TiB 175: Regulating Facebook; how to win more; DeFi and the real world; and more...

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What happened when Facebook banned political ads?

For at least five years the influence of Facebook in the political sphere has been controversial, as we've discussed several times (e.g. TiB 7, 41, 65, 88, and 164). Perhaps the most politically potent charge against Facebook is that it amplifies political misinformation. This was back in the news this week, with Joe Biden accusing the social media giant of failing to stop vaccine misinformation and Facebook hitting back. One of the most visible measures Facebook has taken to defang these criticisms was its ban on political advertisements in the last week of last year's US presidential election campaign. But did it work?

A new report by Duke's Centre on Science & Technology Policy attempts to evaluate the impact of the ban and the authors reach some (perhaps) surprising conclusions. First, they finds no evidence that it meaningfully reduced misinformation (because most misinformation is organic); second, they finds that it hurt poorer campaigns more than well funded ones; and, third, they find that it hurt Democrats more than Republicans (because Republicans are much better at organic engagement).

The report concludes by recommending that Facebook (re)permit political advertising for future campaigns. This underlines the difficulty of finding effective, rather than feel-good, regulatory solutions in tech. For another example, see this excellent piece by my colleague Benedict Evans - and, indeed, his whole archive on tech regulation - on the challenges of even defining what problem we want to fix, let alone turning that into policy. As I've said before, the internet is the ultimate variance amplifying institution - and there are no quick fixes to make the weirdness go away.

Can DeFi escape the real world?

One of the most exciting areas in cryptocurrency is "decentralised finance" ("DeFi"). The core idea is that the financial system could be less expensive and more accessible if much of the activity performed by financial intermediaries like banks today was instead performed by smart contracts executed on blockchains like Ethereum or Tezos. There's an accessible introduction here or listen to Chris Dixon make the bull case in this excellent podcast (segment starts 26 mins in).

Remaking the financial system, however, isn't easy. Nic Carter and Linda Jeng have an interesting new paper on the risks and challenges facing DeFi (FT Alphaville has a good summary here). It's important to emphasise that Carter and Jeng aren't crypto naysayers; in fact, Carter is a prominent crypto advocate and investor. Nevertheless, they emphasise that the benefits of DeFi introduce new risks: the fact that fewer intermediaries mean less oversight and fewer controls is both feature and bug.

One risk is, of course, regulation - and central banks and other regulators are certainly paying close attention to the space (see, e.g., the recent Federal Reserve piece on "programmable money"). We talked before about the controversy surrounding Tether, one of the largest stablecoins, which has attracted some extraordinary legal complaints (see this wonderful piece by Alex Danco, plus this follow up). This week a Fed offical published a paper that calls for Tether and others to be regulated like banks, which would be disruptive to their operations, to put it mildly. As Carter and Jeng put it:

the irony is that as DeFi struggles to make itself more useful in the real world, its dependency on the established financial system grows

BONUS: If you're new to crypto, this week's TiB podcast episode is a conversation with Gian Volpicelli of Wired UK and author of the Wired guide to Cryptocurrency. It's a whistle stop tour of the economics, politics and sociology of crypto for beginners

Why does success breed success?

An important idea in many domains is the Matthew Effect - the idea that success breeds success (or, alternatively, "the rich get richer"). But where does this effect come from? A new paper by Ambroise Dechamps, Changxia Ke and Lionel Page uses an interesting lab experiment to test competing theories by simulating "best of three" games between two opponents. This twitter thread by Page provides a good summary.

They find that, even in such a simple simulation, the winner of the first game is disproportionately likely to win the series. One explanation is that the winner of the first game has a stronger incentive to win the second: a single win gives them the series rather than merely a tie. But the authors use a clever randomisation strategy to reject this hypothesis. Rather, they find a self-confidence effect: "After a success, people feel more confident in their strength, motivating them to perform better". It's interesting to speculate about parallels in other domains, such as entrepreneurship...

Of course, there are other explanations that might be a better fit. We observe the Matthew effect in science (e.g. this paper, which shows that researchers just above an early career funding threshold do much better than those just below it because they're perceived as smarter); venture capital (e.g. this paper, which suggests that investors with early wins get better dealflow and so better returns); and even politics (e.g. this tweet by Dominic Cummings, who says people overweight his opinion because of his Brexit victory). In any case, it pays to win - early and often!

Quick links

Vaccines work. Probably the best chart I've seen for visualising the impact of COVID vaccines (This one is useful too)
Regret kills. Why winning an Olympic silver medal is very dangerous.
As easy as 123456. The 10,000 most common passwords (not new, but new to me, and quite mesmerising)
150 million reasons to love the internet. Astounding claims about changes in amounts of time spent shopping during the pandemic.
The next CRISPR? Fascinating thread on BORGs, which may be the next big thing in biology.

The bit at the end

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Until next week,

Matt Clifford

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