalion in preparation for Japan.
In July 1945, James H. Quello began his position as Publicity Director for the Lone Ranger and Green Hornet at the WXYZ-AM Detroit station, where he became the personal liaison between Bing Crosby and the ABC radio network. After WXYZ-AM station was purchased by the ABC network Quello took a position as General Manager at WJR-AM, the dominant 50,000-watt clear channel station. Later, he was promoted to Vice President, where his broadcast executive leadership was distinguished by a doubling in WJR (FM)’s power, the implementation of affirmative action policies, and the placement of J.P. McCarthy in a key drive-time spot; where he was the highest rated morning man for 28 years. Under Quello’s leadership, WJR was awarded numerous awards and citations.
During his tenure, WJR implemented affirmative action policies; hiring the first black Disc Jockey, Bill Lane, in 1949. Quello was the architect of “complete range programming,” featuring minority and adult programming. WJR was the only station to feature a 16-piece orchestra and choir training program for high performing high school students, “Make Way for Youth.” Amongst the graduates were prominent black choral members Freda Payne and Ursula Walker. WJR served as the leader in coordinating with national news networks during Detroit’s 1967 rebellion, providing comprehensive local and national coverage. Quello also wrote articles for fourteen community newspapers, titled “Radiograms” by Jim Henry, and was a Detroit stringer for Variety magazine.
James H. Quello had extensive involvement in the Michigan Association of Broadcasting (MAB), where he served as president and government relations chairman. He was appointed by four different Mayors to serve as a member of the Detroit Housing and Urban Renewal Commission for a total of 21 years, where he advocated for open occupancy and low-cost housing for minorities. He also served as a trustee on the Michigan Veterans Trust Fund for 22 years, where he was appointed by four different Governors, and facilitated innovative initiatives. Quello’s broadcasting career provided a practical foundation for his career as an FCC Commissioner and Chairman (1993).
Federal Communications Commission
James H. Quello’s 24-year career as an FCC Commissioner, 1974-1998, was greatly influential, assisting the FCC in ushering in revolutionary technological changes during a global cultural shift in media and communications. His advocacy for communication and broadcasting policies brought new telecommunications options to the American public through the development of cable and satellite TV, high-definition digital broadcasts, and personal communications services. Quello’s regulatory philosophy was guided by a desire to create flexible policies to accommodate quickly changing technologies, as the world began to expand through economic and political initiatives into new territories, technologies, and cultures.
Known for the longest and shortest confirmation hearing, 8 days and 15 minutes, respectively, James H. Quello was first appointed as an FCC Commissioner in 1974 by President Richard Nixon on the recommendation of the Vice President, Gerald Ford, who built his political career representing Michigan in the House of Representatives until 1973. Despite Quello’s bipartisan support, his appointment was heavily contested by Ralph Nader, who viewed Quello as a pawn of the radio and broadcasting industry. Throughout his career as an FCC Commissioner, James H. Quello advocated for equal opportunity; minority ownership; affirmative action policies; free universal television; and deregulation; taking a strong position against sex and violence in television broadcasting, and financial interest and syndication rules. He heavily pursued the fining of shock-jock Howard Stern for anti-indecency rule violations.
Commissioner Quello was a champion for public broadcasting; committed to free over-the-air broadcasting, deregulation, and limiting violence in television broadcasting. He assisted with the modernization of broadcasting transmission systems, bringing HDTV into the modern age with minimal government oversight. A strong proponent of must-carry rules and retransmission consent, he believed these regulations would be beneficial for broadcasters and viewers. Commissioner Quello served as Chair of the TCAF committee, providing assistance to public broadcasting stations seeking financial stability. In the final year of his career as an FCC Commissioner, James H. Quello worked on the 1996 Communications Act, enabling cross-ownership between telecommunications companies; designed to foster marketplace competition, but which was followed by greater concentration of media ownership.
As a supporter of freedom of speech and First Amendment rights, Commissioner Quello supported the deregulation of commercial limitations in television broadcasting (1981). He adamantly argued against the imposition of three hours of educational programming in children’s television programming, contending that educational programming regulations would impose on First Amendment guarantees of freedom of speech, and quantitative regulations would be difficult to uphold in court. He later reversed his position in 1996, after outraged demands from congressmen and senators.
During his career as a Commissioner, the FCC initiated affirmative action policies utilizing rigorous standards of equal opportunity employment to increase minority hiring and ownership in broadcasting. Licensees were required to understand the community they served and make efforts to recruit employees represented in the community. In 1977, the Commission adopted affirmative action policies for the review guidelines for EEO license renewal, requiring an in-depth staff review for stations with six to ten full-time employees and no minority or female employees. In 1980, the Commission tightened the EEO review policy, increasing the standards for equal opportunity employment in the broadcasting industry; imposing sanctions on broadcast stations that did not provide opportunities to minorities.
James H. Quello was a consistent advocate for the review of ownership rules. He was the first FCC commissioner to demonstrate support for minority ownership, advocating for affirmative financing policies in commercial broadcasting station ownership. Commissioner Quello also pushed for distress sales to minorities at 75% of appraisal value versus license revocation and for tax certificates with tax breaks for minorities. Clear Channel Communications was the first network to sell a broadcasting station to minority owners, as they were forced to divest due to ownership limitations imposed by the FCC. Commissioner Quello supported improvements to UHF broadcasting to facilitate the development of local public broadcasting initiatives and minority ownership.
Personal Communication Services
Considered the “Father” of Personal Communication Services (PCS), Quello’s initiative helped spurr the development of the cellular industry. Quello served on a commission, which established the regulatory framework for PCS; developing the band plan and regulatory scheme for private land mobile devices. Quello’s staff advocated for a regulatory framework of the Low Earth Orbiting Satellites (LEOS), that made mobile communications globally feasible. Commissioner Quello ushered in a vision of global communication networks.
In 1993, James H. Quello was appointed Acting Chairman by President Bill Clinton, during which the FCC Commission implemented the Cable Act; imposing rate regulations on cable television broadcasting and lifting long-standing restrictions on television networks from entering the market for reruns and syndication. Congress granted the FCC auction authority, raising over $20 billion for the U.S treasury. Additionally, the FCC cleared the way for new wireless phone and two-way data services, expanding opportunities for personal communications services globally. His tenure as Acting Chairman was lauded as a period of transparency and collaboration.
Michigan State University
In 1998, James H. Quello assisted James Spaniolo, Dean of the College of Communication Arts and Sciences, in the development of the James H. and Mary B. Quello Center for Telecommunication Management and Law at Michigan State University, as a multi-disciplinary center within the Department of Media and Information. The Quello Center’s original mission was to support social research of changing communication technologies, industries, and consumer choices through rigorous interdisciplinary research initiatives, global professional opportunities to facilitate cross-disciplinary dialogues, participation in communication policy developments, and expertise and independent research for public and nonprofit institutions. This mission remains central to the Quello Center moving into the digital age. Quello played a major role in the development of the Quello Center, helping to generate over 200 gifts for the Center through a general endowment that has grown to $5 million by 2017. James H. Quello died on January 24, 2010, at the age of 95, in his home in Alexandria, Virginia.
Thursday, August 10th, 2017
Our Quello Research Fellow, Professor Keith N. Hampton, a Professor in the Department of Media & Information in MSU’s College of Communication Arts & Sciences, has received a prestigious award from the Sociological Research Association (SRA) in being elected as a new member. The SRA is an honor society that elects up to only 14 new members a year, based on their excellence in research. As the officers of SRA noted: “SRA election signifies the esteem of your colleagues in the profession and their enthusiasm for your scholarship.”
Professor Hampton joined MSU last year and has already been incredibly active in developing new grant proposals, and continuing his stream of academic publications around use of the Internet in shaping many dimensions of community. He is presently involved with the Quello Center’s research on digital divides and social capital in Detroit, and an ambitious proposal on the future of the Internet and community enabled by next generation broadcast standards.
Our congratulations and thanks to Keith for enhancing the stature of the Center, Department, and College of Communication Arts & Sciences at MSU. It goes without saying that his colleagues share the SRA’s enthusiasm for his scholarship, and particularly his presence and impact on our students, faculty and many colleagues.
Monday, July 31st, 2017
We are delighted that her work on the Advisory Board of the Quello Center will continue to work with the Quello Center’s Advisory Board. Given the Center’s work on projects like ICT4Detroit, we can see her new role providing a continuing stream of useful perspectives and advice for the Center.
Tuesday, July 18th, 2017
The social and economic potential of a global Internet — one that bridges the world — is widely recognized. The potential for using the Internet to reconfigure access to information and knowledge, and also reshape freedom of expression, privacy, and ethical norms and behaviour, has been a theme in academic research, but also has been recognized by the Member States of UNESCO, who were broadly consulted in the development of a recent report, entitled ‘Keystones to Foster Inclusive Knowledge Societies’.* Professor Dutton, who helped UNESCO draft this report, will provide a brief overview of the major themes and challenges of this report as a means to open a discussion of how an open, global and secure Internet might bridge the four corners of the world in ways that enable access to information and knowledge, freedom of expression, privacy, and respect for the diversity of ethical concerns in local and global communities.
*The UNESCO report is available online at: http://www.unesco.org/new/en/internetstudy/
Monday, June 19th, 2017
Last week, Dennis Rodman once again entered the media spotlight by taking a trip to North Korea. In spite of the media hullabaloo over the alleged purpose of Dennis Rodman’s latest round of basketball diplomacy, and apparent subsequent disappointment over the lack of controversy following the trip, the controversial star’s intent seems patently obvious: he is America’s cryptocurrency ambassador.
Media photographs of Rodman consistently pictured him decked out in gear emblazoned with the logo of his sponsor, PotCoin.com. Potcoin.com touts itself as “an ultra-secure digital cryptocurrency, network and banking solution for the $100 billion global legal marijuana industry,”—so Bitcoin, but marketed for pot entrepreneurs. The video embedded in the center of its homepage—which I could not help but to transcribe below—explains it all:
“Potcoins are digital coins you could send through the Internet. Potcoins have a number of advantages. Potcoins are transferred directly from person to person via the Net. This means that the fees are much lower. You can use them in every country. Your account cannot be frozen and there are no prerequisites or arbitrary limits [so you can pay for as much pot as you want in a single transaction].
“Let’s look at how it works. Your Potcoins are kept in your digital wallet on your computer or mobile device. Sending Potcoins is as simple as sending an e-mail and you can purchase anything with Potcoin [the possibilities!!!]. The Potcoin network is secured by thousands of computers using state of the art encryption. Anyone can join the Potcoin network and the software is completely open source so anyone can review the code. Potcoin opens up a whole new platform for innovation.
“Potcoin is changing finance the same way the Web changed publishing. When everyone has access to a global market, great ideas flourish [insert marijuana joke here]!”
In summary, because Potcoin appears to be Bitcoin for pot and also for things other than pot, it is effectively yet another cryptocurrency alternative to Bitcoin. Indeed, after watching this video, I found an eerily similar one on the homepage of bitcoin.org, with the word “pot” replaced by the word “bit.” In other words, the Potcoin video is a rehash (pun absolutely intended).
Earlier this month, I attended Northwestern University’s annual Internet Commerce and Innovation Conference, where Hanna Halaburda and Gur Huberman, economists who know quite a bit more than the average person on this topic, kindly explained how cryptocurrencies such as Bitcoin actually work.
I will keep the explanation at a bird’s eye view level, but a more in-depth discussion is available on Scott Driscoll’s blog post entitled, “How Bitcoin Works Under the Hood,” and the paper by Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronics Cash System,” available at bitcoin.org. Hanna Halaburda has also written a book on the topic: “Beyond Bitcoin: The Economics of Digital Currencies.”
Transactions: Suppose that a Bitcoin user, call him Scottie, in possession of a Michael Jordan Hand Signed 50th Anniversary Basketball, is willing to accept a single Bitcoin from existing Bitcoin user, Dennis, who happens to have precisely one Bitcoin (around $2,500 at the time of this writing) in his possession. Any cheaper than that and Dennis may as well steal the ball. As Bitcoin users, both Scottie and Dennis have installed Bitcoin wallet software that allows them to facilitate the transaction.
Upon first usage, the wallet software on both users’ devices downloads a record of every Bitcoin transaction by everyone ever made. This record, called the Blockchain, represents a complete history of incremental groups of completed transactions, referred to as blocks. The Blockchain takes the place of a public ledger for Bitcoin. To undertake the transaction, Dennis must provide a digital signature to authenticate that he is in possession of and can transact Bitcoins. In addition to having a private component only available to Dennis, it contains a public component that reveals that Dennis can undertake the transaction and allows him to have the transaction recorded in the Blockchain. Once the transaction is verified by other Bitcoin users (more on these below), it is added to the ever growing Blockchain.
Verification: Here is where it gets weird: groups of transactions directing transfers of Bitcoins entail a public broadcast of these transactions interlinked with a mathematical puzzle that is, as I understand it, too complex to solve by any means other than computer driven guess work. Users, called miners, compete against each other to solve problems associated with each transaction. The first miner to solve the puzzle associated with a group of transactions gets to add that group to the Blockchain, thus expanding the history of transactions and enabling the transfer of Bitcoins. The miner is rewarded with Bitcoins—which is how new Bitcoins come into being—and earns the right to charge a transaction fee for verifying a group of transactions (more on this in the abovementioned references). If the transaction between Scottie and Dennis belongs to that particular group, the financial component of their transaction is completed (with some caveats left out) and Scottie can ship the ball to Dennis. However, as I indicate below, Scottie might wish to smoke two joints while he waits for a few additional blocks to be added to the chain before shipping the ball (though I make no personal recommendation as to what Scottie should actually do with his time while he waits).
Fraud: As described, the transaction verification process does not involve a centralized authority such as a bank. This leaves potential room for fraud as follows. If Dennis were a character of ill repute, he might wish to set up an additional transaction sending his one Bitcoin to an alternative account that he possesses. If that transaction is verified prior to his transaction with Scottie, Scottie’s transaction is considered nullified, but this will not be discovered until an attempt is made to add the transaction to the Blockchain. If Scottie, worried that the ball would deflate if not sent in time, sends it before the transaction with Dennis is added to the Blockchain, he would have no recourse unless he personally knows Dennis and can verify the terms of the transaction to a centralized authority. Moreover, even if Scottie could verify these terms, he might learn that Dennis lives in some place like North Korea, which might not offer him any recourse.
Alternatively, Scottie might view a new block being added to the Blockchain as sufficient time before sending the basketball. But then he risks that Dennis might execute and verify (by mining) additional fraudulent transactions on top of his now fraudulent block to extend the fraudulent chain before others solve sufficient puzzles to extend the true chain sufficiently far to actuate public agreement stipulating that the true chain is indeed the correct representation of the full Blockchain. This is not particularly likely unless Dennis has sufficient computing power to outcompete all active miners until Scottie sends him the ball. Thus far, I have made a stab at explaining buyer side fraud, but sellers with no reputation may be fraudsters as well, and it is less clear to me how to resolve concerns over seller side fraud. I found a rather creative suggested solution on an archived Reddit post requiring a buyer to confirm receipt before a seller can access the Bitcoins sent by the buyer, but also preventing the buyer from any further access to the Bitcoins once she has undertaken the transaction (sent the Bitcoins).
Disclaimer: Here I have only touched upon the bare bones of Bitcoin, but missing from this blog post is a slew of mathematics, economics, and practicalities. For those interested, I advise you to consult one or more of the readings above or to talk to an actual expert on the subject. I do not condone the use of any illicit substance and do not recommend the abuse or misuse of any mind or mood altering drug, whether illicit or not. I am, however, a vocal advocate and frequent user of double entendre.