factors driving the cryptocurrency and blockchain (r)evolution

Cambridge CentreforAlternativeFinance

FACTORSDRIVINGTHECRYPTOCURRENCYANDBLOCKCHAIN(R)EVOLUTION

MichelRauchsIDEALondon11December2017

PUBLICBLOCKCHAINS

Whatarepublicblockchains?

Ledgerstructuredaschainofblocks(‘blockchain’)

P2Pnetwork

Nativeasset/tokenDistributedconsensus(‘mining’)

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Whataretheyspecificallydesignedfor?

Censorship-resistance

Payments Computations/’contracts’ Storage

• Nosinglepartycanprevent/censoraspecificoperation

• Nosinglepartycanconfiscateaparticularresource

Achievedthroughdecentralisation:nocentralauthorityincontrol

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Decentralisationisnofreelunch

Thecostofdecentralisationishigh:publicblockchainsare…

• Inefficient:dataisreplicatedandcomputationsareperformedbyeverysinglenode

• Slow: blocktimes>0seconds

• Expensive: costofminingandnetworkinfrastructure

• ‘Uncertain’: nosettlementfinality

• Difficulttoscale: growingusageleadstoscalingissues

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Whywouldyouuseapublicblockchainthen?

Twomainreasons:

1) Usecases/applicationsthatrequirecensorship-resistance

2) Lackofworkingalternative(s) inagivensituation/context

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Where/wheniscensorship-resistanceneeded?

Assets

a)Financialsovereignty(unseizable)

Payments

Circumventsanctions/blockades

b)Wealthtransferability

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Lackofpracticalalternative(s)inagivensituation

‘Store’ofvalue Cross-borderpayments

Alternativeassetclass ‘Consumer’payments

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Twokeyquestionstoask

b)Whenusinganexistingpublicblockchainsystem(orthetoken):

• Q:Doestheuseofthesystem/tokenprovidegreaterutilitythanusinganexisting(traditional)alternative?

• A:Context-dependent- widelydiffersbetweengeographiesandindividuals(verysubjectiveandtiedtoaparticularsituation)

-->Thischanges/evolvesovertimeasthecostsslowlyoutweighthebenefits

a) Whendesigninganewpublicblockchainsystem:

• Q:Dothe(potential)benefitsofdecentralisationoutweighthe(long-term)costs?

• A:InmostcasesNO

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PERMISSIONEDBLOCKCHAINS(’DLT’)

Sowhatifwejustkeep‘theblockchain’?

LedgerstructuredaschainofblocksP2Pnetwork Nativeasset/token ‘Mining’(PoW)

• Idea:haveasharedledgerbetweenknownandvettedparticipants(regulatedentities):‘Iseewhatyousee… andIknowthatwhatIseeiswhatyousee’(RichardGendalBrown,R3)

• Goal:Preservethecharacteristicsofpublicblockchainswithordersofmagnitudehigherperformanceandefficiency

• Security:basedonaccesscontrolsandlegal’off-chain’contractsinsteadofeconomicincentivedesign

Blockchainsareallabouttrade-offs!

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Enormoushypearoundpotential‘blockchain’usecases

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Threewaysofusingablockchain

a) Issuanceofnew(native)assets:

Anasset(e.g.,bond)isissuedonadistributedledger(‘primaryissuance’)à digitalbearerasset

b) Tokenisationofexistingassets:

Anexistingasset(e.g.,goldheldincustody)isdigitallyrepresentedonadistributedledger(‘tokenised’)

c) Record-keepingofexternal‘events’:

Externalevents/factsarebeingrecordedontheblockchain(e.g.,supplychaintracking)

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Permissionedblockchainsarenotapanacea

Ablockchaincannotenforcesomethingthatisoutsideofitsreach!

Therearecommonmisconceptionsaboutwhattheycando:

Whenblockchainsinteractwiththe’real’world,atrustedthirdpartyisgenerallyrequiredtomakethatconnection

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Sowhatabout adoption?

Quietmovefrom’blockchain’todistributedledgers

• Realisedthatachainofblocksisnotthemostefficientorusefuldatastructureinmanycases

• Noteverynodeshouldbebotheredwithrunningeverysingleoperation

Lotsofhigh-profileprojectsannounced

• Havenotmaterialisedyet

• Manyprojectsstuckattheproof-of-conceptstage

• Onlysmall-scalenetworksrunninginproduction– ofteninparallelwithexistingsystem(s)

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Keyreasonsforlaggingadoption

1. Protocolandplatformselectionisdifficult:nointeroperability

2. Lackoflarge-scalenetworkdeploymenttodate

3. Buildingandtransitioningtosharedmarketinfrastructuretakestime

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Conclusion

• Publicblockchainsarespecificallydesignedforcensorship-resistance

• Theycanalsoconstituteabettersolutionthanexistingalternativesforsomeusecasesinaspecificsituation

• Permissionedblockchainstakedifferentdesignchoicestoincreaseperformanceandefficiency:involvestrade-offs

• Blockchainsarenotasilverbullet:manyusecasesrequiretrustedthirdparties

• Laggingadoptionamongcorporates:mostprojectshaveyettomaterialise

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ThankYou

MichelRauchs

m.rauchs@jbs.cam.ac.ukwww.jbs.cam.ac.uk/ccaf

@mrauchs