Blockchain: It’s much more than Bitcoin

Agenda

Eren Ercan (Harris Partners, Data Scientist)- What is a Blockchain- What is Bitcoin- How does a Blockchain get built- How does a Blockchain get verified- Weaknesses of Blockchain technology- Value- Current applications- Future applications

John Biggs (Freemit, CEO; Techcrunch, East Coast Editor)

Q&A, discussion

6:00-7:00

7:00-7:30

7:30-8:00

Blockchain defined

A blockchain is a type of distributed database specifically suited for processing time-ordered data

It is a vehicle for transferring value and holding records

Does not involve a central authority, computers that store the blockchain are decentralised and not owned by a single entity

Every block is connected to the prior one, the ledger contains the record of every transaction

What is Bitcoin?

Bitcoin is a peer-to-peer digital currency system

Decentralised and pseudo-anonymous transactions

Publicly disclosed linked ledger of transactions is stored in a blockchain

Reward driven system for achieving consensus (mining) based on proof-of-work for helping secure the network

Deflationary currency with an eventual cap of 21M bitcoins

Features of Bitcoin

Reward cut in half every four years, so the supply is limited Bitcoins can be irrevocably destroyedFinite

Nearly infinitely divisible currency Currently supporting eight decimal places 0.00000001btc is known as a “Satoshi”

Infinitely divisible

Nominal transaction fee’s paid to the network Cost to send $1 is the same as $1,000,000 Consensus driven

Infinitely divisible

Cannot add coins arbitrarily Cannot double-spend

Counterfeit resilient

Once it’s gone, its gone No recourse and no one to return sent tokens

Non-repudiatable

What is of Bitcoin worth?

AUD 9.4B

But what does the champ think?

"In a few years from now bitcoin and other digital currency are going to be a normal part of our monetary systems”

Establishing consensus in a blockchain, how do you decide which transactions are valid?

How do you get everyone in the room to agree on a single time to meet?

Simple solution: have people shout a time First person to shout determines the time In distributed networks, there can be many

firsts Depends on where you are standing and how

long the signal takes to propagate As a result, the crowd won’t reach a single

consensus on the time

Establishing consensus in a blockchain, how do you decide which transactions are valid?

Another approach: give everyone in the room a random number generator which determines how many minutes they must wait before shouting

As long as the interval between each number is longer than the time needed to propagate the signal across the network (room), most of the time, only one person will shout the time first

This is a distributed way of arriving at a time, there is no central decision maker

However, there is a flaw: If one of the people in the room is dishonest and wants to set the time, then they can cheat an shout out the time earlier than their random number generator tells them

How do you get everyone in the room to agree on a single time to meet?

Establishing consensus in a blockchain, how do you decide which transactions are valid?

A better, but not perfect solution: give each person a difficult task to perform, then find a string that a hash functions converts to the time they want to meet

This problem is difficult, and will take a different amount of time for each person to solve, even if they start at the same time

The result is that the time to complete is more or less random, and on average, only one person will shout the answer first

Not only that, but by providing the string that solves the problem, they prove they have done the work and not cheated

It is also difficult to see how the process could be subverted by a group of people at a large scale

How do you get everyone in the room to agree on a single time to meet?

Public key cryptography

Public key cryptography- A method of encryption that prevents unintended

people from reading it- A digital signature, verifying the identity of the sender

There are many different methods and algorithms, some of the most popular include RSA, AES

Public key cryptography: illustrative example

You write a message and lock the box, then you send it to me

I have a locked box, I cannot open it, I put my own lock on the box, and send it back to you

You now have a box with two locks on it; You remove your own lock and send it to me again

Now I have a box, with your message in it, and only my own lock on it, I remove my own lock from the box, and can read your message

We want to send messages to each other without anyone else seeing the message

Think of the message as being inside of a box

1

2

3

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Blockchain is the core innovation behind the currency

Key design element of blockchains – embedded security

This is one way they are differentiated from ordinary scalable distributed databases such as MySQL and MongoDB

Permissionless public blockchains such as Bitcoin are the most developed, but presents regulatory compliance issues

Many of these issues potentially addressed by private, permissioned blockchains

Types of blockchains: public vs. private

Blockchain in which direct access to blockchain data and submitting transactions is limited to a predefined list of entities

Public

Private

Blockchain in which there are no restrictions on reading blockchain data (which may still be encrypted) submitting transactions for inclusion into the

Types of blockchains: permissionless vs. permissioned

Blockchain in which there are no restrictions on identities of transaction processors (i.e. users that are eligible to create blocks of transactions)

Open, decentralised ledger which records the transfer of value

Every transaction is cryptographically chained to the previous one

Permanent, immutable, verifiable record of truth that everyone can see

Permissionless

Permissioned More appealing to enterprise and financial services Transaction processing performed by a predefined list of

entities

Why does blockchain technology matter?

Blockchains are an attractive replacement for existing solutions utilised by financial institutions

Global fintech investment tripled from US$4 billion in 2013 to US$12.2 billion in 2014

According to a survey report by World Economic Forum, first tax collected by a government using the blockchain technology is expected to occur in 2023

The same report suggests that 10% of global gross domestic product will be stored in blockchains by 2027

What are advantages of blockchain?

When investors currently buy and sell debt and equity securities, or transact derivatives, they generally rely on settlement and registration systems that sometimes take several days

Speed and efficiency

Disinter-mediation

Reduced transaction costs

Improved market access

Blockchain automates trust It eliminates the need for trusted third-party intermediaries In the traditional market, buyers and sellers can’t automatically

trust one another With blockchain, the decentralised ledger offers this trust

Eliminates the need to use settlement and registration systems, and other intermediaries

There is significant potential to reduce transaction costs for investors and issuers

Global markets have the potential to become even more easily accessible to investors and issuers

Blockchain provides the efficiency of a central database and the robustness of a clearing house for complex transactions, without the costly middleware

Architecture

Settlement process

Speed

Transactioncost

Benefits

Limitations

Internal Transaction Systems

Middleware/Messaging

Clearing Houses Blockchain

Centralised internal database

Internal

Real-time

Internal IT

Speed, cost, relative simplicity

Committing transactions with third parties/across networks

Secure inter-party messaging

Independent (but enabled by messaging)

Up to 3-5 days

External provider + settlement costs

Secure transaction between external, standard data formats

Data errors, slow transactions, flexibility

Third party agent-in-possession

Via clearing house

Days (transaction dependent)

Third-party service

Reduced settlement risk/DVP

Complex and cumbersome, expensive

Distributed ledger with cryptographic integrity

Consensus

Near real-time to minutes

Similar to internal databases

Enables third-party transaction to be as simple and efficient as internal transactions

Tech maturity, integration with existing systems/workflows

Other applications: smart contracts

Imagine a contract you sign, where all the key clauses could automatically execute

This is the idea behind smart contracts Imagine a scenario where blockchain technology is

helping keep records in sync between multiple parties, (e.g. which shipping container which television is in)

Smart contracts are the logic layer on top of that, which allow for “if this, then do that” conditions to be activated directly from the agreement

Other applications: smart contracts (cont.)

Another example, what if the current buyer had agreed to buy 100 televisions from the seller, as long as the market price for televisions stayed above $1?

A smart contract would record this clause, in the same way a paper contract would

The difference however, is if the price of a television fell below $1 the smart contract could change the owner of the television back to the seller

Everledger is an application that uses blockchain as an immutable ledger for diamond certification

In the past, different stages of a diamonds value chain have tended is be disparate and paper based- Producer- Shipping- Insurance

All recorded using pieces of paper, all of which can be lost of forged at any point

Everledger consolidates tracking across stages using blockchain technology, providing an immutable record which allows individual jewels to be indentified

Insurance companies, law enforcement agencies can access specific history

Currently live technology with close to a million diamonds being tracked on their blockchain

R3 CEV has developed a reference architecture based on blockchain technology for financial industry

Works in conjunction with a consortium of 42 partner banks around the world including CBA and NAB

Focused on identifying potential applications and implementation

Key aspect of this work is collaborating on protocols to standardise and make interoperable, common, core processes for distributed ledgers

On January 20th R3 announced the launch of a private distributed ledger that connects 11 member banks using Ethereum technology and is hosted on a virtual private nework in Microsoft Azure’s Blockchain as a Service

The ASX is building a blockchain for Australian equities

ASX working with Digital Asset to build a blockchain that will run in parallel to the existing CHESS system, which connects almost 120 parties for settlement and clearing.

This process currently takes three days ASX is looking at using distributed ledger technology

to reduce complexity and risk for brokers who currently have to lodge margin with ASX daily to manage the markets settlement risk

Many other areas of research, especially reducing back-office costs and the burden of AML/KYC regulation

Freemit is a bitcoin based remittance system

Charges for transferring money across borders are high and / or it takes a long time

The market is large: remittances cost is ~$50B annually, and hidden FX fees in tourism are ~$40B

Typical $500 transfer from the US to Europe- Western Union 9% (3-4

days) or 11% in minutes- Wire transfer 11% (1-2

days)- PayPal 5% (3-4 days)- TransferWise 1% (5-6

days)

Freemit uses Bitcoin as a store of value to deliver:- Instant transfers - Published exchange rate- Lower cost through

automation and process transparency