blockchain: it's much more than bitcoin
Post on 07-Jan-2017
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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
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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
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