How do we increase availability of capitol to small and traditionally disadvantaged borrowers? How can we invest in businesses we care about while purchasing products/services we want, especially during pandemic closures?
Carnegie Mellon Professor Goldstein has been investigating the interaction of technology, work and money with his computer science students to overcome several long-standing problems of established lending markets.
By utilizing a public blockchain-style ledger they have created an equal access funding mechanism, BoLT: Building On Local Trust, that can reduce poverty and inequality.
Learn about the interesting deep technical problems they faced to bring solutions to people today.
Lauren Weymouth (00:00):
Hello and welcome to All About Blockchain, as we look at innovative and interesting applications of blockchain and cryptocurrency. Today we're gonna dive deep into a solution for traditional lending market failures. Lenders have been biased against socially and economically disadvantaged people, and all small businesses using excessive financing requirements. These have hurt the ability of aspiring entrepreneurs to create and grow small business.
But marketplace lending is remaking banking, as we know it, so that low net worth individuals, and minorities, and small businesses can step into business ownership. So, how do borrowers and underserved areas access capital? This is a problem that has been exacerbated by the pandemic. And bringing us something new and different is Seth Goldstein. Professor Goldstein is a computer scientist investigating the interaction of technology, work and money. He supports innovation and creativity in the post labor economy by developing social tech. Bringing us an alternative to monetary systems that can reduce poverty and inequality. His team at Carnegie Mellon University is busy developing a revolutionary lending and trading platform for local business. Welcome, Professor Goldstein.
Seth Goldstein (03:53):
Thank you very much. It's great to be here.
Lauren Weymouth (03:55):
So, tell us a little bit about your background. my research has been primarily focused on massively distributed systems, so that ranges from parallel computers, how to build them, how to program them to,
Seth Goldstein (03:58):
I'm a professor at Carnegie Mellon. My research has been primarily focused on massively distributed systems, so that ranges from parallel computers, how to build them, how to program them to molecular electronics, how to build computers out of molecules programmable matter, how to think about, uh, sort of tiny, tiny robots that would all work together to create, uh, sort of programmable shapes. most recently, the massively distributed system that I've been thinking about is the economy, people interacting together to do things.
Lauren Weymouth (04:48):
And what got you more interested in developing social tech?
Seth Goldstein (04:53):
Some number of years ago, I don't (laughs) remember how long ago, I came back from a startup that I did, to, Carnegie Mellon, and I was looking for a new research area. And I sort of became convinced that, technological progress was gonna fundamentally change the labor market. and I think that this is a huge opportunity if we do it right. And one of the things that will allow people that, that does allow people who don't know each other to do something interesting to collaborate together as money. And so I started thinking about how we can change the sort of underlying structure of money, in an economy that, where a lot of technological progress has made sort of jobs irrelevant. The pandemic came and I realized that not as a great opportunity, but as a sort of practically a disaster, a lot of people were out of work. And I thought these ideas that I had been thinking about, uh, would be useful now. And so I sort of advanced my timeline and started working on both.
Lauren Weymouth (06:12):
Okay. So, you're a computer guy that got really interested in the economy and started to look at how the digital economy, digital currency could help, especially during the time of the pandemic. What was the first time you heard about cryptocurrency or the digital economy?
Seth Goldstein (06:28):
I probably heard about cryptocurrency many, many years ago. in fact, when I was a grad student, I worked at the Digital Research Lab in Paris, where they had been thinking about, uh, digital currency. So, that was, you know, 20 plus years ago. we think about money as having value, but it's really our belief that it has value that gives its value. And whether it's written down on a piece of paper or it's represented by my credit card bill, or it's a cryptocurrency, it's the fundamental belief that other people will take it that gives it its value. Cryptocurrency makes it easier to do interesting things, but it's not, it's not really about cryptocurrency.
Lauren Weymouth (07:32):
Well, talking about money's value. I really enjoyed hearing you speak at the UBRI conference last fall. And you went into historical references of how something has intrinsic value and, or, or could be turned into useful currency. Can you explain some of those past experiences here?
Seth Goldstein (07:49):
there are a lot of historical cases where things have been turned into what's essentially money, even though they're not backed by the state. So, one of my favorite examples of this is what happened in Ireland in the late '60s and early '70s, when there were these banking crises and the banks closed. When the banks closed, essentially like 80 or 90% of the money supply disappeared overnight. And the expectation was that the economy would crash and burn, and whatever was motivating the bank closures, they would have a tremendous amount of negotiating power. But what happened instead is, uh, people would write checks that no one could verify whether they were good or not. And those checks turned into currency in the sense that, I would write a check to grocery store and give it to them for my groceries. They couldn't cash it, but instead what they would do, is they would use that check, the one that I wrote, to go to their suppliers and get more goods, they could put it on the shelves or use it to pay their employees. And the way this worked is Ireland was a fairly tight knit community, uh, centered around the pubs. And essentially the, the publicans, the, the pub owners would certify that, you know, Seth was a good guy and sign the back of my check, and then became like cash. And at the end of these crises, it would take, uh, it took, there were three of them, it took days or even weeks to clear all the checks and basically all the checks were good. So, here we turned this piece of paper that had no value whatsoever into a completely useful currency, and the Irish economy actually grew in spite of the fact that the banks were closed.
Lauren Weymouth (09:57):
Okay. So, we can kinda hear how you can be innovative in times of crisis to create other means of trading and bartering. What are the long standing problems of the lending market that you're out to solve?
Seth Goldstein (10:09):
The way I like to think about BOLT is that, it is a system that can help communities and businesses, or even individuals to convert their reputation in their network into capital. Okay. And the reason why people need to do that is there are problems with the mainstream capital markets. There's systemic bias against small businesses, against minority and female owned businesses, and the banks are essentially just leaving a ton of money on the table. I mean, between 2007, and now there's been essentially a 30%
the combination of the fact that banks are incredibly risk averse, and they don't really have a good way to evaluate the risk of small businesses, along with the sort of traditional bias that we think about, like the fact that, there were certain neighborhoods that were redlined and black communities or all minority owned commu- communities had trouble getting loans and things like that, have really created a situation where people that should be able to borrow money can't. And we do know that access to capital is essentially the gateway to growing your business or your life. so without that, predatory lenders are stepping in to fill the gap. So, what we're trying to do here is sort of uniquely combine into one platform, the ability to lend money or borrow money and pay for goods and services. And so what this does is it means that anybody on the system can essentially lend money or to, let's say, support their local business by buying their BOLTs. Okay. These are the, the sort of digital objects that represent, uh, you can think of them as like a digital gift card. nd so they've just given some, uh, business, some us dollars. In return, they've gotten those businesses BOLTs, like think of them as digital gift cards. And now, uh, that would be like a traditional lending platform. So, the customer lent, uh, the business of money. What's unique about our system is that you can then take those BOLTs and spend them at anybody on the network. So, by combining sort of lending and payment into one platform, we're c- essentially creating liquidity, you can say we're creating money out of nothing in some sense, right? So, uh, Alice's bakery sells these BOLTs, has some us dollar cash to pay her employees or whatever, her customer has these BOLTs, she, the customer can come into Alice's bakery and buy some baked goods. But also, if Bob's hardware store is willing to accept Alice's bakery BOLTs, then you can go and, and spend them. So, even somebody who doesn't have a lot of extra money lying around that they could use to invest, they can buy these BOLTs, support their local businesses and spend that money somewhere else, so they are not like locking it up. And so by having these BOLTs flowing around the community, we're creating liquidity in the community. in some sense it's a win-win situation.
Lauren Weymouth (13:45):
And, and that also kind of explains why and how it's different than traditional gift cards, because you're not just beholden to one store, you can spend them at, at all the local businesses that are accepting and, and giving these BOLTs. BOLT stands for Building On Local Trust?
Seth Goldstein (13:59):
Lauren Weymouth (14:01):
How did you come up with the name?
Seth Goldstein (14:04):
I think my wife helped me with this. We were talking about good things and BLT sandwiches are some of the best things. So, there was Building Local Trust, so we're building on local trust.
Lauren Weymouth (14:16):
Seth Goldstein (14:17):
I think, you know, one of the reasons why I really like the example, uh, the Irish example to show that with belief, people can turn essentially IOUs or pieces of paper into money, is that the trust that merchants have with their consumers, the sort of their loyal following, they're turning that trust into capital. And that's why we're building on local trust. And I would say even more importantly, I think our protocol doesn't just build on local trust, but it builds local trust. And we know that the more trust there is in a community, the more wealth there is in the community. So, this is not just a way of facilitating the trust that's there, but the protocol actually creates trust in sort of a technical sense. And that should sort of increase the wealth in the community. The other nice thing about this is that, who's gonna accept Alice's BOLTs? Well, it's gonna be people that probably know Alice. And so we're not only creating liquidity and capital in a community, but we're keeping it in the community. So, it really is sort of, you can think of it as sort of the ultimate go local tool for money.
Lauren Weymouth (15:30):
And especially as so many local businesses are coming back from being closed this year, it really helps fuel commerce.
Seth Goldstein (15:38):
that is what I really hope. We're hoping to deploy this and test out this hypothesis that you can turn the trust in your network into capital that you can use to rebuild your business, or expand, or whatever it is that you want to do. And that creates economic activity in the community, which is just good for everybody.
Lauren Weymouth (16:01):
And not getting too far in the weeds of the tech behind this, but how do you use computation and networks to create this new form of money?
Seth Goldstein (16:08):
So, the platform itself it's essentially a, like a wallet app. Like you could think of it as like Apple Pay or Google Pay, where you have BOLTs in your wallet and you go to a store and you scan their QR code or whatever, and you make a payment. So, that sort of standard. Behind that, we have a public ledger so everybody can see every transaction. of course, if there were different wallets, they would also read and write to the same public ledger. I think the interesting thing here is that because we have a public ledger and the transactions are on the ledger, we can now use some machine learning algorithms to do things like, look at the pattern of use of a particular merchants BOLTs and convert that into something that is an accurate predictor of their risk of default, like a credit score.
And so what the hope is, is that when businesses want to raise small or medium amounts of money, they can use BOLT to do that. And then when they really want to grow and it's bigger than their network can support, there is this activity on the ledger that some bank could use using our algorithms to say, this is actually, uh, a store that we can evaluate their risk of default, so we can actually make them alone. So, this should hopefully convert the sort of qualitative hard to measure notion of reputation and customer loyalty into a quantitative score that can be used so that everyone can have access to the mainstream capital markets.
Lauren Weymouth (17:58):
All right. So, public ledger is keeping track of all the transactions. And how does, if it's also turns into crowdfunding, how does BOLT go beyond existing sites like Kickstarter GoFundMe, IFundWomen, et cetera?
Seth Goldstein (18:11):
one way to think about BOLT is a merger of something like Kickstarter or GoFundMe or Kiva, or any of those with, uh, with a payment system like square or Venmo or any of those. with, by kiva.com or GoFundMe, you make a loan to a business, or you give them the money, and even if you're expecting to get it back one day, you can't spend it right now. And that's this, the, the sort of unique combination of a payment and a lending platform. And so with our system, you can help your local business, but then you have something in your hand that you can then spend. So, you don't have to have excess cash lying around, which during the pandemic, a lot of us don't have to be able to help your local businesses.
Lauren Weymouth (19:04):
And what are the requirements for the borrower and the issuer?
Seth Goldstein (19:08):
So, you know, this is all about trust and reputation. in some sense, people will be able to raise money related to what their reputation is in their community. The only protocol defined requirement is that you must accept your own bolts when someone comes into your store or does business with you. So, if I wanna pay you, if you say, you know, cost $10, if I have $10 worth of your BOLTs, then you have to accept those for payment.
Lauren Weymouth (19:45):
That seems fair. (laughs) And as you were thinking through the protocol, were you surveying small businesses in your local neighborhood? How did you get intel on how to build this?
Seth Goldstein (19:55):
The protocol itself I would say, was sort of developed based on our understanding of economic theory of money. As far as the system itself and like extra things are on it, like the fact that you have a merchant that has a bunch of cashiers and you need to be able to delegate authority to the cashiers and how do you present the information on the wallet and this kind of stuff that we've been doing customer discovery on to try and understand what would make the system be easiest to use, because it is complicated and it's a lot of flexibility in it. One of the important things related to that is that, the system is only as powerful as the network is. So, if there's only one merchant on the system, it's not that useful.
Seth Goldstein (20:50):
I mean, it would make for a good digital gift card system, but the full power of the system wouldn't be realized. And so the real question is, is how do we grow the network when we know that when the network is small, it doesn't have that much power. We've looked at ways to use the protocol, to create like community currencies. Like you can imagine that a city says, you know what, I'm going to create like, uh, a little, not a universal, basic income, but let's say a universal basic helping hands. And they're gonna issue city BOLTs to their, all of their residents or the residents in need. And what they do because the protocol demands it is that, they say, if, when you pay your taxes or, uh, fees or get licenses, or have to pay a parking ticket, we'll accept city BOLTs. Now, all of a sudden, all the merchants in the town have the reason to accept these city BOLTs because they know they can use them to pay their taxes. And so having that central actor sort of allows us to create, uh, a big network right from the start. And it doesn't have to be a city. It could be a foundation that says, we'll guarantee the BOLTs of lots of merchants. And all of a sudden now the foundation money has a huge multiplier. Instead of giving $10,000 grants to let's say, five or 10 businesses, they could say, we're gonna guarantee, let's say $100,000 worth of BOLTs from 20 or 50 businesses. Because as long as those businesses don't go in default, the foundation's not out any money. So, they got a huge force multiplier by this. Or it could be that there's a chamber of commerce or a community development corporation, or a not-for-profit that gets 25 or 30 merchants together and says, why don't you all agree to accept our BOLT, and we'll give you loans of US dollars, and we'll sell BOLTs to people in the community, and then they'll take our BOLTs and come to your store. And so we can sort of create this trusted environment in the community to create this network. And then once the network is in place and people understand how to use the system, then individual merchants could start raising capital directly to their customers.
Lauren Weymouth (23:11):
We really can hear that once the web of trust is in place and the network grows and gets larger, this public ledger digital gift system can really support local businesses and communities maybe even create lower overhead systems and, and enable local people to raise capital outside of their local markets.
Seth Goldstein (23:32):
that is the plan. So, we have to deploy this and test it and see whether that plan bears out in reality.
Lauren Weymouth (23:41):
And the functionality. I'm sure you're building something so that someone that doesn't really understand all the tech behind it can easily use the mechanisms.
Seth Goldstein (23:49):
We're developing a web app where it should function, I hope, (laughs) as easy as what people are used to with like Venmo or Apple Pay or any of those systems, where you go into a merchant that's accepting BOLTs, they ring up your sale on a tablet or a point of sale terminal that shows a QR code, you're hold your phone over the QR code and you say, spend. So, it, it should be as simple as that.
Lauren Weymouth (24:18):
And when do you expect, a prototype?
Seth Goldstein (24:21):
We have a prototype. Now we have to convince a community somewhere to deploy it. And, uh, we're talking to organizations in the Pittsburgh area and in particular in Wilkinsburg, we're talking to a company and the municipality in India. And we're also talking to some people, uh, in France. One of those three will probably be first.
Lauren Weymouth (24:54):
And then you're a global, I mean, you have Europe, you have AMEA.
Seth Goldstein (24:54):
Yeah. You have to grab the chances that you see. And so we're working with them and working on that.
Lauren Weymouth (24:59):
That's great. how do you grow that network? Like, it takes off in Pittsburgh and maybe the municipality in France takes it on. Is there like a team that's gonna start sharing all the data to, to, to show other cities or other foundations that this is the future?
Seth Goldstein (25:23):
what we're hoping to do is, a difference in different study. I mean, we can't do a controlled experiment, but what we're aiming to do is when somebody decides to deploy it we will then look at some other communities that have similar demographics, and look at how the economic activity and various macro economic indicators change in the city that uses BOLT and the city that doesn't. If our expectations are correct, and we see this huge improvement in economic activity and lowering of unemployment, and creation of new business and, and things like that, then I hope it's a, if you build it, people will come, but, you know, we'll be out there trying to deploy it in other communities to test out our hypothesis.
Lauren Weymouth (26:21):
And Seth, you're the face of both right now. Tell us about your team.
Seth Goldstein (26:25):
I have been working with an amazing group of students, you know, one of the, uh, silver linings to the pandemic was that I got to get a really bunch of smart students working with me over the summer to do the initial development. then over the course of the last eight months various students have worked on this, as part of their courses or research at Carnegie Mellon. recently, uh, Lisa Embolis joined me as sort of a director of business operations. Some great people, uh, from really a diverse set of backgrounds. There are students from the business school, the public policy school, urban design school, computer science, architecture, information systems, Human-Computer, uh, Interaction Institute. it's really been a great team to work with. and it's also been a global team in a sense because the students aren't all on campus. So, we have a lot of meetings at 9:30 at night, so that we can get our students in India and China on the call at the same time. it's been a lot of fun.
Lauren Weymouth (27:52):
I can imagine how excited they are working on a real world problem, and that they have hands in creating solutions.
Seth Goldstein (28:00):
there is a very high excitement level in the group that we're actually trying to do something that's gonna make a difference now, as well as some interesting and deep technical problems in scaling things like a public ledger, and how do you present complicated ideas in a simple way, and, you know, the monetary theory to understand how different BOLTs function for different people and predicting, uh, this idea of a credit score based on the activity on the ledger. I mean, so there's really interesting deep technical problems and some important solutions to bring to people today.
Lauren Weymouth (28:59):
Seth, where can people find out about this project?
Seth Goldstein (29:04):
So, they can go to my webpage. It's still a rough academic page, www.cs.cmu.edu/twiddlesets/bolt and they'll see a paper that describes the protocol and some different use cases, and descriptions of some of the projects we're working on, if they're interested in working on it. Um, and they can contact me by sending me an email and saying, Hey, I wanna deploy BOLT in my community.
Lauren Weymouth (29:37):
And I'll make sure to drop the link in the-
Seth Goldstein (29:39):
Lauren Weymouth (31:18):
(laughs) This has been such a dynamic conversation. We all know that getting capital from banks is hard and slow and painful. It's one of the reasons I chose to work at Ripple because they're rolling out on demand liquidity and lending products. and you're creating something where we get to invest in the businesses we care about while purchasing products and services that we want. you're pioneering financial inclusion in real time, and engaged during a period that more mainstream players are starting to wake up to the value of this tech, right? I don't know if you read, but Visa announced that they're gonna be one of the first major payment networks to use stable coins to settle currency. So, there's major changes coming our way. Thank you for sharing your work with us.
Seth Goldstein (30:23):
Well, thank you for having me on. It's been great to talk with you.
Lauren Weymouth (31:40):
It was a pleasure hosting you on UBRI's podcast, All About Blockchain. And listeners, thank you for giving us your time today. If you have any questions about this episode or feedback for any new episodes, please reach out to firstname.lastname@example.org. Until next time.