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Blockchain, sorting the wheat from the chaff - sensible commercial applications of blockchain technology

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A lecture of Mr. Gordon Kerr - Founder and CEO of Cobden Partners, senior investment advisor to OS.UNIVERSITY. Sofia Business School 2018.

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Blockchain, sorting the wheat from the chaff - sensible commercial applications of blockchain technology

  1. 1. “Blockchain, sorting the wheat from the chaff – sensible commercial applications of blockchain technology” June 2018 Sofia Business School Gordon Kerr A lecture from OS.UNIVERSITY’s Senior Investment Advisor
  2. 2. Distributed ledgers and Cryptocurrency Systems • Distributed ledgers and cryptocurrency systems are fundamentally different. • Validation Differences: Bitcoin uses pseudonymous and anonymous nodes to validate transactions whereas distributed ledgers require legal identities – permissioned nodes to validate transactions. • DLs can therefore ledgers legally host off-chain assets: owing to authenticated, permissioned approach to validation. • Bitcoin and other permissionless systems cannot. [source T Swanson, Consensus as a Service 2015]
  3. 3. CryptoWorld and Blockchain CryptoWorld and Blockchain – Scam or Transformative Revolution? Easier to understand if we separate the 3 Different phenomena: 1) Cryptocurrency – networks that secure Value transfer (Jury is out) 2) Blockchain – networks can collectively reach consensus re data 3) CryptoAssets – tokens can be financialized and traded (discuss at end) [source K Werbach – Blockchain isn’t a Revolution]
  4. 4. Cryptocurrencies, Looking Beyond the Hype; BIS - 17 June 2018 “Cryptocurrencies promise to replace trusted institutions with distributed ledger technology. Yet, looking beyond the hype, it is hard to identify a specific economic problem which they currently solve. Transactions are slow and costly, prone to congestion, and cannot scale with demand. The decentralised consensus behind the technology is also fragile and consumes vast amounts of energy.”
  5. 5. Key Characteristics of Money Key Characteristics of Money OBVIOUS: - Medium of Exchange - Unit of Account - Store of Value LESS OBVIOUS FEATURES - Institutions, - Issuing Entity controlling Issuance, Deissuance - Balance Sheet – Assets and Liabilities
  6. 6. Payment Issues Payments: A Complex Area. Current key issues: - Speed - Finality of Settlement - Ability to contest transactions that have been incorrectly executed The potential for irreversibility of payments in BTC without legal recourse or accountability means it is a sub-optimal solution for off-chain assets
  7. 7. Cryptocurrencies, Common Features • Set of Rules (Protocol) • Transaction Ledger • Decentralised Network Updating the Ledger BUT (Waldman “Anti-Discretionary Blockchain”) - A) Nodes Lack Identity - B) Forks need resolving - C) All nodes have incentives to behave
  8. 8. Bitcoin – Validator (miner) compensation, from White Paper
  9. 9. Discretionary Blockchain (Waldman) What is the point of building a product with smart contracts tracking off-chain assets if it cannot be enforced in the real world? • Nodes are Identifiable • Forks = disagreement. This is permitted for a time • Outsiders may interact, a mechanism exists to force consensus
  10. 10. The Pitfalls of Centralized Ledgers (Sams) 1. Sin of Commission – Forgery 2. Sin of Omission – Censorship 3. Sin of Deletion – Reversal 101
  11. 11. Shortfalls of Permissionless Blockchains A DL of off-chain assets CANNOT be both censorship proof AND always valid, because of interaction with the real world, eg legal systems and regulations; For instance, the attributes of a permissionless blockchain (e.g., Bitcoin) as they exist today include: • Censorship resistant • Reversals possible (though originally intended to be irreversible) • Arguably only suitable for on-chain assets [Source Swanson ibid]
  12. 12. USE CASES FOR BLOCKCHAIN - 1 Examples: • World Food Programme (Highlighted by BIS) Payment of sovereign currency, for food aid serving Syrian refugees in Jordan; (Permissioned use case) • Provenance (eg Tuna Fish) • Land Title Registers (eg Georgia, Sweden) • Supply Chains
  13. 13. Provenance - Tuna Fish (Source Edex)
  14. 14. USE CASES FOR BLOCKCHAIN - 2 Cannibalisation of existing Online Business – Example US CRE Brokerage BiProxi.com • Cannibalisation of online market leader TenX • Mid Market US CRE (Up to $25m) • Sales fees inefficiency (4% vs 1.2%) Aims to : - increase sell through rates - Shorten deal time 300 to 75 days
  15. 15. Cryptoeconomics and Token Value Appreciation Cryptoeconomics and Token Value Appreciation - Why was 2017 such a good year for TVA - Will this continue? - Introducing Ripple’s XRP – Fintech Use Case
  16. 16. Possible ICO Exploitation – Ripple XRP - Ripple aims to outcompete SWIFT; but SWIFT very low cost. Efficiencies? - Own currency XRP – not clear on need - 100 billion XRP created at inception; 20% “Gifted” by users to Ripple founders, remaining 80% retained by Ripple; - Class Action Suit filed May 2018, Ripple funding via never ending ICO
  17. 17. Regulation Present Confusion among US Regulators: 1) SEC’s Clayton – All ICOs are securities, but cryptocurrencies are not; 2) CFTC (Commodity Futures Trading Commission) – cryptos are commodities 3) Fin Cen (Financial Crimes Enforcement Agency) Tokens may fall under Money Services regulations 4) IRS – crypto assets and currencies are property, hence tax
  18. 18. Expected New Regulations - Some ICOs look like IPOs securities regulation - Some ICOs generate Utility Tokens (eg Open Source University) consumer payment protection regulation These should be encouraged; smart contracts and credentials validation seem admirable use cases - ‘Nationless’ nature of crypto-activity likely to result in globally co-ordinated regulation
  19. 19. Trading of CryptoAssets Permissioned Blockchains to support tokenized assets, perhaps eventually including sovereign currencies (jury very much out). Here the goal will be tracking, not trading; CryptoAssets, divorce the exchange function of tokens from the utility function; important because as of now many ICOs fuse these two criteria, the tokens and the assets.

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