Opera Streaming Revolution: Boston Baroque, IDAGIO, And GBH Music Unveil Digital Innovation For Global Audiences

This was originally published in Forbes.

On the heels of its 50 year anniversary, Boston Baroque, in partnership with IDAGIO and GBH Music, premiered an incredible series of performances on April 20th of the opera Iphigénie en Tauride by Christoph Willibald Gluck with a digital streaming and will remain available for $9 per stream until May 21st. Under the musical direction of Martin Pearlman and leadership of Jennifer Ritvo Hughes, Boston Baroque has become a leading cultural institution and innovator.

Technological innovation in classical music

Although all sectors were adversely affected by the onset of Covid-19 and the associated lockdowns, none were more affected than arts and entertainment with over a 50% decline in employment between February 15 and April 25 2020, which remained in decline well into the summer and 2021, according to research published by the Brookings Institution. The same phenomenon held across other developed countries, according to the OECD. The loss in employment led to a significant deterioration in mental health and well-being among performers and other workers in cultural institutions, according to professors Samantha Brooks and Sonny Patel in a 2022 article published in Social Sciences & Humanities Open.

However, some cultural institutions responded to these challenges with substantial innovation. Following the onset of Covid-19, Boston Baroque began working with GBH – the leading multiplatform public media producer in America – to digitally stream performances across the world. GBH Music became a production collaborator and presenter of Boston Baroque, among other celebrated music organizations, allowing for a continuation of musical performances. Even though there was an overall increase in streaming of performances, GBH Music was unique, most notably with their excellent production quality, resembling an in-person experience as much as possible.

"When GBH Music first met with Boston Baroque to explore the presentation of opera in our Calderwood Studio, we agreed that the goal was to find a new, innovative way to present these amazing works by taking advantage of the technology and talents we have at our disposal. And the results have been exceptional. The in-studio and on-line experiences bring audiences closer to the music, to the singers, and helps breathe new life into this centuries-old music. The visual and aural connection between artists and audiences is unique. Seeing musical talent, stunning production values, high-quality audio all come together to benefit opera, is thrilling,” said Anthony Rudel, General Manager of GBH Music.

Now that in-person performances have resumed, digital streaming has become a complement, rather than a substitute, for Boston Baroque, enlarging their reach and strengthening their world-renown brand as a staple cultural institution. “The arts often don’t place enough value on how people want to consume what we have to offer—we miss out on key opportunities to grow revenue and reach… In a traditional performing arts business model, the opportunity for return on investment ends when the concert downbeat begins due to a bias for in-person performance. At Boston Baroque, we’ve used digital innovation to disrupt this core business model constraint, providing unique to market, compelling content that consumers value,” said Jennifer Ritov Hughes, the Executive Director of Boston Baroque.

Economists have long pointed towards technology as the primary driver of productivity growth in society, but whether it translates into improvements in well-being and flourishing depends on whether and how society integrates technology as a complement, not substitute, to humans.

“Through partnerships with GBH, IDAGIO, and others, we’ve built a model for developing and delivering content that audiences are asking for, while paying artists for their work in the digital concert hall. A reviewer once called what we do an ‘authentically hybrid experience,’ where we simultaneously deliver in person programming while capturing digital content of a high enough quality to monetize and distribute on platforms with a global reach… One year after going digital, our market grew from 4,000 regional households to 35,000 households in the US and the UK. At the close of our 22/23 season, we now have audiences in 55 countries on 6 continents and counting. We’re just beginning to explore the potential of digital—many possibilities lie ahead,” Hughes continued.

“When I founded Boston Baroque 50 seasons ago, it was the first period-instrument orchestra in North America, and so it was quite an experiment. Everything that has come since then—being the first period-instrument orchestra to perform in Carnegie Hall, being nominated for 6 GRAMMY® Awards for our recordings, and now streaming our concerts on six continents—has been the wonderful and unexpected outcome of a simple desire to make music in a free and authentic way,” said Martin Pearlman, the Founding Music Director.

Iphigénie En Tauride

Iphigénie en Tauride is a drama of the playwright Euripides written between 414 BC and 412 BC, detailing the mythological account of the young princess who avoided death by sacrifice at the hands of her father Agamemnon thanks to the Greek goddess, Artemis, who intervened and replaced Iphigenia on the altar with a deer. Now a priestess at the temple of Artemis in Tauris, she is responsible for ritually sacrificing foreigners who come into the land. The opera revolves around her forced ritualistic responsibility on the island, coupled with an unexpected encounter with her brother, Orestes, who she had thought was dead.

Led by stage director Mo Zhou and conductor Martin Pearlman, Soula Parassidis, a Greek-Canadian dramatic soprano, played the title role of Iphigénie on April 20, 21, and 23 in Boston, accompanied by an outstanding cast of distinguished international artists, including William Burden, Jesse Blumberg, David McFerrin, and Angela Yam, among others. The performance has amassed a wide arrow of glowing reviews.

Because the same opera is replayed many times over even within the same year, stage directors bear significant responsibility to bring a new perspective each time, particularly in an era with limited attention spans. “The classical music field is going through a schismatic change right now. As a practitioner and an educator, I ask myself and my students this question everyday: “In the age of Netflix and Hulu, how can we make our art form more accessible?” We’ve been putting ourselves on a high pedestal for a long time. If we do not adapt, we will gradually lose touch with the new generation of audiences, said Mo Zhou, the Stage Director.

In contrast to the more regietheater style where the director is encouraged to diverge from the original intentions of the playwright or operatist, this production stayed true to its roots, featuring Iphigénie in a beautiful gown and highlighting the intense pain that Iphigénie felt when she was asked to continue a sacrifice to the gods and subsequent intense joy when she discovered her brother, Orestes, was alive.

“I found this process of working on Iphigénie en Tauride with Boston Baroque, GBH and IDAGIO extremely fulfilling and refreshing. I think this production has presented a feasible formula where we keep the unique experience of the “live” performance, but also capture the ephemeral moments on stage and make it available to a broader audience across the world… In addition to thinking about the character building, stage composition and visual design like a conventional stage production, I also incorporated the notion of camera angles into my pre-blocking and design process, which shows in our end result. It demands a lot of advanced planning and the clarity of your dramatic and visual intention. It’s a beautiful collaboration between myself and our livestream director, Matthew Principe,” Zhou continued.

Future of the arts and the metaverse

IDAGIO has pioneered an incredible service for classical music and the performing arts, giving thousands more people across the world access to top-tier performances. “We are offering the infrastructure to any partner who is interested in sharing media content with audiences online. Recording and producing a concert is one thing. Distributing them and making them available to committed audiences around the world is another. That’s what we enable and what we love to do,” said Till Janczukowicz, CEO and Founder of IDAGIO.

The response to opening up in-person performances to digital audiences has been overwhelming. “IDAGIO has over 50,000 reviews on the App store averaging 4,7 / 5 stars. Users and artists love IDAGIO for many reasons, also because of our fair pay-out model: we remunerate by second and per user. This is as fair as you can get in audio streaming,” continued. In many ways, digital streaming of performances is an early use-case of metaverse applications that aim to provide users with more immersive experiences and connectivity between physical and digital assets.

While we have yet to see many truly immersive and fully-fledged metaverse use-cases, there is substantial interest from consumers and metaverse companies alike, particularly for changing the way that people engage with the arts by giving artists a more experiential mechanism of performing for and connecting with their audience.

“Rapper Royce 5’9” is a great example of this. Even with a successful 20-year career under his belt, he has sought out better platforms to engage with aspiring artists and his community. With Passage, he’s creating a beautiful 3D space called the Heaven Experience to host exclusive songwriting and studio sessions, interviews with music industry veterans, live performances, and more. These types of interactions simply wouldn’t be possible on something like a Zoom call or traditional livestream,” said Caleb Applegate, CEO of Passage.

During an era of intense technological change, the arts plays a more important role than ever and technology has the potential to augment, not replace, in-person performances.

A management scientist explains why personality matters as much as skill for the future of work

This article was originally published in Fast Company.

The vast majority of discussions about the future of work focus on “reskilling”—that is, equipping workers with knowledge and skills that are in demand and at the technology frontier. Ranging from the OECD (i.e., the “The Case for 21st Century Learning”) to the U.S. Office of Science Policy and Technology (i.e., “Interagency Roadmap to Support Space-Related STEM Education and Workforce”), there is bipartisan, interagency, and international support for reskilling.

To be clear, these aims are important and filled with good intentions, but focusing on skills, especially technical skills, risks overlooking what’s right in front of us: personality. There is no debate that skills matter in the workplace—an industrial engineer without the technical know-how could make an error that causes a building to become structurally unsound.

But overemphasizing skills, which are easily attainable, oversimplifies the career journey by creating a moving target for a goal post: Today it’s AI that’s in demand, but tomorrow it’s blockchain. An alternative strategy is to focus on the personality characteristics that lead people to not only acquire the requisite technical know-how, but also work well with others and persevere through trials.

My newly released research shows that personality matters at least as much as skills in explaining differences in compensation across jobs and over time. Using data from the Department of Labor that measures 16 occupational personality requirements—that is, personality constructs that can affect how well someone performs a job—we constructed two general indices that we refer to as intellectual tenacity and social adjustment.

On one hand, intellectual tenacity encompasses achievement/effort, persistence, initiative, analytical thinking, innovation, and independence. For simplicity, let’s call this attribute persistence. On the other hand, social adjustment encompasses emotion regulation, concern for others, social orientation, cooperation, and stress tolerance. These span the spectrum of personality traits and their construction is anchored in a mountain of research from the psychology literature.

We subsequently linked these data on personality requirements across occupations with data on over 10 million individuals between 2006 and 2019 to study how differences in personality requirements are valued across occupations. Crucially, we found that individuals working in occupations that rank higher in persistence earn substantially more than their counterparts, and that the economic return—measured through annual earnings—was increasing over time. We did not, however, find similar effects for individuals working in occupations that rank higher in social adjustment, although occupations that rank high in both persistence and social adjustment earn the most.

One concern is that we are not comparing apples to apples. People who work in occupations ranking higher in persistence differ in other ways from those who work in occupations ranking higher in social adjustment. While that is true, we control for a wide array of demographic factors, including age, education, race, gender, and family size. Furthermore, we isolate comparisons among people in similar industries and broad occupations to ensure more reasonable comparisons, ensuring that we are not comparing, for example, CEOs with cashiers.

Another concern is that occupations that rank higher in persistence also rank higher in their skill requirements, so our focus on personality is simply a mask for skills. However, we also control for differences in cognitive skill requirements across occupations and continue finding a strong positive association between persistence and annual earnings. And the link between persistence and earnings is roughly as large as the association with cognitive skills. The relative and growing importance of persistence is especially striking given a slowdown in the returns to cognitive skills.

What do these results mean for policymakers and managers?

Strengthen Persistence

First, increasing persistence is a promising avenue for workforce development and education to help workers become “future proof” in the emerging digital economy. Economic and labor market outcomes depend on the capacity of individuals to learn and adapt in the face of automation and artificial intelligence.

While personality is commonly misperceived as fixed, it continues to evolve throughout the lifespan. Interventions aimed at developing the mindsets, skill sets, and contexts that encourage persistence are timely targets for education reform and workforce development, which may have the greatest impact in the early stages of childhood development.

In fact, my recent book with Goldy Brown III investigates a wide array of best practices for strengthening persistence in early childhood development. For example, after school programs that allow children to practice skills outside of the classroom and others can be effective in cultivating good habits and keeping children, especially those at risk in low-income neighborhoods, out of otherwise dangerous situations. Similarly, my recent handbook chapter also highlights the role of music education in early childhood in building the habit of persistence and cognitive skills.

Second, persistence is an important developmental target for everyone—not just skilled workers or the more educated. The effect of occupational persistence requirements on earnings was consistent among both college graduates and individuals without college degrees. Industrial-worker jobs are still valued in the economy as long as they require persistence. That means organizations, even those that require less skilled workers, should be mindful of inculcating a culture of continuous learning and improvement independent of the degree of digital intensity of the tasks.

Formally Assess Personality

Third, in addition to assessing relevant skills when hiring, organizations may also find it useful to conduct formal assessments of personality. While that insight is not new, and indeed The Gallup Organization (among others) has developed a sophisticated assessment, personality is likely to play an increasingly important role in technology organizations, especially as more work is done remotely and the need for clear and cohesive communication grows.

There has been much discussion and debate about how to reskill the labor force. That discussion is good and important, but organizations and policymakers should not make technical skills the priority at the expense of the underlying personality traits that sustain life-long learning and resilience to trials and adversity. We always knew personality mattered. Now we finally have robust quantitative evidence on exactly what dimensions matter most for career progression.

Christos A. Makridis is a research affiliate at Stanford University, among other institutions, and holds doctorates in economics and management science and engineering from Stanford University.

Beyond the TikTok mess, creators have options to protect data and privacy

This article was originally published in Dallas Morning News with Soula Parassidis.

The recent congressional hearings around a potential ban of TikTok in the United States have revitalized fundamental questions about both the positive and negative effects of social media on people and the economy. Setting aside the legitimate national security considerations of TikTok and the way that China leverages data from the platform, we need to have a broader discussion about digital platforms, their effects on creators, and the way forward.

On one hand, social media platforms have provided creators with tools to build communities and sell desirable goods and services. Marketing has traditionally required large budgets that go toward paid advertisements. Today, creators can speak directly to potential consumers and fans without having to engage expensive press relations companies.

On the other hand, these platforms hold monopoly power with few checks and balances and produce an array of adverse side effects on mental health and even physical safety. For example, a platform might change its algorithm, or even engage in censoring, and catch a creator completely off guard. Further, malicious users — including human traffickers — are known to exploit these platforms (e.g., Meta, Instagram, TikTok) by using them to solicit children.

Advocates of the digital platform incumbents often engage in binary thinking — that is, society either has to live with the big tech monopoly as it currently exists, or we lose an open and free internet and creators are out of a job forever. The reality is that there is a large middle ground, ranging from policy reforms that introduce additional structure to new technological tools that provide alternative ways for creators to reach their fans.

Let’s first consider policy reforms. Section 230 of the Communications Decency Act was written in a completely different era — one without the internet, and roughly a decade before any trace of social media. Sadly, Section 230 has provided what is known as a liability shield around big tech companies, allowing them to abdicate responsibility even in the presence of demonstrated harm by claiming that they are a publisher with editorial discretion. But simultaneously, these companies claim that they are creating an open and free internet that promotes well-being.

You cannot have it both ways.

The result is an unpredictable technological and business landscape where creators can have their content censored or even inadvertently overlooked because of algorithmic changes. For example, Instagram’s recent announcement to sell verification as a service now devalues the verification that notable figures previously had. Furthermore, paying customers receive more visibility on their content, compared to those figures who already had verification. That volatility for creators counters the very argument that advocates use to defend big tech platforms.

But fortunately, distributed ledger technologies, or DLTs for short, are offering creators new ways to reach their fans while maintaining sovereignty over their data and more privacy. Even though current social media platforms come across as “free,” they are not — users implicitly forgo the value of their data, which is what the digital platforms effectively securitize and sell to advertisers for targeted ads. In other words, the user is the customer!

Our recently published research in the research journal Frontiers in Blockchain Economics points out use-cases of distributed ledger technologies in the creator economy, most notably through the use of non-fungible tokens, which allow users to publicly signal and record on an immutable blockchain their created content. NFTs provide proof of ownership using unique identifiers and metadata stored on the blockchain that can be publicly accessed and verified over the entire spectrum of content, ranging from a deed on a house to a digital drawing to a classical music recording. They also allow for the secure transfer of ownership on secondary marketplaces and royalties, reducing the dependence on intermediaries and scope for dispute and expensive legal fees for content creators. There is much more still to experiment with and build, but the infrastructure and possibilities already exist.

We continue to investigate, experiment and figure out emerging online tools, especially how to resolve conflicting NFTs that exist on different blockchains. This is not a new problem — countries have resolved international disputes for years, and the beauty of the blockchain is that it has the potential to confer greater transparency and clarity to facilitate the resolution of these disputes. Whether policy reforms happen in the short or medium run, creators can confidently begin working with these tools and begin empowering themselves.

Christos Makridis is chief operating officer and Soula Parassidis is CEO at LivingOpera.org. They wrote this column for The Dallas Morning News.

In global technology race, Virginia holds the key

This article was originally published in Richmond Times-Dispatch with Joshua de Salis Soprhin.

The recent congressional hearings over TikTok underscore the growing bipartisan concerns about the Chinese Communist Party (CCP) and how the United States’ technological exposure to Chinese interests could impair national security. But national security is also impacted by economic competitiveness, particularly in strategic industries that have dual-use applications in both the private and public sectors. If the U.S. is to maintain its competitive edge against the CCP and stand as a source for freedom in the world, it needs a compelling industrial policy.

Fortunately, there is growing bipartisanship behind certain elements of industrial policy, which led to the passage of the CHIPS and Science Act in 2022 that was designed to help promote the U.S. semiconductor industry and its competitiveness across the globe, especially with China. However, more work is needed to develop regional partnerships and clusters between innovators in the private sector and the national security funding and technology apparatus.

Semiconductors are the fourth-largest U.S. export, and the industry directly employs 300,000 Americans and touches an additional 1.6 million, according to a 2022 report by the President’s Council of Advisors on Science and Technology. Furthermore, the global semiconductor industry grew by more than 300% from $139 billion in sales in 2001 to $573.5 billion in 2022, and unit sales of semiconductors grew by over 290%. Demand grew substantially during the height of the COVID-19 pandemic due to the increase in consumption of digital goods and services. However, the sector struggled to meet demand due to fragmented and thin supply chains. Although Taiwan and South Korea are both large producers of semiconductors, China committed $150 billion over a 10-year period to the sector and has been aggressively making inroads to monopolize the industry by 2030.

In 2023, Virginia will receive over $8 billion in infrastructure investments to build on that technological cutting edge. This investment will include $6.22 million for increased access to broadband internet in rural areas to provide everyone with the tools they need to succeed. In addition, Virginia will receive $106 million to create a new electric vehicle charging grid, in addition to other investments in smart infrastructure. All Virginia residents will gain access to new opportunities through these programs even if they do not work in tech directly.

Clearly our adversaries are aware of the sector’s strategic importance, and they have publicly proclaimed it. While there are many tools at our disposal to promote innovation, the U.S. must choose carefully how to respond to risk over escalation and a spiral of reactionary policies.

Every state has a role to play in confronting this challenge, but perhaps the most obvious is Virginia because of its proximity to the national security community in Washington, D.C. Virginia can contribute to safeguarding the U.S. semiconductor industry and its role in ensuring our national security by mapping its economic activities to similar efforts and applying CHIPS Act federal funds toward initiatives that drive the further development of capabilities in the design and manufacturing of chips. However, further investments — and not just financial — are needed.

The national security community has long acknowledged the challenge of engaging and supporting smaller R&D groups that have high-impact, but operate independently. Despite the best efforts, these groups still struggle and are not able to easily tap into federal awards for emerging technologies that traditionally go to the more established incumbents. To remain innovative and competitive, the federal government will need to support these smaller organizations and overcome the “valley of death.”

1. Build a protected sandbox where only small businesses can initially participate — and not simply as subcontractors to larger groups that have already received an award — with further refinements to the system for the award management (SAM) registration process. We must build up confidence and provide trust by incentivizing the Small Business Administration and allied federal agencies to move more quickly and efficiently.

2. Eliminate the practice of government agencies using requests for information and requests for proposals as purely a market-intelligence exercise. Using these as mechanisms to survey cutting-edge technologies not only wastes the time of entrepreneurs and small business owners, but also undermines trust when the perception of having a chance at winning an award is yanked out from under them. Leveraging local proximity and innovation clusters in Virginia to cultivate relationships, rather than relying on highly formal and impersonal communication patterns, would motivate entrepreneurs.

3. Establish a better contracting infrastructure that focuses on continuous development and delivery and avoids generational gaps over long-term investment cycles in how technology innovation is made available to the government. Too often, one contractor may provide a generation 1 technology and then separate software is released that needs generation 4 technology, but there is no support for the government to run the new software and it translates into a multimodal failure in implementation. This is especially relevant in production of semiconductors where there is a longer timeline for development of both the hardware manufacturing facilities and machining capabilities, which are in turn tightly integrated into the contemporary or future design of chips as part of hardware/software co-design methodologies.

As we navigate the intricacies of our contemporary foreign policy with the CCP and its impact on our nation’s ability to compete globally, states like Virginia hold the essential physical and human capital resources to strengthen the U.S. industrial base and catalyze a resurgence of domestic manufacturing capabilities. While the CHIPS Act is an important start, implementing and maintaining a long-term strategic effort will require further educating state, federal and local leaders to have a more holistic and better understanding of the disparate array of economic, technical inputs that need to be continuously balanced in order to ensure the national security position of the U.S. well into the future.

Dr. Christos A. Makridis is a professor, entrepreneur and adviser, and holds doctorate degrees in economics and management science and engineering from Stanford University. Contact him at cmakridi@stanford.edu.

Joshua De Salis Sophrin is the owner of Delaware-based JDSS, a family business that invests in technology and infrastructure. Contact him at information@assoc.jdss.com.

Crypto security audits and bug bounties are broken: Here’s how to fix them

This article was originally published in Cointelegraph Magazine.

Blockchain exploits can be extremely costly; with poorly designed smart contracts, decentralized apps and bridges are attacked time and time again.

For example, the Ronin Network experienced a $625-million breach in March 2022 when a hacker was able to steal private keys to generate fake withdrawals and transferred hundreds of millions out. The Nomad Bridge later that year in August experienced a $190-million breach when hackers exploited a bug in the protocol that allowed them to withdraw more funds than they had deposited.

These vulnerabilities in the underlying smart contract code, coupled with human error and lapses of judgment, create significant risks for Web3 users. But how can crypto projects take proactive steps to identify the issues before they happen?

There are a couple of major strategies. Web3 projects typically hire companies to audit their smart contract code and review the project to provide a stamp of approval.

Another approach, which is often used in conjunction, is to establish a bug bounty program that provides incentives for benign hackers to use their skills to identify vulnerabilities before malicious hackers do.

There are major issues with both approaches as they currently stand. 

Web3 auditing is broken

Audits, or external evaluations, tend to emerge in markets where risk can rapidly scale and create systemic harm. Whether a publicly traded company, sovereign debt or a smart contract, a single vulnerability can wreak havoc.

But sadly, many audits – even when done by an external organization – are neither credible nor effective because the auditors are not truly independent. That is, their incentives might be aligned toward satisfying the client over delivering bad news.

“Security audits are time-consuming, expensive and, at best, result in an outcome that everything is fine. At worst, they can cause a project to reconsider its entire design, delaying the launch and market success. DeFi project managers are thus tempted to find another, more amenable auditing company that will sweep any concerns under the carpet and rubber-stamp the smart contracts,” explains Keir Finlow-Bates, a blockchain researcher and Solidity developer.

“I have had first-hand experience with this pressure from clients: arguing with developers and project managers that their code or architecture is not up to scratch receives push-back, even when the weaknesses in the system are readily apparent.”

Principled behavior pays off in the long run, but in the short term, it can come at the cost of profitable clients who are eager to get to market with their new tokens. 

“I can’t help noticing that lax auditing companies quickly build up a more significant presence in the auditing market due to their extensive roster of satisfied customers… satisfied, that is, until a hack occurs,” Finlow-Bates continues.

One of the leading companies in Web3 auditing, CertiK, provides “trust scores” to projects that they evaluate. However, critics point out they have given a stamp of approval to projects that failed spectacularly. For example, while CertiK was quick to share on Jan. 4, 2022, that a rug pull had occurred on the BNB Smart Chain project Arbix, they “omitted that they had issued an audit to Arbix 46 days earlier,” according to Eloisa Marchesoni, a tokenomics specialist, on Medium. 

But the most notable incident was CertiK’s full-scope audit of Terra, which later collapsed and brought half the crypto industry down with it. The audit has since been taken down as they have taken a more reflective approach, but bits and pieces remain online. 

Terra-fied

Zhong Shao, co-founder of CertiK, said in a 2019 press release:

“CertiK was highly impressed by Terra’s clever and highly effective design of economy theory, especially the proper decoupling of controls for currency stabilization and predictable economic growth.”

He added, “CertiK also found Terra’s technical implementation to be of one of the highest qualities it has seen, demonstrating extremely principled engineering practices, mastery command of Cosmos SDK, as well as complete and informative documentations.”

This certification played a major role in Terra’s increased international recognition and receipt of investment. The recently arrested Do Kwon, co-founder of Terra, said at the time:

“We are pleased to receive a formal stamp of approval from CertiK, who is known within the industry for setting a very high bar for security and reliability. The thorough audit results shared by CertiK’s team of experienced economists and engineers give us more confidence in our protocol, and we are excited to quickly roll out our first payment dApp with eCommerce partners in the coming weeks.”

For its part, CertiK argues its audits were comprehensive and the collapse of Terra was not down to a critical security flaw but human behavior. Hugh Brooks, director of security operations at CertiK, tells Magazine:

“Our Terra audit did not come up with any findings that would be considered critical or major because critical security bugs that could lead a malicious actor to attacking the protocol were not found. Nor did this happen in the Terra incident saga.”

“Audits and code reviews or formal verification can’t prevent actions by individuals with control or whale’s dumping tokens, which caused the first depeg and subsequent panicked actions.”

Giving a stamp of approval for something that later turned out to be dodgy is not confined to the blockchain industry and has repeated itself throughout history, ranging from top five public accounting firm Arthur Anderson giving the nod to Enron’s books (later destroying parts of the evidence) to rating agency Moody’s paying out $864 million for its dodgy optimistic bond ratings that fueled the housing bubble of 2008–2009 and contributed to the Global Financial Crisis.

So, it’s more that Web3 audit companies face similar pressures in a much newer, faster-growing and less regulated industry. (In the past week, CertiK released its new “Security Scores” for 10,000 projects — see right for details).

The point here is not to throw CertiK under the bus – it is staffed with well-intentioned and skilled workers – but rather that Web3 audits don’t look at all of the risks to projects and users and that the market may need structural reforms to align incentives.

“Audits only check the validity of a contract, but much of the risk is in the logic of the protocol design. Many exploits are not from broken contracts, but require review of the tokenomics, integration and red-teaming,” says Eric Waisanen, tokenomics lead at Phi Labs.

“While audits are generally very helpful to have, they are unlikely to catch 100% of issues,” says Jay Jog, co-founder of Sei Networks. “The core responsibility is still on developers to employ good development practices to ensure strong security.”

Stylianos Kampakis, CEO of Tesseract Academy and tokenomics expert, says projects should hire multiple auditors to ensure the best possible review.

“I think they probably do a good job overall, but I’ve heard many horror stories of audits that missed significant bugs,” he tells Cointelegraph. “So, it’s not only down to the firm but also the actual people involved in the audit. That’s why I wouldn’t ever personally trust the security of a protocol to a single auditor.” 

zkSync agrees on the need for multiple auditors and tells Magazine that before it launched its EVM compatible zero knowledge proof rollup Era on mainnet on March 24, it was thoroughly tested in seven different audits from Secure3, OpenZeppelin, Halburn and a fourth auditor yet to be announced.

White hat hackers and bug bounties

Rainer Böhme, professor for security and privacy at the University of Innsbruck, wrote that basic audits are “hardly ever useful, and in general, the thoroughness of security audits needs to be carefully tailored to the situation.” 

Instead, bug bounty programs can provide better incentives. “Bug bounties offer an established way to reward those who find bugs… they would be a natural fit for cryptocurrencies, given they have a built-in payment mechanism,” Böhme continued.

White hat hackers are those who leverage their talents to identify a vulnerability and work with projects to fix them before a malicious (“black hat”) hacker can exploit it. 

Bug bounty programs have become essential to discovering security threats across the web, generally curated by project owners who want talented programmers to vet and review their code for vulnerabilities. Projects reward hackers for identifying new vulnerabilities and upkeep and integrity maintenance on a network. Historically, fixes for open-source smart contract languages — e.g., Solidity — have been identified and fixed thanks to bug bounty hackers.

“These campaigns began in the ‘90s: there was a vibrant community around the Netscape browser that worked for free or for pennies to fix bugs that were gradually appearing during development,” wrote Marchesoni.

“It soon became clear that such work could not be done in idle time or as a hobby. Companies benefited twice from bug bounty campaigns: in addition to the obvious security issues, the perception of their commitment to security also came by.”

Bug bounty programs have emerged across the Web3 ecosystem. For example, Polygon launched a $2-million bug bounty program in 2021 to root out and eliminate potential security flaws in the audited network. Avalanche Labs operates its own bug bounty program, which launched in 2021, via the HackenProof bug bounty platform.

However, there is tension between the extent of the security gaps they believe they have found and how significantly the issue is taken by projects. 

White hat hackers have accused various blockchain projects of gaslighting community members, as well as withholding bug-bounty compensation for white hat services. While it goes without saying, actually following through with the payment of rewards for legitimate service is essential to maintain incentives.

A team of hackers recently claimed that it was not compensated for its bug bounty services to the Tendermint application layer and Avalanche.

On the other side of the fence, projects have found some white hat hackers are really black hats in disguise.

Tendermint, Avalanche and more

Tendermint is a tool for developers to focus on higher-level application development without having to deal directly with the underlying communication and cryptography. Tendermint Core is the engine that facilitates the P2P network via proof-of-stake (PoS) consensus. The Application BlockChain Interface (ABCI) is the tool with which public blockchains link to the Tendermint Core protocol.

In 2018, a bug bounty program for the Tendermint and Cosmos communities was created. The program was designed to reward community members for discovering vulnerabilities with rewards based on factors such as “impact, risk, likelihood of exploitation, and report quality.” 

Last month, a team of researchers claimed to have found a major Tendermint security exploit, resulting in a services crash via remote API – a Remote Procedure Call (RPC) Tendermint vulnerability was discovered, impacting over 70 blockchains. The exploit would have a severe impact and could potentially include over 100 peer-to-peer and API vulnerabilities since the blockchains share similar code. Ten blockchains in the top 100 of CertiK’s “Security Leaderboard” are based on Tendermint.

However, after going through the proper channels to claim the bounty, the hacker group said it was not compensated. Instead, what followed was a string of back-and-forth events, which some claim was a stalling attempt for Tendermint Core, while it quickly patched the exploit without paying the bounty hunter their dues. 

This, among others that the group has supposedly documented, is known as a zero-day exploit.

“The specific Tendermint denial-of-service (DoS) attack is another unique blockchain attack vector, and its implications aren’t yet fully clear, but we will be evaluating this potential vulnerability going forward, encouraging patches and discussing with current customers who may be vulnerable,” said CertiK’s Brooks.

He said the job of security testing was never finished. “Many see audits or bug bounties as a one-and-done scenario, but really, security testing needs to be ongoing in Web3 the same way it is in other traditional areas,” he says. 

Are they even white hats?

Bug bounties that rely on white hats are far from perfect, given how easy it is for black hats to put on a disguise. Ad hoc arrangements for the return of funds are a particularly problematic approach.

“Bug bounties in the DeFi space have a severe problem, as over the years, various protocols have allowed black hat hackers to turn ‘white hat’ if they return some or most of the money,” says Finlow-Bates.

“Extract a nine-figure sum, and you may end up with tens of millions of dollars in profit without any repercussions.” 

The Mango Markets hack in October 2022 is a perfect example, with a $116-million exploit and only $65 million returned and the rest taken as a so-called “bounty.” The legality of this is an open question, with the hacker responsible charged over the incident, which some have likened more to extortion than a legitimate “bounty.”

The Wormhole Bridge was similarly hacked for $325 million of crypto, with a $10-million bounty offered in a white hat-style agreement. However, this was not large enough to attract the hacker to execute the agreement.

“Compare this to true white hat hackers and bug bounty programs, where a strict set of rules are in place, full documentation must be provided, and the legal language is threatening, then failure to follow the directions to the letter (even inadvertently) may result in legal action,” Finlow-Bates elaborates. 

Organizations that enlist the support of white hats must realize that not all of them are equally altruistic – some blur the lines between white and black hat activities, so building in accountability and having clear instructions and rewards that are executed matter. 

“Both bug bounties and audits are less profitable than exploits,” Waisanen continues, remarking that attracting white hat hackers in good faith is not easy.

Where do we go from here?

Security audits are not always helpful and depend crucially on their degree of thoroughness and independence. Bug bounties can work, but equally, the white hat might just get greedy and keep the funds. 

Are both strategies just a way of outsourcing responsibility and avoiding responsibility for good security practices? Crypto projects may be better off learning how to do things the right way in the first place, argues Maurício Magaldi, global strategy director for 11:FS.

“Web3 BUIDLers are generally unfamiliar with enterprise-grade software development practices, which puts a number of them at risk, even if they have bug bounty programs and code audits,” he says. 

“Relying on code audit to highlight issues in your application that aims to handle millions in transactions is a clear outsourcing of responsibility, and that is not an enterprise practice. The same is true for bug bounty programs. If you outsource your code security to external parties, even if you provide enough monetary incentive, you’re giving away responsibility and power to parties whose incentives might be out of reach. This is not what decentralization is about,” said Magaldi.

An alternative approach is to follow the process of the Ethereum Merge. 

“Maybe because of the DAO hack back in the early days of Ethereum, now every single change is meticulously planned and executed, which gives the whole ecosystem a lot more confidence about the infrastructure. DApp developers could steal a page or two from that book to move the industry forward,” Magaldi says.

Five lessons for cybersecurity in crypto

Let’s take stock. Here are five broad philosophical lessons we can take away.

First, we need more transparency around the successes and failures of Web3 cybersecurity. There is, unfortunately, a dark subculture that rarely sees the light of day since the audit industry often operates without transparency. This can be countered by people talking – from a constructive point of view – about what works and what does not work. 

When Arthur Anderson failed to correct and flag fraudulent behavior by Enron, it suffered a major reputational and regulatory blow. If the Web3 community cannot at least meet those standards, its ideals are disingenuous.

Second, Web3 projects must be committed to honoring their bug bounty programs if they want the broader community to obtain legitimacy in the world and reach consumers at scale. Bug bounty programs have been highly effective in the Web1 and Web2 landscapes for software, but they require credible commitments by projects to pay the white hat hackers.

Third, we need genuine collaborations among developers, researchers, consultancies and institutions. While profit motives may influence how much certain entities work together, there has to be a shared set of principles that unite the Web3 community – at least around decentralization and security – and lead to meaningful collaborations.

There are already many examples; tools like Ethpector are illustrative because they showcase how researchers can help provide not only careful analysis but also practical tools for blockchains.

Fourth, regulators should work with, rather than against or independently of, developers and entrepreneurs.

“Regulators should provide a set of guiding principles, which would need to be accounted for by developers of DeFi interfaces. Regulators need to think of ways to reward developers of good interfaces and punish designers of poor interfaces, which can be subject to hacking and expose the underlying DeFi services to costly attacks,” says Agostino Capponi, director of the Columbia Center for Digital Finance and Technologies.

By working collaboratively, regulators are not burdened by having to be subject matter experts on every emerging technology – they can outsource that to the Web3 community and play to their strengths, which is building scalable processes.

Fifth, and most controversially, DeFi projects should work toward a middle-ground where users go through some level of KYC/AML verification to ensure that malicious actors are not leveraging Web3 infrastructure for harmful purposes.

Although the DeFi community has always opposed these requirements, there can be a middle ground: Every community requires some degree of structure, and there should be a process for ensuring that unambiguously malicious users are not exploiting DeFi platforms.

Decentralization is valuable in finance. As we have seen once again with the collapse of the Silicon Valley Bank, centralized institutions are vulnerable, and failures create large ripple effects for society. 

My research in the Journal of Corporate Finance also highlights how DeFi is recognized as having greater security benefits: Following a well-known data breach on the centralized exchange KuCoin, for example, transactions grew 14% more on decentralized exchanges, relative to centralized exchanges. But more work remains to be done for DeFi to be accessible.

Ultimately, building a thriving ecosystem and market for cybersecurity in the Web3 community is going to require good-faith efforts from every stakeholder. 

Eroding America’s Cultural Capital

This article was originally published in City Journal.

For people the world over, the United States remains the target destination. People flock to the U.S. because it has offered freedom, stable institutions, and property rights, with few barriers to individual achievement. In turn, high-skilled immigration has strengthened economic and social development in the U.S. But now the Department of Homeland Security proposes fee increases for visas, especially O-1B visas, reserved for artists, athletes, and performers of extraordinary ability. DHS’s move is misguided.

Recent research by the University of Pennsylvania’s Britta Glennon demonstrates that U.S. restrictions on H-1B visas (for foreign workers in specialty occupations) have caused multinational firms to increase their employment of these skilled workers at their foreign affiliates and to open new establishments to employ them, instead of deploying them in the American market. The U.S. has experienced so much offshoring partly because of such restrictions.

No data are publicly available on O-1B visas, but we do know a few things. First, arts institutions will struggle to pay fee increases. Though philanthropic donations in general continue to grow, the arts and humanities make up one of the smallest categories of giving, according to the Arts Consulting Group. The mandated closure of theaters for two years during Covid-19 devastated the performing arts, and nearly all institutions are still trying to recover. A fee hike now would further stifle these efforts.

Second, even when arts institutions get funding, that money rarely flows to individual artists. Using millions of observations from the American Community Survey between 2006 and 2021, my research shows that real wages among artists, relative to non-artists, have been declining since 2006. Controlling for factors including age, race, gender, and education, the chart below shows that artists earned nearly 30 percent less than their non-artist peers in 2021. Arts institutions are likely to pass on the costs of higher visa fees to artists in the form of lower wages.

Third, the vast majority of talented performing artists are located in Europe, because that is where demand for their services is greatest. Raising application fees for O-1B visas would further reduce the probability that U.S. theaters will attract the top talent. The effects will accrue over time and degrade the American cultural environment.

True, the U.S. Citizenship and Immigration Services (USCIS) needs additional funding. Currently, nearly all its revenue comes from application fees. But it isn’t clear why that should be the case. If USCIS truly is the first line of defense for the nation when it comes to immigration, then the federal government should find another way to fund it. The easiest option would be through the National Defense Authorization Act (NDAA), followed by further appropriations through the homeland security subcommittee. After all, the aims of USCIS are intimately tied with national security: deciding who gets into the United States constitutes our first line of defense.

The current dependence on application fees for revenue creates several major challenges. The USCIS has appeared underfunded even in the best of times, and if anything, the agency is struggling even more now. As the Manhattan Institute’s Daniel Di Martino has suggested, providing expanded premium processing options for applicants in exchange for higher fees would boost revenues and expedite visa processing—at least in the short term. But as long as USCIS funding is fee-based, the agency will have less accountability to Congress and taxpayers. Lawmakers should be asking hard questions about how the agency can improve its operations.

USCIS’s reliance on application fees also creates perverse incentives. Bureaucratic rules force businesses to apply for H-1B visas rather than visas they would prefer to sponsor, such as green cards. The process for receiving a permanent-residence visa usually takes two years, and few applicants make it to the end. Thus businesses opt for temporary work visas, such as H-1Bs. Few candidates or businesses can wait two years or more to migrate and begin working in the U.S.

And since the H-1B lottery is random, many large firms sponsor more migrants than they need in hopes of gaming the system. These factors have the unintended consequence of causing the H-1B visa program to subsidize other areas of the immigration process. Since USCIS is chronically underfunded, this distortion is tolerated.

Putting the USCIS budget under the purview of the NDAA and providing further appropriations through the homeland security subcommittee would constitute a more sustainable strategy than another increase in visa fees.

On Maria Callas Centennial, Stage Is Set For Economic Development In Greece

This article was originally published in Forbes.

Despite socio-political turmoil in Greece, Athens premiered a new rendition of Christoph Williabald Gluck’s masterpiece, Iphigénie en Tauride, at the Pallas Theater on March 18th. The debut comes on the centennial of Maria Callas, a cultural icon and Greek soprano who performed the role in 1957 at La Scala in Milan.

The anniversary of Maria Callas comes at an especially important time when many eyes are on the recent advances of AI-driven tools, like ChatGPT, reminding people that there is no substitute for carefully-executed, engaging, live performances. While opera is often viewed as the highest form of luxury entertainment, such artistic expression, as demonstrated by the legacy of Callas, has the potential to galvanize support across many different spheres of influence. One hundred years after her birth, the life of Maria Callas continues to touch sectors outside of opera, including: fashion, art, business, and tourism within and outside of Greece.

The Life Of Maria Callas, La Divina

Callas — also known as “La Divina” or “The Divine One” — was best known for her unique vocal ability and realistic characterizations. “Maria Callas’ contribution to the opera world was revolutionary, not just because of her vocal perfection, but because her performative precision and passion made her recitals historical,” said Lina Mendoni, the culture minister for Greece.

Callas’ centennial birth anniversary will be included on UNESCO’s celebratory list of anniversaries for 2023, which only concerns “personalities of genuinely universal stature, nominated posthumously only” and “must be indisputably known outside the borders of their own country, in order to reflect the ideals, values, cultural diversity and universality of the organization,” according to UNESCO.

Maria Callas had a challenging upbringing. In addition to a difficult family life with a mother who was often at odds emotionally and verbally with her, Callas moved from New York City to Athens at the age of 13, experiencing poverty, personal humiliation, and, during the World War II years, even threats to her life, according to Paul Wink in his book Prima Donna: The Psychology of Maria Callas. “Poverty and conflicted relations at home with her mother and sister failed to compensate Callas for hostility at work. A significant gain in weight further undermined her self-confidence,” said to Wink.

And yet, Callas demonstrated significant resilience amid difficult economic, social, and family conditions. “Although conceived in Greece, Maria Callas, was born in New York City, and returned to Greece in adolescence as a social and cultural outsider. Her phenomenal rise to stardom was the result of an unwavering belief in her talent, independence in judgment, and a sense of destiny. These characteristics allowed her to realize an artistic vision unimpeded by opinions of others including the press or social media in today's parlance,” said Wink.

Iphigénie En Tauride

Iphigénie en Tauride is a drama of the playwright Euripides written between 414 BC and 412 BC. The opera details the mythological account of the young princess Iphigenia who avoided death by sacrifice at the hands of her father Agamemnon thanks to the Greek goddess Artemis (Diana) who intervened and replaced Iphigenia on the altar with a deer. Now a priestess at the temple of Artemis in Tauris, she is responsible for ritually sacrificing foreigners who come into the land. The opera revolves around her forced ritualistic responsibility on the island, coupled with an unexpected encounter with her brother, Orestes, who she had thought was dead.

Led by stage director Thanos Papakonstantinou and conductor George Petrou, Soula Parassidis, a Greek-Canadian dramatic soprano, played the title role of Iphigénie on March 18th and 19th in Athens, accompanied by an outstanding cast of distinguished international artists, including tenor Juan Franciso Gatell, and baritone Philippe-Nicolas Martin, among others.

“Iphigénie en Tauride is, together with “Medea,” one of the two main roles inspired by Ancient Drama that Callas sung with great success at La Scala in Milan in 1957... moreover, for me, this is Gluck's foremost dramatic piece with wonderful and touching music,” said Olivier Descotes, director of the Olympia (Maria Callas) Theater.

“My theatre work has always been about finding a way to contemporize Ancient Greek myths. With Iphigenie, my process began with the protagonist as a doppelgänger of the goddess Artemis (Diane in Gluck’s opera). Inspired by the rituals of the “cult” of Artemis, a parallel narrative about the rites of passage emerged, encompassed by the brutality of life, which is represented by the Scythians in the opera. If we were to reduce the pathos of the opera into a single sentence, it would be that while the storms of life are inevitable, the transformation they bring to our journey can result in something beautiful if we can withstand trial and tragedy. I would be very happy if someone watched our performance and this sense was conveyed to them,” said Thanos Papakonstantinou, the stage director.

Callas emphasized the dramatic intent of her characters by rooting her interpretations within the scope of the music, recalling remarks from Tullio Serafin, a renowned Italian conductor: “When one wants to find a gesture, when you want to find how to act onstage, all you have to do is listen to the music. The composer has already seen to that. If you take the trouble to really listen with your Soul and with your Ears—and I say ‘Soul’ and ‘Ears’ because the Mind must work, but not too much also—you will find every gesture there.”

“Maria Callas is one of the most iconic figures in the history of the performing arts... she managed to convince 20th century audiences that opera, drama, and music go hand-in-hand — that is exactly what Iphigénie en Tauride is about: the perfect combination of music and drama, one serving the other as equals,” said conductor George Petrou.

“For any soprano, particularly any Greek soprano, the immense weight and shadow of Callas is always equally looming over one’s shoulder, while simultaneously inspiring one’s creative soul. It takes a certain level of courage to interpret any role made famous by Callas, let alone on her centennial. For my part, I can only bring my unique gifts and talents to the work and be satisfied by them, no matter my own limitations as an artist. The work of fully embodying a character is never completely done even when we’ve reached opening night - there is always another vocal color to employ, another gesture, another spark of inspiration to imbue. I think La Divina would agree that this unattainable perfection is part of what makes being a live performer so thrilling,” said Soula Parassidis, an international soprano and entrepreneur, who sang the lead role of Iphigénie.

Learning From La Divina: A Catalyst For Economic Revival

“Arts and cultural economic activity accounted for 4.4 percent of gross domestic product (GDP), or $1.02 trillion, in 2021,” according to the U.S. Bureau of Economic Analysis. Cultural and creative industries in Europe account for a strikingly similar share of GDP in Europe too, according to the European Association of Communication Agencies. “This sector, an economic heavyweight, which is at the heart of Europe’s social fabric, could become the number one ally of an economic revival. It showcases the power of culture, its dynamism and its contribution to the EU’s global influence,” said Marc Lhermitte, a partner at Ernst & Young.

These estimates, however, underestimate the social contributions of the arts that are not priced in the market directly, often referred to as “positive externalities” by economists. It may not come as a surprise, therefore, that the areas with greater degrees of social capital — that is, trust, networks, and norms — are those that had less of a decline in their arts and culture sectors over COVID-19.

The effects of the arts are also visible at a microeconomic level: they provide a platform for expression, enjoyment, and creativity. “Art induces inspiration, which in turn facilitates performance on creative tasks,” according to professors Donghwy An and Nara Youn in a 2018 study published in the Journal of Business Research. “Individuals with higher openness toward aesthetics were inspired more frequently and deeply in their daily lives and showed greater creativity in an idea-generation task and Remote Associates Test (RAT) scores,” they continued.

However, the arts only exist if there are creative and persevering artists who can overcome obstacles and give expression to these broader and timeless themes that unite people across borders and cultures. And sadly, artists across the world are struggling with their mental health and financials, particularly following the closure of theaters in 2020.

Cultural workers contribute only 1.4 percent to the nation’s GDP even though they make up 3.2 percent of the workforce. To be sure, the arts in Greece needs many more reforms to attract talent from outside the country and retain talent inside the country. Consider the following example. “Greece imports annually 181 million euros of cultural products and only exports 110 million euros. However, Greek museums, which are currently showing only 7% of their collections (with the rest of the artifacts in storage) cannot loan out to international institutions against a fee... they cannot exploit their collections to bring in money to develop themselves and offer working opportunities to newly qualified staff,” according to Yerassimos Yannopoulos, managing partner at Zepos & Yannopoulos.

While Maria Callas’ legacy is anchored in the arts, her influence extends into many sectors and the conditions surrounding her early Athenian career prior to World War II were more challenging than those faced in Athens today, so the need for continued reform should not stop people from persevering through adversity and reaching their potential.

An optimistic example of such reforms include the emerging Greek Tech Visa program led by Endeavor Greece, which will help source talent and, therefore, pave the way for more startups and established companies to build hubs in Greece. Such reforms serve to not only increase economic productivity within the country, but also make Greece a year-round destination — not just for tourism over the summer — and, in the process, the demand for the arts will grow.

Successfully producing an opera involves hundreds of moving pieces on and off stage, ranging from set design to costumes to lighting to stage management to the actual performers themselves executing on the vision laid out by the director with a common objective: to wow the audience and stimulate creativity long after the performance has ended. And so it goes in any economy: each part must be synchronized with the other for the whole to reach its intended objective, which is ultimately human flourishing in the midst of change, whether in times of stability or times of precarity.

If a single singer can become a symbol of national pride, hope, and creativity 100 years after her birth, what could a whole nation do operating in concert with one another?

Silicon Valley Bank was the tip of a banking iceberg

This article was originally published in Cointelegraph.

Traditional financial institutions take deposits from customers and use them to make loans. But they loan out much more than what they have in store at a given point in time — a concept known as fractional banking. On one hand, the difference between the interest on the loans and the interest paid to depositors is referred to as the net interest margin and determines a bank’s profitability. On the other hand, the difference between the assets and liabilities is referred to as their equity and determines the bank’s resilience to external shocks.

Before the latest run on the bank, SVB was viewed as not only a profitable banking institution but also a safe one because it held $212 billion in assets against roughly $200 billion in liabilities. That means they had a cushion of $12 billion in equity or 5.6% of assets. That’s not bad, although it is roughly half the average of 11.4% among banks.

The problem is that recent actions by the United States federal reserve reduced the value of long-term debt, to which SVB was heavily exposed through its mortgage-backed securities (roughly $82 billion). When SVB flagged to its shareholders in December that it had $15 billion in unrealized losses, wiping out the bank’s equity cushion, it prompted many questions.

On March 8, SVB announced it had sold $21 billion in liquid assets at a loss and stated that it would raise money to offset the loss. But that it announced a need to raise more money — and even considered selling the bank — concerned investors significantly, leading to roughly $42 billion in attempted withdrawals from the bank. Of course, SVB did not have sufficient liquidity, and the Federal Deposit Insurance Corporation took over on March 17.

The macro-finance literature has a lot to say about these situations, but a good summary is to expect highly non-linear dynamics — that is, small changes in inputs (the equity-to-asset ratio) can have substantial changes on output (liquidity). Bank runs may be more prone during recessions and have large effects on aggregate economic activity.

Pursuing structural solutions

To be sure, SVB is not the only bank that has higher and risky exposure to macroeconomic conditions, such as interest rates and consumer demand, but it was just the tip of the iceberg that hit the news over the past week. And we’ve seen this before — most recently during the 2007–2008 financial crisis with the collapse of Washington Mutual. The aftermath led to a surge in financial regulation, largely in the Dodd–Frank Act, which expanded the authorities of the Federal Reserve to regulate financial activity and authorized new consumer protection guidelines, including the launch of the Consumer Financial Protection Bureau.

Of note, the DFA also enacted the “Volcker Rule,” restricting banks from proprietary trading and other speculative investments, largely preventing banks from functioning as investment banks using their own deposits to trade stocks, bonds, currencies and so on.

The rise of financial regulation led to a sharp change in the demand for science, technology, engineering and math (STEM) workers, or “quants” for short. Financial services are especially sensitive to regulatory changes, with much of the burden falling on labor since regulation affects their non-interest expenses. Banks realized that they could reduce compliance costs and increase operational efficiency by increasing automation.

And that’s exactly what happened: The proportion of STEM workers grew by 30% between 2011 and 2017 in financial services, and much of this was attributed to the increase in regulation. However, small and mid-sized banks (SMBs) have had a more challenging time coping with these regulations — at least in part due to the cost of hiring and building out sophisticated dynamic models to forecast macroeconomic conditions and balance sheets.

The current state-of-the-art in macroeconomic forecasting is stuck in 1990 econometric models that are highly inaccurate. While forecasts are often adjusted at the last minute to appear more accurate, the reality is that there is no consensus workhorse model or approach to forecasting future economic conditions, setting aside some exciting and experimental approaches by, for example, the Atlanta Federal Reserve with its GDPNow tool.

But even these “nowcasting” tools do not incorporate vast quantities of disaggregated data, which makes the forecasts less germane for SMBs that are exposed to certain asset classes or regions and less interested in the national state of the economy per se.

We need to move away from forecasting as a “check-the-box” regulatory compliance measure toward a strategic decision-making tool that is taken seriously. If the nowcasts do not perform reliably, either stop producing them or figure out a way to make them useful. The world is highly dynamic, and we need to use all the tools at our disposal, ranging from disaggregated data to sophisticated machine learning tools, to help us understand the times we’re in so that we can behave prudently and avoid potential crises.

Would better modeling have saved Silicon Valley Bank? Maybe not, but better modeling would have increased transparency and the probability that the right questions would be asked to prompt the right precautions. Technology is a tool — not a substitute — for good governance.

In the aftermath of Silicon Valley Bank’s collapse, there has been a lot of finger-pointing and rehashing of the past. More importantly, we should be asking: Why did the bank run happen, and what can we learn?

Corporate America Shouldn't Let Politics Get In the Way of Company Morale

This article was originally published in Real Clear Markets with Jeremy Tedesco.

In the age of social justice activism and virtue signaling, a growing number of corporations are caving to external and internal activists’ demands that they use their resources and brands to advocate particular political outcomes on contentious social issues.

Whatever near-term points corporations think they gain from pandering to political activists, a recent study and poll indicate that these corporations risk sustained alienation of their current and prospective employees (and their consumers, too) from such short-sighted behavior.

The 2023 Viewpoint Diversity Score Freedom at Work Survey, conducted by Ipsos, surveyed over 3,000 American adults employed across a wide variety of professions. A research paper analyzing the results concludes that “companies could increase employee engagement and trust over their products and services by creating a climate where people feel comfortable expressing themselves without fear of unintended consequences on their career and life.”

Among the survey’s wide-ranging questions, respondents were asked whether they support parental-rights-in-education laws—like the one Florida adopted last year—that “protect the freedom of parents to decide what their kindergarten through 3rd grade children are taught in the classroom about sex and gender identity by limiting what teachers can discuss and requiring notification and consent of parents before sensitive topics can be addressed.”

Fifty-five percent of participants supported such legislation, compared with only 14 percent who oppose it. As our paper discusses, even when respondents who were initially unaware of the Florida parental rights legislation learned more through an information treatment, they reported increased discomfort with current or prospective employers taking stands against parental rights. Simply put, the more participants learned about parental rights bills, the more they supported them.

This broad employee support for parental rights laws like Florida’s is notably out of sync with the widespread corporate opposition to them. Two-hundred-eighty-four large corporations (including The Walt Disney Corporation, Starbucks, Target, Apple, and financial institutions including Deutsche Bank and PNC Financial Services Group) signed the Human Rights Campaign’s statement opposing such state-level legislation.

The disconnect between the C-Suite and employees on social issues can seriously harm a firm’s ability to retain and recruit employee talent. A plurality of employees (44%) say they are uncomfortable with their employer taking a stance on a controversial cultural issue that contradicts the views of many employees and customers. Forty-two percent say that perceptions of hostility against religious or political views make them much less likely to apply to a company. And 30% say they have considered changing jobs to live in a state or region that is more tolerant of their values.

The survey also suggests that corporate political activism is spilling over into the workplace, creating an impression of an intolerant culture where employees fear they will lose their jobs if their heterodox religious or political views become known. Large majorities (60% and 64%) say that respectfully expressing religious or political viewpoints would “likely or somewhat likely” have negative consequences on their employment.

Nearly half of those surveyed have not shared their personal views about a social or political issue because of fear that sharing them would harm their career. Roughly a fifth have encountered negative treatment or discrimination for respectfully communicating their religious or political views. And 54% say they are very or somewhat concerned that sharing political content on their own social media accounts could result in negative consequences in the workplace.

Employees shouldn’t fear that their religious or political views could cost them their job. But the Freedom at Work Survey shows that a significant number of employees do.

If corporate America wants to earn and retain the trust of employees, companies will have to do far better when it comes to respecting their diverse religious and political views. They can start by adopting several Viewpoint Diversity Score standards and best practices that received significant support from survey respondents.

First, companies should include respect for a wide range of religious and political beliefs as part of their commitment to diversity (66%). Second, they should adopt a policy that commits to respecting viewpoint diversity in the workplace (49%). Third, they should adopt a policy that respects the freedom of employees to engage in political activity on their own time, without having to fear repercussions at work (48%). And companies cannot just give lip service to these principles; if they don’t genuinely allow the freedom of expression among all, they will bear the costs.

It's no secret that America is deeply divided, but corporations shouldn’t fan those flames. Instead, they should create a workplace culture based on mutual trust and respect for religious, political, and other differences. The employees who participated in the Freedom at Work Survey charted a path for companies that want to build back trust. The only question that remains is, will business leaders listen?

From Mastercard to Nike, jobs in Web3 are growing. Here’s a manager’s guide to hiring (including interview questions)

This article was originally published in Fast Company (with Avery Akkenini).

While the economy has been facing headwinds ever since the onset of COVID-19, Web3 jobs have been rapidly expanding. The demand for Web3 skills has been so large that supply has not been able to expand fast enough, bidding up the average wage. For example, LinkedIn reported a nearly 400% increase between 2020 and 2021 in job titles containing the words “blockchain” and “cryptocurrency,” compared with nearly a 100% increase in the broad tech sector.

And, even with the so-called “crypto winter” in a market of polarized Web3 sentiment, the demand for blockchain developers and other Web3 professionals has continued to grow.

The myth is that demand for Web3 talent is concentrated solely among startups, but many enterprises are actively hiring dedicated Web3 teams to meet a rising consumer interest in Web3-focused applications. For example, many Fortune 500 companies across sectors, ranging from entertainment to retail to fashion to technology, announced Web3 hiring in 2022, according to Vayner3’s 2022 trends report. And we expect more to follow suit in 2023. In fact, some of these companies have even created dedicated Web3 investment teams with both non-technical and technical roles, including Mastercard, Anheuser Busch, Adidas, Nike, and PepsiCo.

We believe that these early signs of investment from enterprises provide further evidence that Web3 is here to stay, and that the technology is sufficiently general purpose that it will forever transform the way companies do business. This highlights that major brands are putting both their reputational and financial capital behind Web3, and continued education, evangelism, and community building will chart a new road ahead.

But as with any emerging technology, understanding how to hire and manage Web3 talent has been challenging. Given our expertise as professors/researchers (Christos) and executives of a leading consultancy (Avery), we believe that there are a couple of best practices that will help the hiring process for startups and enterprises alike.

CONDUCT A HUMAN CAPITAL INVENTORY

Whenever there is a new salient and trendy technology, it is easy to focus on all of its features. But we need to remember that what matters at the end of the day is value creation for the end consumer and how we treat employees. Every organization needs to understand the tasks that are involved in delivering that value, and then connect people with the execution of those tasks—even if they are yet to be hired.

Specialist organizations (like Vayner3) can emerge from established entities (like VaynerX), and we’ve seen similar things occur at much larger companies, from Salesforce Web3 Studio to Adidas /// Studio. This is often driven by a single passionate individual, who builds a business case to internal leadership; but also can occur through top-down executive sponsorship.

Possible interview questions:

• Imagine that you could work with your human resources department to survey interest in Web3. What do you specifically think Web3 brings to the table for your organization?

• What would you ask others in the survey to galvanize support for Web3 initiatives?

FOCUS ON PERSONALITY AND PASSION FOR THE SUBJECT MATTER, NOT JUST HARD SKILLS

It’s easy to develop technical assessments, especially for developers, to gauge their skill level and ability to program under pressure. These are necessary, but not sufficient. Recent research from one of us analyzing millions of observations on peoples’ wages across occupations and time in the U.S. shows that personality, namely intellectual tenacity (reflecting problem solving capabilities, mental toughness, and curiosity), is at least as important, if not more, important in explaining wage differences in the labor market than technical skills.

In the very early days of Web3, hiring “natives” who live and breathe the Web3 culture to educate cross functional teams accelerated. In particular, at Vayner3, we hired several individuals from the Web3 community, using recruitment tactics that may seem unusual to traditional human resource systems, namely identifying candidates via Discord and Twitter, compared with Greenhouse and LinkedIn. Other pioneers in the field have followed a similar strategy. The founders of Forum3 (the platform behind Starbucks Odyssey) met as part of a specific Web3 community. Even Playboy’s Web3 team hired passionate community members to their team.

The easiest trap for enterprises to fall into is to treat Web3 talent acquisition the same as other talent and assume that what matters is technical skill alone. Part of the attraction of Web3 to many community members is the countercultural elements, especially the focus on decentralization and autonomy, so filtering for technical skills on traditional job posting boards alone will risk attracting people who look good on paper, but are not going to catapult the organization to new heights—or potentially even align with the team.

Possible interview questions:

• What Web3 communities do you admire the most, and why?

• Are you personally a holder of any Web3 projects, and what motivated you to become one?

• Have you been involved in any Web3 community programming (DAOs, NFTs, metaverse experiences)?

FORMAL BLOCKCHAIN EDUCATION IS HELPFUL, BUT NOT REQUIRED

Even though blockchain has been around for years, few institutions of higher learning have any serious curricula around blockchain apart from cryptography classes in computer science departments. One of the few is University of Nicosia in Cyprus, which was the first to launch a masters in blockchain and digital currency and will be the first to launch a masters in the metaverse. Core to its success is its engagement of practitioners, not just academics, who actively work in the blockchain space, which provides learners with the opportunity to hear about real-time trends in the market and cultivate hands-on skills.

But the reality is that many programs do not yet have the support to provide significant value-added, so focusing on candidates with the appearance of Web3 or blockchain educational credentials may give the impression of capabilities that are not really there.

Instead, there are many self-trained candidates who would be excellent hires, but do not have any educational degrees to necessarily back it up. In these cases, look at what they have done and pay attention to how they talk about the Web3 community. Candidates’ aptitude to learn and thrive in the role matters even more than their current technical knowledge—that’s easy to fill in!

Practically, one way to determine whether a candidate has the right aptitude and personality (as an alternative to relying on outside credentials) is to give them a hypothetical problem to solve and see how they handle it. These hypothetical problems are thematically no different than the classic case problems that pervade the management consulting world, but here the problems and set of skills that are being tested will vary based on the role. Hiring managers should pay close attention to the candidate’s thought process and, if it is a technical problem, their approach to building a system and drawing on prior knowledge.

Possible interview questions:

• Can you show me a best-in-class blockchain-based application? Why is it a smart use of technology?

• What separates a great smart contract from a standard one?

• How would you leverage blockchain technology to solve a problem that you are especially passionate about?

• What are some elements of this that Web3 could not solve?

THINK LIKE AN ARTIST, BUT BUILD LIKE AN ENGINEER

Web3 is fundamentally a general purpose technology because it provides a new layer, or delivery mechanism, for assessing, recording, and validating activity in a distributed fashion. And with that general nature comes the opportunity to apply incredible creativity to the product design and user experience. But that creativity needs to be tempered with an engineering-like mentality that also knows how to execute. The combination must be paired on a team explicitly, or balanced by someone who can think like an artist and build like an engineer.

Too often in business and venture capital, the focus is on bringing products to scale. But before scale comes the individual and their experience with the product or service. This is the key: We believe that Web3 talent must focus on building for people, not for profit. That’s why so many attempts at “community building” fall short. Disingenuous efforts eventually show their signs and get called out, and the results aren’t pretty.

So, how do you do that? Artists do not think of their customers as “users,” but rather as their audience and even patrons. Artists perform and produce to service them. And that cannot be made any more clear than in an opera where the audience gives a standing ovation and even more than 10 minutes of standing applause for an exceptional performance. That demand on the artist creates transparency and accountability to perform beautiful and creative art.

But to execute all of these aims at scale enterprises need engineering talent that can take these creative ideas and embed them in code. Indeed, the blockchain relies upon distributed ledger technologies and smart contracts that work seamlessly and attract people from geographically disparate areas to participate as validators on the network. Enterprises cannot forsake top engineering talent, but they need to ensure that engineering is not done robotically or with an overly narrow perspective that it short circuits the creativity of the overall brand.

Possible interview question:

• Imagine a big brand came to you asking for help to launch a Web3 initiative, and Gary Vee was willing to serve as an ambassador. Describe the process you would take.

TAILOR YOUR WEB3 HIRING TO YOUR ORGANIZATIONAL STRATEGY

Every organization is different. Some are bigger than others. Some rely more on external contract work than others. And some function more as creative consultants than others.

Organizations need to know who they are before they make hiring decisions. In Vayner3’s recent trends report, we shared the results from conversations with many large enterprises on the three most common approaches to operating models for Web3 teams:

1. Steering committees

2. Centers of enablements

3. Design studios

A steering committee approach views Web3 projects as complements to a broader set of digital initiatives. This could be an excellent starting point for brands, however requiring a high degree of cross-functional decision-making and alignment.

A center of enablement approach develops the best practices and guiding principles to facilitate cross-enterprise execution of Web3 projects, meaning that Web3 is getting embedded into the fabric of the organization. This drives flexibility for multi-brand execution and allows for greater accountability due to dedicated stakeholders. 

A Web3 design studio approach involves a dedicated, cross-functional team who handles the go-to-market strategy and execution, taking a hands-on approach to seeing the Web3 vision come to reality. This allows a faster go-to market strategy however requires a top-down commitment, vision and funding.

Possible interview questions:

• What do you believe are the core team members needed on a Web3 program team?

• Imagine you’re a business leader at a Fortune500 company. How would you incubate innovation in your marketing or operations department? Would you consider integration within core teams; a “center of excellence” model or a protected “studio” model? Or something different?

Christos A. Makridis is a cofounder and COO/CTO of Living Opera, a Web3 multimedia startup, and holds academic appointments at Stanford University, Columbia University, and the University of Nicosia.

Avery Akkineni is the president of Vayner3, a leading Web3 consultancy. 

How blockchain can help fund artists—and revive the arts

This article was originally published in Philanthropy Daily (with Esther Larson).

Funding for artists tends to go to major institutions, not to artists. But a new decentralized solution offers a way for philanthropists large and small to support artists directly.

Giving to arts, culture, and humanities organizations in the United States increased by roughly 27% from 2020 to 2021 rising to $23.5 billion, according to Giving USA Foundation. And yet, large art institutions attract the majority of arts related funding instead of individual artists. Because of the reputational benefits and seemingly reduced risk in giving to large institutions, this concentration of funding often deters direct support of individual artists.

We encourage philanthropists to consider funding artists directly—to complement the support of art institutions—through decentralized philanthropy.

Decentralized philanthropy—small donations aiming at big impact—has the capacity to propel the arts in significant ways. For opera singer, Soula Parassidis, this approach changed her life. After recovering from cancer and overcoming the odds to graduate from the University of British Columbia, she was approached by a local philanthropist who thought she had promise as an opera singer. Parassidis presented him with a business proposal, and he gave a life-changing gift of a few thousand dollars. That generosity was enough to make it possible for Parassidis to move to Germany to train, and, after a lot of hard work, launch an international career and even a worldwide arts community called Living Opera that is aimed at empowering other artists.

SMALL GIFTS CAN CHANGE LIVES

In short, a single act of philanthropy in a relatively small amount set in motion a chain reaction of creative artistic expression that would eventually build Living Opera, impacting over 14,000 people across the world, in addition to catalyzing Parassidis’s career in opera.

Unfortunately, these stories of direct connection between donor and artist are the exception, not the rule. Despite all the funding that fine arts institutions receive in philanthropy, very little of it is passed through to artists. In fact, our research and surveys by Living Opera show that real wages for artists have declined over time and that most artists are bearing a bigger financial burden than ever before. For example, 53% report having a job outside of the arts to fund their primary calling, and 54% were clinically diagnosed with depression—arguably driven by the financial precarity and challenge of settling down when going from gig-to-gig.

In this sense, the question of how we increase funding for the arts is relevant, but it does not address the deeper issue: that the artists themselves have been experiencing greater hardship. So, how can we scale decentralized grantmaking to encourage greater engagement between philanthropists and the artists that many donors ultimately want to support through their charitable giving?

DECENTRALIZED GIVING

Enter blockchain technology and non-fungible tokens (NFTs), which have the capacity to facilitate philanthropy in the arts. Although NFTs and the broader cryptocurrency market faced some challenges and controversy in 2022—which are unrelated to the technology—when used appropriately, this technology can serve as a democratizing force within philanthropy by providing a transparent, more open forum for artists and philanthropists. This technology has the potential to take Parassidis’ rare experience and make it a more regular occurrence for artists.

But how does it work?

Blockchain technology provides the infrastructure that allows users to access, record, and validate activity digitally. Often through a decentralized process, the technology lends itself well to collaborative involvement, fostering coordination and authentication of activity—like different art forms—among multiple people, especially those who may not already know each other, allowing a community to unite under a common objective. That potential for greater collaboration and decentralization does not mean it always happens, but the possibility is built into the design.

As a complement to the blockchain technology platform, NFTs enable direct support of artists by a community of philanthropists. Given the growing, yet unrealized potential of these philanthropic tools, Living Opera recently launched an NFT collection called Magic Mozart and a nonprofit called Living Arts Foundation, a decentralized grantmaking community with the ability to fund individual artists and their unique creative contributions.

BRINGING THE BLOCKCHAIN TO ARTISTS AND PHILANTHROPISTS

When someone buys a Magic Mozart NFT, they obtain not only a unique piece of digital and musical artwork, but also a “digital key” that grants them access to Living Arts Foundation. For those who want to contribute funds, but do not have the time to participate in the community, they can donate and sponsor recipients of the Mozart NFTs.

The use of these technologies enables a two-step, collaborative, and open grantmaking process to resource individual artists.

First, interested artists undergo the Living Opera arts entrepreneurship curricula, which upon completion, makes them eligible to submit a proposal to Living Arts Foundation. Though structured as a nonprofit, Living Arts Foundation will operate as a decentralized autonomous organization (DAO), which automates otherwise routine tasks such as validating a certificate and disbursing funds.

Second, NFT holders receive governance rights in the DAO, allowing them to vote on the proposals that they most identify with and believe in. This enables individual artists to not only learn presentation skills and accountability, but also philanthropists are able to directly support and follow the artists throughout the creative process.

Another important requirement for grant recipients within the community is that they produce multimedia that they upload on social media and YouTube describing how they benefited from the grant. That has the dual benefit of providing visibility into how the funds were used and showcasing to donors that they are changing the lives of individuals, while also training the recipients on how to build and showcase engaging content—a principle of the arts entrepreneurship training. In this sense, the inclusion of blockchain technology helps the project achieve scale, but the essence of it still relies on people giving and helping other people—something technology can never replace.

DIVERSE AND DEMOCRATIC GIVING

The arts empower the American way of life by allowing us to express ourselves freely, foster beauty and creativity, and encourage a truly vibrant and free society. Stories like Parassidis’ are increasingly rare, and we believe philanthropy has a significant opportunity and role to play in fanning the flames of further artistic expression in our society.

To conserve, propel and deepen the impact of the arts in our society, we encourage donors to consider micro-philanthropic approaches to further cultivate vibrant artistic expression and not hinder it.

Living Opera’s Magic Mozart Collection Powers Philanthropy and Performing Arts Engagement

This article was originally published in BlockTelegraph.

Late last year our team at Living Opera debuted the Magic Mozart NFT collection, a generative art project based on characteristics from Mozart’s Magic Flute. The collection contains digital art and personalized on-chain musical minuets based on a replica of Ein Musikalisches Würfelspiel – a musical dice game attributed to Mozart.

While music lovers agree that the game is an incredible demonstration of Mozart’s musical genius, it also appeals to technologists: with over a quadrillion permutations that create a new musical selection, the algorithmic musical composition has captivated the interest of top computer scientists.

At Living Opera, we aspire to reform the philanthropy space using a decentralized autonomous organization (DAO) to facilitate access to grants on a rapid and transparent basis. When they function at their true state, DAOs use smart contracts – or code – that dictate what will happen if a certain condition is met. Smart contracts promise to expedite the grantmaking process and add greater transparency over the acquisition and use of funds.

In 2021, US arts and humanities organized received $23.5 billion in charitable donations. However, artists’ wages have continued to stagnate. Our whitepaper based on Census Bureau data shows that US artists not only earn less than the average American, but have experienced a relative decline in their total earnings since 2009. Despite substantial funding for arts and cultural institutions, challenges for artists have only grown. Although that might sound immaterial for people in non-arts sectors, it is gravely important: not only does the arts and culture sector constitute 4.2 percent of gross domestic product, notes the Bureau of Economic Analysis, but also the arts have a profound multiplier effect on creativity and innovation that is not easily reducible with available data.

DAOs could facilitate micro-grants to artists and democratize funding applications and experiential arts learning. Living Opera is building the first arts entrepreneurship verifiable credential that will exist on the blockchain. DAOs and smart contracts enable a wave of innovation and mobility into certain states over others. Living Opera relocated to Nashville because of a legislation that Tennessee Representative Jason Powell spearheaded that allows DAOs receive similar treatment to LLCs and non-profits – perfect for the Living Arts DAO.

The performing arts are a challenging profession, and most artists, according to our research, struggle with depression and mental health. But just like anyone else, they feel more motivated when they believe that they are learning and growing. Members in the Living Arts DAO community who submit proposals gain valuable experience in writing and presenting themselves to others—a skill they typically do not get in college—together with an arts-entrepreneurship digital certificate.

In fact, my ongoing research with Jonathan Kuuskoski at the University of Michigan shows that only about 10 percent of colleges even offer an arts entrepreneurship certificate, though college students who major in the fine arts and get some exposure to business curricula end up earning higher hourly wages. In this sense, the DAO is designed not only to meet an immediate need but also to equip members with the credentials and knowhow to market themselves over the long run. This also allows the DAO to become a community of practice that can simultaneously incubate talent and help arts institutions source the right people for performances.

DAOs, like other blockchain technologies, cannot replace good judgment, the right people, and good ideas. But they have the potential to promote better governance, return on investment, and flourishing in the arts profession by increasing transparency and accountability. My hope is that the Living Arts DAO functions as an early pilot for a new approach within the world of arts philanthropy that leads to transformational outcomes for artists, philanthropists, and society at large.

Living Opera, founded by two opera singers and an economist, is a multimedia art-technology company that unites the classical music and blockchain communities to produce transformative content. Living Opera takes a holistic approach to life, work, and education: “living” means “full of life and vigor,” and “opera” means (in Latin) “labor, effort, attention, or work.” Living Opera NFT collections, such as Magic Mozart, are designed to bring the art and tech worlds together by expanding the audience of people who traditionally engage with classical music and fine art.

Christos A. Makridis is a research affiliate at Stanford University and Columbia Business School and an adjunct fellow at the Manhattan Institute. He holds doctorates in economics and management science & engineering from Stanford University.

ESG investors have good intentions, but there’s a better way to measure corporate impact and health

This article was originally published in Fast Company (with Bill Fotsch).

In 2004, the term “ESG” was officially coined with the publication of the UN Global Compact Initiative’s Who Cares Wins report. ESG is simply another way of measuring the centuries-old concept of socially responsible investing. The UN’s report defined the three main pillars of ethical finance as environmental, social, and governance (ESG).

These new metrics tapped into a worthy desire among investors to see not only good financial returns on their investments, but also improvements in societal outcomes.

However, the launch of ESG metrics also led to significant marketing opportunities for fund managers. Labeling funds “ESG” allowed them to charge more fees and acted as a get-out-of-jail-free card if their funds performed poorly financially. After all, they were serving two masters: financial return and ESG.

But ESG has been hard to define and measure over the years, shifting most recently from conversations about corporate social responsibility (CSR) to ESG. Investors can easily see the financial return a fund has provided in the last year, last five years, last 10 years, and in the life of the fund, but the returns to ESG are much tougher to measure, let alone measure. Financial returns are quick, objective, and reliable.

On the other hand, ESG measurements have proved much more nebulous because the interpretation of ESG is so subjective. In short, there are too many indicators and too little quantitative work linking transparent measurement to outcomes.

THE CHALLENGE WITH ESG RATINGS

Many ESG ratings do not have an intrinsic standard. Instead, they vary based on a subjective grading system assigned by different rating organizations. Different raters assign factors different weights, resulting in different grades. For example, KLD Research & Analytics assigns heaviest weight to climate risk management, product safety, and remuneration. Another rater, Moody’s ESG, assigns greatest weight to Diversity, Environmental Policy, and Labor Practices.

But it’s not just the weighting that differs, but also the way they actually create the metrics and scope of metrics that are included in the overall scores. Two rating agencies can produce two entirely different ESG ratings based on their subjective assessments.

Recent research by professors Florian Berg, Julian Kolbel, and Roberto Rigobon in the Review of Finance documents substantial discrepancies across the different rating agencies. They find that differences in measurement and scope contribute to 56% and 38% of the divergencies across scores, respectively, and weights contribute 6%. Florian Berg, together with coauthors, has also found that ratings agencies have gone back into retrospective data and rewritten it to have more favorable correlations with financial performance among firms, thereby manipulating the rankings. Few have been upfront about these substantial concerns with the ratings.

Even if we take the ESG ratings at face value, higher ratings are not predictive of lower corporate governance problems, according to recent research by Ruoke Yang in the Journal of Financial Intermediation. While unfortunate and sad, the low predictive power is not surprising given the incentives that agencies have to invest in detecting greenwashing and the incentives that firms have to superficially signal efforts to improve their public image.

Admittedly, measuring environmental performance is not easy. But the difficulty does not absolve us from the responsibility of actually measuring what we care about. For example, if natural gas companies are effective at producing energy with low emissions—thanks to advances in fracking technology—then they should be environmental stars, particularly in light of the industry that they are in. And yet, they do not appear in ESG funds.

Although investors’ dual desire to get a high return on their investment and improve the world in the process is good, ESG has not evolved to a point where it can adequately address both desires.

A BETTER MEASURE OF CORPORATE HEALTH

The good news is there are plenty of exemplary companies that are both industry leaders and doing a great deal of good in the process—here are a few from our prior research:

• Costco has led the retail industry in customer satisfaction, employee satisfaction and stock performance for 40 years. They track the number of employees who have graduated from college, unlike any other retailer.

• Southwest Airlines has been an industry leader for 50 years, in financial performance, customer satisfaction, and employee loyalty, having never laid off an employee.

• Welty Construction has grown to 100 times its size 20 years ago by delighting customers, employees, and investors. President Donzell Taylor began a program of hiring former addicts to empower meaningful change for them and the community.

Many more examples abound, but we need more than examples of companies that are both profitable and do good in the world—we need a set of organizing principles. Put differently, what are the practices that create good in a company and, in turn, scale to create good in society?

We believe that the answer resides in the concept of economic engagement—a term characterized by companies that treat their employees and customers like partners, focused on serving customers profitably—and can be summarized with five factors:

• Customer service: Serving customers is not only morally sound, it provides a company with a strong, valued, and typically profitable customer relationship.

• Shared economic understanding: Providing all employees with a common cause based on an understanding of value enables them to agilely respond to customers’ needs.

• Transparency: Offering financial transparency enables employees to see the relationship between performance and results, to continually learn from one another, and to avoid bad behaviors that would be exposed.

• Shared compensation: Everyone in the company has a stake in the increased value they are jointly creating, making employees truly partners in the business and raising employee compensation.

• Employee participation: Everyone is involved in improving company performance, in whatever way they can, regardless of position.

Our economic engagement survey tool, anchored in academic research and collaborations out of Harvard Business School, uses three different items, or questions, associated with each of the five pillars, leading to a total of 15 metrics that we use to evaluate companies.

After 10 waves of research with 50 to 150 companies in each, what we discovered was astounding: Companies in the top quartile of economic engagement were enjoying double the profit growth of their peers.

The aims of ESG are good: Companies should seek to be environmentally friendly, sustainable, and practice good governance. No one disputes that. But the devil is in the details, and sadly the measurement of ESG has been fraught with subjectivity over the years. The proof ultimately has to be in the pudding: if a metric does not show up in financial returns, either the market is completely broken or something is wrong with the metric and its measurement.

We propose a different lens to think about ESG by focusing on economic engagement. These objective, repeatable measures of behaviors deliver consistent financial returns and improve the lives of not only the employees of a company but also society at large.

Christos A. Makridis holds academic appointments at Columbia Business School, Stanford University and serves as the CEO/founder of Dainamic, a financial technology startup, and has earned PhDs in economics and management science and engineering from Stanford University.

Bill Fotsch is the founder of Economic Engagement LLC.

The Role of Airdrops for Loyalty, Rewards, Brand Awareness and Scale in Web 3.0

This article was originally published in Hackernoon.

How many times have you heard “thought leaders” and experts talking about how you need to “build community”? Everyone wants to talk about a thriving community, but many fewer are willing to put in the work to make it happen. And that work means genuinely caring about people and demonstrating that care over time – not rushing to get Twitter or Telegram followers.

One of the most common techniques from “web3 experts” is to work with influencers to get the word out. But those partnerships can be heavily hit-or-miss because follower counts do not necessarily translate into engagement and eventually sales, especially if the partnership is not genuine – that is, the influencer and token project are more transactional.

When thinking about building and cultivating community, what you really want to focus on is:

• Is there research that validates the strategy so you can talk about it more credibly?

• Is the community building strategy repeatable and/or scalable?

• Is there a way of determining what techniques for community building are more helpful at different parts of the experience?

The reality is that there is no substitute for becoming an accomplished and proven expert in your field so that you speak from experience when advising and building community. And, that’s also the way you signal that you’re serious about building community versus just passing by out of convenience and for pure profit motives. Putting in the time and energy to become highly trained is a demonstration that your time and money is where your mouth is.

But setting these foundational principles aside, there are also tools that can help build and foster community – and airdrops are one of them.

What are airdrops?

Marketers have long designed methods for attracting new customers and retaining existing ones through the use of discounts, promotions, and more. Such methods can be especially important for projects operating in competitive environments so that they can cut through all the noise. The same holds in the emerging area of web3: token issuers look for ways to set their tokens apart from others. Airdrops provide one mechanism to differentiate companies from their competitors, providing the ability to reward users and incentivize certain behavior.

In particular, airdrops allow companies to communicate and gift items directly to people on their digital wallets. The technological capabilities, coupled with the social phenomenon of tokens, can expand the tools that brands have to engage existing and prospective consumers, namely that they can tailor rewards and incentives to them based on observed behavior on the blockchain.

There are several types of airdrop strategies that depend on project goals, but they can generally be categorized as follows:

• plain vanilla where eligibility criteria are minimized as to include as much community members as possible,

• holder-based where eligibility criteria hinge on holding a token for a specified time period,

• past value-based where eligibility criteria favor past users and loyal supporters,

• future value-based where eligibility criteria are linked to future interaction with the project or favorable behavior.

What does the research say on airdrops?

All organizations battle for the attention and business of their prospective customers, ranging from retail consumers to businesses, and airdrops are only one mechanism to achieve this. Although airdrops within web3 are a new vehicle, as a concept they are no different than loyalty programs or price discounts offered by traditional non-web3 companies: they aim to confer value to those who engage with the product or service while encouraging future involvement.

My recent research published in the Journal of Corporate Finance presents the first empirical and large-scale statistical analysis on the effects of airdrops. After documenting the rapid growth among decentralized exchanges (DEXs) up until the end of 2021, my coauthors and I quantify how the use of airdrops affects the growth rate of market capitalization and transaction volume for an exchange. Crucially, we find that DEXs that implement airdrops exhibit a 13.1 and 8.6 percentage point increase in the month-to-month growth rate of market capitalization and volume even after controlling for broad changes in the market and the trust factor of each exchange.

These results are consistent with research by professors Xiaofeng Liu, Wei Chen, and Kevin Zhu who find that token incentives are successful in attracting users and generating productive value, as well as research by professors William Cong, Ke Tang, Yanxin Wang, and Xi Zhao who investigate the effects of an airdrop on the Ethereum blockchain and find a positive effect on democratization and financial inclusion on the network.

However, there are also reasons why some airdrops may not work. If they are used too many times, they lose their “surprise” and the price of the token can get inflated (Makridis, 2022). Much like announcements from the federal reserve when changing the buying and selling of bonds can fail to have a surprise effect on market sentiment if they are used too often, airdrops can also become less effective over time. The rationale goes back to a classic debate in monetary economics about rules rather than discretion pioneered by Nobel Laureates Edward C. Prescott and Finn Kydland: monetary policy announcements based on discretion can only “work” so long as the public is sufficiently surprised by the information that they change their behavior.

Experiences with airdrops

There are many reasons to consider using airdrops, including go-to-market strategies, but one of their important benefits if implemented properly is building community. Airdrops provide a way for project owners to bring people into a community who otherwise may not have engaged with it, as well as to reward members who may be active participants and demonstrating preferred behavior. For example, last year I interviewed Gary Vaynerchuk in a Cointelegraph Magazine story and discussed his building a community around the VeeFriends NFT collection.

In fact, he announced in 2021 that every customer who bought 12 print copies of his new book, Twelve and a Half: Leveraging the Emotional Ingredients Necessary for Business Success, would also receive one mystery NFT through an airdrop to their digital wallets. While the book was interesting on its own, the novelty of a mystery NFT coupled with the success and appreciation of his even earlier VeeFriends NFTs created a significant splash and demand. In fact, Vaynerchuk received over a million pre-orders of the book within a 24-hour period!

But even closer to home is what we’re building in Living Opera, a web3 multimedia startup that is bridging the web3 and classical music communities. Together with two leading opera singers, we are passionate about producing beautiful art and empowering the artists that make it possible. That’s why we recently launched the Living Arts Foundation – a nonprofit DAO that functions as a micro-grants and educational community of practice for artists, fueled by holders of our Magic Mozart NFT collection (see our whitepaper for a summary).

Despite continued increases in giving each year, the problems are still getting worse, especially funding in the arts. Our research shows that real wages among artists have been declining over time. And that’s not even including the increased costs they incur (e.g., paying for auditions). By providing a way for micro-philanthropists to fund artists, and creating educational curricula around entrepreneurship for artists that they can go through to gain access to the micro-grants community, we are building a two-sided marketplace that generates greater value for both sides – the philanthropists see the return on their donations, and the artists gain access to funding.

Airdrops will play an important role to build community and ensure active participation among the Mozart NFT holders in the Living Arts Foundation DAO. For example, we want to provide Mozart NFT holders a chance to see my two co-founders and world-class opera singers, Soula Parassidis and Norman Reinhardt, in actual performances. We also plan on giveaways of Living Opera merchandise. Airdropping gifts will help keep DAO members excited and engaged with voting and community building events.

About Christos A.Makridis

Christos A. Makridis is the co-founder, chief operations officer, and chief technology officer for Living Opera, a web3 multimedia startup. He also holds academic appointments with Columbia University, Stanford University, University of Nicosia, and others. Christos has dual doctorates in economics and management science & engineering from Stanford University.

About Living Opera

Founded by two opera singers and an economist, Living Opera is a multimedia art-technology company that unites the classical music and blockchain communities to produce transformative content. Living Opera takes a holistic approach to life, work, and education: "living" means "full of life and vigor," and "opera" means (in Latin) "labor, effort, attention, or work." Living Opera NFT collections, such as Magic Mozart, are designed to bring the art and tech worlds together by expanding the audience of people who traditionally engage with classical music and fine art.

What Investors Should Know About Projects With a Philanthropic Component

This article was originally published in Nasdaq (with Soula Parassidis).

Don’t dismiss opportunities out of hand simply because there’s a mission to give back or do good- that’s not synonymous with high risk or failure; in fact, it could still mean explosive returns. However, certain considerations become even more vital when you’re ready to take the leap with a “heartstrings” investment

Philanthropic donations have continued to grow year-to-year, reaching $484 billion in 2021 – a 4% increase, relative to 2020. Charitable donations decline during times of economic distress and expand during booms, according to economics research. But times of distress are often when donations matter the most.

Retail investors are trained to think about return on investment and contract investment during times of economic distress. Recessions are often periods of high uncertainty and ambiguity, so sitting on cash can be a safer bet than taking even an educated bet on an investment.

However, that’s not always the best way to think about philanthropic donations; like any general advice, there are always exceptions. In this piece, we’ll look at why investing and engaging during these times can be potentially rewarding both financially, and in other important ways such as personal, social, and passion fulfillment; and we’ll look at the concerns you should keep top of mind.

First, some of the most impactful discoveries are borne during recessions. Our own recently published research in Research Policy shows that the types of inventions discovered during periods of economic distress are the more impactful and general purpose ones, rather than the marginal discoveries that are more prevalent during booms. Sometimes that is because a crisis can highlight what’s really important and direct time and financial resources to solving it, rather than getting caught up with all the momentum trading during a boom.

If a project has found a unique and creative way to solve a giant problem – whether for the world at large or even a niche industry – then the question is simply how long will it take for the project to scale. In other words, when faced with an opportunity to contribute to a “moonshot” investment, don’t worry if the conditions aren’t perfect – better to take the moonshot than wait for “ideal” conditions and miss the opportunity to make an impact.

And that logic doesn’t just apply to conventional products and services – it is also relevant for philanthropy. In fact, some of the most impactful dual-technologies were created in response to a collective social need, rather than a traditional go-to-market strategy, although unfortunately there has been a move away since the 1980s.

Furthermore, a solution to a giant social challenge will generate a ripple effect of other benefits and ultimately lead to some sort of economic gain down the road through improved community and brand. Consider, for instance, the impact that Goodwill Industries has had on the world, providing education, training, work, and practical needs for millions, while simultaneously generating over $6 billion in revenue.

Second, retail investors need to make sure they are not assuming or expecting a level or pace of commercialization that may have been taken off the table by someone integrally involved in the project for reasons that might be vital to its success. Expecting immediate financial returns in some situations is unrealistic, perhaps given the gravity of the problem or the market. 

Let’s continue with the arts as an example. While the arts and humanities received $23.5 billion of donations in 2021, artists themselves—almost across the board—have been experiencing declines in their real wage and employment opportunities, coupled with absorbing higher costs, according to our own research at Living Opera. But the problem is not a lack of funding – it’s the efficacy of each dollar spent; and though not always, this often ultimately stems from conjecture in the first place about expectations of projects timelines, horizons, and values. Why? Because of the competing two major interest groups that fund the category: Altruistic, passionate lovers of art and art institutions in it “for the love,” and those looking to make money in the Art Business.

This means of course that the sector is going to require major reform and fundamental change in the business model (which is already underway with web3 disruption, digital assets, and the rise of independent creators). But that does not happen overnight – or necessarily even in 5 years. The deterioration has been taking place for decades, so it might take a similar amount of time to truly shift the state and trajectory.

So, if retail investors get involved in an arts project for the wrong reasons, they can make demands that may undermine the efficacy of a project and perhaps the very reason it was started in the first place.

We’ve had that happen to us plenty of times in Living Opera. For example, with our launch of the Living Arts Foundation fueled by our Magic Mozart NFT collection – a nonprofit that decentralizes grantmaking in the performing arts – we’ve been asked at least once or twice by people seeking a fast return on investment to convert it more into an NFT marketplace. 

But from where we sit as technologists, economists, and passionate supporters of the opera and classical music categories- what performing artists need right now is not another NFT marketplace, but rather a community of practice containing curricula on arts entrepreneurship and grants. Another NFT marketplace might sound better to potential investors, but performing artists need access to grant opportunities and entrepreneurial skills that are vital to career flourishing. So, in the case of our project, yes- we expect it to yield an eventual monetary ROI for our investors to be sure; but utility, philanthropy, research and innovation are in the driver’s seat for our projects, while commercialization, profits and revenue are certainly along for the ride--just not at the wheel, looking to pull off at the first easy exit. This is exactly what our investors need to know—and do know as communicated by our content—and the kind of info everyone should have for similar projects.

In it for the long haul

You’re going to want to be prepared for a longer tail of potential transformative outcomes and be more hands-on for part of the ride. While there are a lot of ineffective nonprofits – perhaps too many, and that’s why we see donations rising year after year without improvements in the underlying problems that they’re trying to solve – there are also incredibly effective ones that generate social impact greater than many traditional organizations. Goodwill Industries is one such example of a non-profit that has had a profound impact for decades, achieving both financial profitability and social impact at scale. And there are many more examples, ranging from the Boy Scouts of America to St. Jude’s Children’s Research Hospital.

It’s good to move forward with these types of projects that align with your personal passions, values, interests as a human being–not just an investor. This is what will carry you through if and when the passion project takes longer to pay off, conventionally. 

About the authors

Christos A. Makridis is a research affiliate at Columbia Business School, Stanford University and the University of Nicosia, and CEO and founder of Dainamic, a startup that aims to democratize access to AI for mid and small sized banks. Greek-Canadian operatic soprano Soula Parassidis is an entrepreneur, anti-human trafficking advocate, and producer. She has appeared on stage in the world's major performance venues and is the CEO of Living Opera.

About Living Opera

Founded by two opera singers and an economist, Living Opera is a multimedia art-technology company that unites the classical music and blockchain communities to produce transformative content. Living Opera takes a holistic approach to life, work, and education: “living” means “full of life and vigor,” and “opera” means (in Latin) “labor, effort, attention, or work.” Living Opera NFT collections, such as Magic Mozart, are designed to bring the art and tech worlds together by expanding the audience of people who traditionally engage with classical music and fine art.

Should Bored Ape buyers be legally entitled to refunds?

This article was originally published in Cointelegraph.

Should people who purchase nonfungible tokens (NFT) be entitled to refunds if they decide they don’t like their digital pictures? Some Europeans are beginning to make that case under a 25-year-old law.

Unhappy buyers have claimed that their right to a refund is protected by a 1997 European Union law that requires any person or business engaged in “distance selling” — that is, buying and selling a product that is not done in person — to allow customers a 14-day grace period to return the product for a refund. But since digital goods are different, the law makes provision for the 14-day period to be waived if customers are made aware in advance.

While the interpretation of the law is going to inevitably play out in the courts, there are several important caveats to take into account, particularly given that the law was written before the ubiquity of digital goods and services. Simply put, the law was written before the emergence of the internet, let alone digital assets like NFTs, so it is much less applicable today.

Just as an example that it is not applicable to the current state of the NFT market, consider that “this Directive shall not apply to contracts” that are “concluded with telecommunications operators through the use of public payphones.” What differentiates contracts that are concluded through the use of public telephones versus through the blockchain? Nothing substantive other than the delivery mechanism, underscoring that the intent of the law was to prevent consumers from getting ripped off by sellers who were shipping physical goods that turned out to be different from what the consumer originally desired before seeing it in person.

Fundamentally, applying the directive to NFTs would pose grave consequences for patent and trademark law. Crucially, each NFT is, by definition, inherently unique, and any NFTs that get refunded and discarded inevitably imply the destruction of intangible capital. By contrast with the 1997 EU directive, shipped products are largely homogeneous, so a buyer who seeks a refund and returns it does not damage the product and prevent the seller from reselling it.

Furthermore, allowing for refunds would eliminate the very purpose of rarity in profile picture projects — potentially eliminating their value altogether. Consider the example of Bored Ape Yacht Club NFTs. The highest-value BAYC purchase was for $3.4 million spent on #8817 — which was minted for roughly $1,000 in April 2021. Its rarity is partially a product of its “gold fur,” a trait held by less than 1% of BAYC NFTs on the market.

Of course, if buyers can simply request a refund in the event that they do not like the NFTs they randomly receive during the minting process, it’s safe to say that such “1% NFTs” will become much more common, as buyers will simply keep seeking refunds until they obtain the NFTs they want. If you follow the logical consequences of that thinking, there will no longer be rare NFTs in any corner of the market.

The reality is that the law around digital assets has not kept up with the technology, so there is naturally a temptation to rely on outdated, irrelevant regulatory guidance, for better or worse. But if we keep pressing on and companies innovate and serve consumers in good faith, we can converge to a new equilibrium that generates value on all sides of the equation.

Christos Makridis is the chief operating officer and co-founder of Living Opera, a Web3 multimedia startup anchored in classical music, and a research affiliate at Columbia Business School and Stanford University. He also holds doctorate degrees in economics and management science and engineering from Stanford University.

Four principles for crypto regulation

This article was originally published in The Hill with Jay Jog.

There was a substantial surge in the market capitalization of cryptocurrencies recently, reaching nearly $3 trillion in 2021 but collapsing to under $1 trillion by the end of 2022. We also witnessed fraudulent behavior by many bad actors, from Terra (Luna) to FTX.

Any asset has fluctuations, and the fraudulent behavior was not due to an inherent flaw in distributed ledger technologies (DLTs) but rather bad governance and an absence of a predictable and reasonable regulatory framework. In fact, nearly all the fraudulent behavior took place offshore, at least in part because most cryptocurrency companies have viewed the U.S. regulatory framework as too confusing or ambiguous to set up shop.

Distributed ledger technologies, often referred to as “web3” (or the new generation of the internet for short), use the blockchain to provide ways for users to access, record and validate activity digitally. Although the process is not always fully decentralized, or “permissionless,” blockchain is an enabling technology for collaboration and economic activity often among many, geographically disparate people. Web3 tools include cryptocurrencies.

The expansion of DLT into all areas of the economy is inevitable because it is simply better at doing the job than existing centralized ledger technologies, including in financial services. But the regulatory environment will influence whether the U.S. can take advantage of the technology to its fullest — or whether we sit idly by as other countries, such as the United Arab Emirates and Singapore, lead the charge in attracting investment, entrepreneurs and technologists.

We believe there are four important issues that must be reflected in regulation.

1. Impose licensing requirements on centralized cryptocurrency exchanges and other digital currency services that behave like banks.

Just because a company trades cryptocurrencies does not mean that it should be exempt from financial regulation. If the company serves as a custodian of consumers’ assets, and it lends those deposits to others, it is effectively operating as a bank and should be subject to similar regulations that banks are subject to based on their size and asset class. Sadly, many companies in this space have sought regulatory arbitrage by operating outside of the U.S. because of regulatory ambiguity and the opportunity to arbitrage on it. That’s exactly what happened with FTX, but what’s worse is that then-CEO Sam Bankman-Fried did so in plain sight and conversation directly with regulators that were supposed to be watchdogs.

What does adherence to regulatory requirements look like? For starters, it could involve capital requirements of the form laid out in the recent current and expected credit loss framework that requires that banks use “reasonable and supportable” forecasts to derive the amount of capital reserves they need to hold out in case of adverse economic events. Or it could involve basic cybersecurity and financial security regulatory requirements, like SOC 2 compliance.

Centralized crypto exchanges need to consider the effect that their failure has on the system, and simply arbitraging and evading regulation that already exists and that they should be under can provide the proper guard rails to mitigate future catastrophic outcomes.

2. Provide regulatory clarity about the specifics of legal web3 behavior.

Sadly, there is no single source that specifies the legal requirements for web3 builders. And, in some cases, the regulatory guidance is conflicting. Most notably, the Department of Justice has referred to tokens as commodities in its enforcement actions, whereas the Securities and Exchange Commission (SEC) has called them securities and enforced them as such. Creating guideposts for legal activity will promote not only greater innovation since more companies will build within the U.S. regulatory sandbox, but also more consumer protection since enforcement will have more legal precedent and the bright line for legal activity will be clearer.

Clear and consistent regulations are essential for companies operating in the cryptocurrency space. Regulators should work to create regulations that are easy for companies to understand and follow and that do not create unnecessary barriers to entry. An example of clear and consistent regulations is the New York State Department of Financial Services issuing a “BitLicense” specifically for companies operating in the cryptocurrency space, which sets clear and consistent requirements for companies to meet to operate in the state.

The U.S. has the luxury of experimenting with different approaches because of the varying state-level capabilities. For example, Wyoming passed legislation that recognizes certain types of cryptocurrencies and blockchain tokens as legal property and created a new type of bank specifically for cryptocurrency companies, which allows them to operate in a more permissive regulatory environment. Similarly, Tennessee passed legislation that recognizes decentralized autonomous organizations (DAOs) – a new form of governance that leverages the use of smart contracts and tokens – as limited liability corporations, which provides additional liability coverage for DAO members.

3. Harmonize international standards.

Because of a rigid and stringent regulatory framework, many web3 entrepreneurs and companies locate outside the U.S. for business and residence. Much like developed countries meet to coordinate economic policy through the G20 annual meetings, and the OECD has published international guidelines around the ethical use of artificial intelligence, U.S. regulatory agencies should cooperate with others to identify a common set of principles and standards.

Although many look to the SEC for guidance, they too can learn a lot from international counterparts. For example, they could work with the European Securities and Markets Authority (ESMA) to share information and coordinate regulatory efforts to combat fraud and protect investors in both regions. Similarly, the U.S. could learn from best practices in other countries, including Switzerland’s regulatory sandbox, which not only provides much more clarity on the distinction between security tokens and their counterparts, but also safety in piloting a token as long as the amount raised and transacted upon is below 1 million Swiss francs.

4. Foster dialogue with researchers and industry practitioners.

The cryptocurrency industry is rapidly evolving, and it’s important for regulators to stay informed about the latest developments and trends. Unfortunately, regulation and even the hiring process in the federal government does not yet move fast enough to accommodate these trends, so it is important for regulatory bodies to participate in the web3 community and promote dialogue with researchers and practitioners. For example, the U.S. Commodity Futures Trading Commission (CFTC) could regularly hold public meetings with industry leaders, academics and other experts to discuss the latest developments and trends in the cryptocurrency space.

Fortunately, there are many platforms for facilitating these dialogues. For example, the Center for Digital Finance and Transformation at Columbia University frequently brings industry practitioners and academics together, and sometimes helps convene and participates with federal and state policymakers. Policymakers, especially in the SEC, CFTC and DOJ, should seek opportunities to work with and delve into details with practitioners and researchers.

These recommendations are certainly not exhaustive, but they reflect a general set of governing principles that would improve U.S. economic and social competitiveness, while simultaneously mitigating against the risk of tail outcomes, like those observed over the past year in the crypto community. Most importantly, we encourage regulators not to take a one-size-fits-all approach to web3 regulation, but to understand the context and allow for experimentation and dialogue.

Christos A. Makridis is a research affiliate at Columbia Business School, Stanford University and the University of Nicosia, and CEO and founder of Dainamic, a startup that aims to democratize access to AI for mid and small sized banks. Jay Jog is co-founder of Sei Labs, the first sector specific L1 blockchain specialized for trading. He was previously an engineering lead at Robinhood.

Educational Research Made Accessible

This article was originally published in City Journal with Goldy Brown.

“Equity” has become a major issue in education policy, but it is a politicized, ambiguous word. Does the concept mean that all outcomes must be equal, or do its proponents simply endorse equal opportunity? The policies that have been advanced in equity’s name are generally anchored in the dubious premise that different outcomes stem necessarily from injustice.

Requiring schools to right the wrongs of the past puts an impossible burden on the educational system. Other institutions share that responsibility, from families and philanthropic organizations to civil society and political actors. The world of education, by contrast, needs to focus on helping students learn effectively and find success in life.

Our new book, The Economics of Equity in K-12 Education, recommends specific changes to education policy and programming. We endorse strategies from the scientific literature that could improve the life chances of American students. Social scientists have conducted a vast amount of empirical research in education policy and the economics of education. Our aim is to make this research accessible for interested readers and policymakers, who can use scientifically informed best practices on the job.

Student achievement has continued to deteriorate, even as education funding grows. In fact, reading and math scores recently hit a 30-year low, according to the 2022 National Assessment Education Progress (NAEP) exam results, while federal funding for education grew to nearly $90 billion. These alarming results provide a warning: our emerging workforce is less prepared to handle the increasingly complex demands of the future. Left unchanged, that dynamic will accelerate the inequalities that educational-equity proponents have decried. Any conversation about improving student outcomes should consider how children accumulate skills and cultivate their abilities, also known as “human capital.”

Without implementing evidence-based priorities, recent idealistic proposals may treat a symptom without addressing the cause—making them ineffective and possibly counterproductive. The proposals in our book are for state and local governments, educational leaders, and anyone interested in the American education system’s top priority: to supply students with the necessary skills to participate, flourish, and grow in the American economy.

Christos A. Makridis is a research affiliate at Stanford University and other institutions. Goldy Brown III is an associate professor in Whitworth University’s graduate school of education.

Mozart’s Ghost

This article was originally published in The Return.

I am deeply passionate about promoting human flourishing: people are created with a unique purpose and have so much potential, but so many fundamentally fail to succeed. That wasted potential not only harms the person who failed to live out their calling, but also fails to bless the many people who could have benefited from their gift.

But these are not new ideas – we all grapple with the importance of calling and see people living it out, and (many) others who are not. And perhaps that wasted potential is most evident in the performing arts, where our internal surveys in Living Opera show that over half of performing artists take up a job outside the music sector – often a low-wage job in retail or customer service – to finance their music career. That’s especially damaging, as my research with Jonathan Kuuskoski at the University of Michigan shows, because their hearts are not in these second full-time jobs, and they earn lower wages. Meanwhile, these artists are still burdened with the high college debt that they paid for with their music degree without any practical training.

So, what can we do about it? Three years ago, I got to know two of the world’s leading opera singers, Soula Parassidis and Norman Reinhardt, who have become my best friends. They launched Living Opera in 2019 to provide performing artists with educational content and lessons learned about what it takes to thrive in the business. Nearly two years ago, I joined as a co-founder and led our rebranding as a web3 multimedia startup using blockchain technology to promote and produce transformative experiences through classical music.

On September 30, 2022, we had a soft launch of our first major NFT collection called Magic Mozart, consisting of 1,791 initial pieces each with a portrait of Mozart containing different elements from his final opera, The Magic Flute. It also comes with a personalized musical minuet based on Mozart’s development of the first widespread generative art game. (Our launch date was specific since The Magic Flute premiered on September 30, 1791 in Vienna, Austria!) 

The discovery that Mozart was a pioneer of generative art – which we talk about in detail here – served as the inspiration we needed to get involved in web3 without just jumping on the bandwagon when NFTs and generative art were popular. Indeed, the discovery highlights a throughline between one of the oldest art forms (opera) and one of the most recent social and technological fads (generative art).

But the artistic element of the collection is only the front end: we also just launched the Living Arts Foundation – a nonprofit decentralized autonomous organization (DAO) that will function as a decentralized grantmaking platform for helping and empowering artists. The novelty of the DAO is that it allows us to create stronger incentives on both sides of the “market.” 

Here’s how it works. Artists – whether already part of the Living Opera community or not – can take our free arts entrepreneurship curricula. If they complete it, they earn a digital credential that lives on the blockchain. That digital credential gives them access to our grantmaking platform that allows artists to post short funding proposals detailing their requested amount, how they plan on using it, and why it is important. Then, the Magic Mozart NFT holders, or the micro-philanthropists, have access to the platform and can view and vote on proposals. Once a threshold is hit on a proposal, the artist is funded through a direct transfer to their digital wallet. Artists then record a video documenting their experience resulting from the funds and share it on social media. A line of communication opens up between the micro-philanthropist who voted for the artist, and the artist, with the ability to keep in touch and share.

This approach strengthens incentives on both sides. Furthermore, the micro-grants community provides an organic and experiential way of imparting arts entrepreneurship know-how, including presenting ideas and building accountability around their execution. And we also are helping onboard artists onto web3. While we’re only at the beginning of this journey, we are excited to have Living Arts Foundation formally filed with provisional nonprofit status and are in the process of selling more of the collection and building the technology stack for the platform.

The DAO offers a wide array of advantages, notably more accountability and transparency compared to the norm in the non-profit space. Somehow, funding for non-profits continues to grow, yet the challenges they are trying to solve only worsen. While there are some great non-profits, many are burdened by fraudulent behavior, waste, and ineffectiveness. We believe that decentralizing grantmaking is a tool within the non-profit realm and we have a community of performing artists to pilot it on – and onboard them onto web3!

We have much more to learn and test in the journey ahead of us, but we believe that the best is yet to come and that classical music plays a role in it. Moreover, we see blockchain technology as a complement to human ingenuity – not a substitute.

Putting NFTs in perspective 

We might be tempted to look at NFTs as a speculative boom-and-bust market. Although some collections, such as CryptoPunks and Bored Ape Yacht Club, garnered international attention in 2020 and 2021, these profile picture projects (PFPs) were simply status symbols – not art.

One of the worst parts about this era of trading activity was the fraud and whitewashing of NFTs. For example, a project might launch and plan among a group of friends to buy up the NFTs to give the impression that the collection “sold out,” thereby driving up the perceived value to less savvy or unfamiliar market participants. Perhaps even more deceptive is when a founder would create multiple digital wallets and buy their own collection from a different address to pretend there is interest and sales when the activity was just a show.

But these boom-and-bust dynamics are not unique to NFTs. For example, the run-up of house prices from 2003 to 2006 in the United States, right before the collapse in 2008 to 2009, was another example of what can happen when there is speculative trading on assets. Although the explanations for the financial crisis are still subject to debate, what is clear is that many homeowners who entered the market without a steady income, received a loan based on financial models that simply assumed house prices would continue to appreciate. 

My research on foreclosures during the financial crisis finds that these loans were often adjustable-rate mortgages that had two or three years of fixed interest rates, but would experience a discontinuous change (mostly a jump) in their interest rate subsequently.

The price of any asset is a function of its intrinsic value and the expectation of future cash flow. If expectations don’t align with reality, then the “economic laws of gravity” eventually kick in and the asset price will decline. That is also what happened since the boom in the NFT and crypto market since 2021 – the low-quality projects have plummeted and, while the web3 market has taken a hit (much like the market as a whole), high-quality projects have survived.

The importance of the arts and the role of web3

Few readers would disagree with the statement that the arts matter. Clearly we care about how we dress, what furniture looks like in our residence, the rhythm and lyrics of music, and so on.

Simply put, the arts and culture sectors overwhelmingly influence peoples’ outlook – for better or worse. Much of the viral music does not point to what is good, beautiful, and true, but instead to fairly wicked and shameful behavior that some are trying to normalize. But when people listen to it on repeat – and sometimes not of their own choosing (e.g., if it is the default track in a store), they cannot help but get affected by the messaging.

But sadly, rather than rewarding skilled artists, many people have retreated from the arts all together. Yes, some pretty weird operas get cast, but some pretty weird startups launch. Does that mean we retreat from entrepreneurship? Or do we engage and start contributing to the culture we want to see?

The classical music community – and specifically the community we’ve cultivated in Living Opera – is a highly trained community. These are people who speak multiple languages, can read music, have trained their voice, and can perform and act in front of audiences. These are not the random pop artist who goes viral because of a deal with a record label and a lot of auto tuning that goes on in the background – it’s live music and performance at a high caliber.

So something has to change. Fortunately, web3 provides a catalyst to change the incentives. Now, micro-philanthropists have a more transparent way of contributing, and artists have the tools to build their fan base, rather than rely on institutions that may not have their interests, or those of society, at heart. DAOs – and what we look forward to doing in the Living Arts Foundation – offer new ways to coordinate activity among potentially geographically disparate people connected by a shared objective and community. 

It’s Not Too Late to Prepare for the Next Housing Crisis

This article was originally published in Barron’s with Mark Calabria.

The housing cycle lives. Many economic models predict a housing crisis at some point in 2023 or 2024. The combination of high consumer debt, a slowing labor market, and inflated housing prices has created a ticking time bomb. It will explode – we just don’t know exactly when. But it is never too late to prepare. Luckily, policy makers can look back on past recessions to help refine approaches to mitigating the damage

Yes, some of the worst mortgage products behind the 2008 crisis are history. Unfortunately, they have been replaced with other troubling practices, such as record debt burdens among borrowers, as measured by debt-to-income. Significant numbers of recent borrowers are also already underwater on their mortgage or at risk of becoming so. Appropriately provided loan relief during the pandemic has also inflated borrower credit scores, making it significantly harder for lenders to accurately judge risk.

The federal state governments tried several strategies to mitigate the 2008 crisis, including the Home Affordable Modification Program. Those approaches were complex, convoluted, and often ineffective. New approaches were developed in 2020, in response to Covid, that can better serve both borrowers and the taxpayer. The means-testing of assistance in the 2008 crisis inadvertently resulted in massive disincentives for work. Delinquent borrowers often lost 31 cents of their mortgage assistance for every additional dollar earned. That contributed to one of the slowest job recoveries and biggest declines in homeownership in history.

In contrast, pandemic forbearance was based on time, not income. Borrowers were given a bridge to their expected unemployment insurance benefits, which can take weeks, if not months, to arrive. 

Moving away from means-testing also greatly reduced the paperwork required of both borrowers and lenders. Pandemic mortgage assistance provided through Fannie Mae and Freddie Mac assisted almost 3 million borrowers, twice that assisted under HAMP. Perhaps more importantly, the pandemic programs were set up six times faster. While HAMP helped mitigate the severity of the financial crisis on consumers, it only reached a third of its targeted indebted households because it overlooked important design elements in mortgage finance.

Speed and ease of use in government programs can be, and often is, an invitation to fraud and abuse. This was first addressed by requiring that any missed mortgage payments be repaid. Payments were paused, not forgiven, reducing the incentive to game the system.

Assistance was also paid for within the mortgage market, not by the taxpayer. The HAMP program cost well over $20 billion, not even including a $25 billion settlement with lenders or the $10 billion hardest-hit-fund. In contrast, pandemic assistance provided through Fannie and Freddie was largely paid for with a modest fee on high-income refinancings. The support provided to the mortgage market was paid for in the mortgage market, as it should be. Since the assistance was provided in a budget neutral manner, it also did not add to the inflationary pressures created by other pandemic assistance programs.

Policy matters because it not only directly shapes incentives and economic activity, but also indirectly influences consumer and homeowner expectations. Newly-released research from one of us, using data from the Federal Housing Finance Agency over the past three years, shows that homeowners who are more optimistic about the housing market at the time of their loan origination are roughly 2 percentage points more likely to enter forbearance compared with those who anticipated the housing market will stay the same. That’s significant given that the average rate of forbearance among homeowners was 4% in 2020.

But it’s not necessarily a bad thing – these homeowners who entered forbearance were likely more determined to get back on track with their payments, rather than lose it all and eventually get foreclosed upon. In fact, researchers from the Urban Institute released a report titled “normalizing forbearance,” suggesting that there should be expanded provisions that allow homeowners to share the requisite documentation about extreme events to their servicer and delay payments. In this sense, policy that promotes optimism also indirectly influences the efficacy of loan renegotiation.

There were comparable results among homeowners who anticipate future unemployment and income declines. Crucially, all these results control for a wide array of demographic factors, as well as other individual characteristics, such as credit scores and attitudes about risk.

The tight link between borrower expectations about the housing market at the time of origination and the likelihood of entering forbearance points to an important result: Homeowner attitudes matter and shape the decisions that ultimately might precipitate situations that require federal intervention. That means policy makers should not think about intervention from a static perspective, but rather a dynamic one where the choices they make today have consequences for how consumers and firms behave in the future and, in turn, impact the economy as a whole.

Christos A. Makridis is a research affiliate at Columbia Business School and Stanford University, and the founder/CEO of Dainamic, a financial technology startup. He holds dual doctorates and masters in economics and management science & engineering from Stanford University.

Mark Calabria is the former Director of the Federal Housing Finance Agency, and author of the forthcoming book, Shelter from the Storm: How a COVID Mortgage Meltdown was Averted.