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Is the adoption of blockchains and consensus ledgers a foregone conclusion?

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First presented on February 15, 2015 to the Sim Kee Boon Institute (SKBI) for Financial Economics at Singapore Management University. Citations and references are in the notes section.

Abstract:

For the past two years, many entrepreneurs, developers, investors and enthusiasts have promoted the view that blockchains and in particular, Bitcoin will eventually be adopted as a universal value transfer mechanism -- a type of global payment rail fit for a cornucopia of use-cases. Empirically this does not seem to be the case as over the past year and specifically the past 6 months, multiple startups have been created that specialize in areas that Bitcoin is not particularly well suited for. Whether any of these succeed is another matter entirely, but it is not a foregone conclusion that any one blockchain will be the "one to rule them all" based on their competitive (dis)advantages. This presentation outlines a number of vendors that have either announced or are working on solutions for the broader "Fintech" space as well as incumbent institutions in the existing ecosystem.

Published in: Economy & Finance
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Is the adoption of blockchains and consensus ledgers a foregone conclusion?

  1. 1. Is the adoption of blockchains and consensus ledgers a foregone conclusion? Discussing the evolution and confluence of use-cases, traction and business requirements of the various value transfer projects
  2. 2. In the future • A more clear distinction between: • Distributed ledger (consensus as a service such as Eris or Hyperledger) • Cryptocurrency system (Bitcoin, Ethereum)
  3. 3. Illustrating the promises from last year
  4. 4. Some of those did not pan out • Ethereum still looking to launch (late March 2015?) • Ripple has grown but is still not ‘Turing complete’ (became Codius) • Colored coins are still in a perpetual ‘holding pattern’ • Most (if not all) proof of stake systems still become centralized in some manner (usually via checkpoints) • Namecoin remains a cliche use-case at conferences • Generally speaking, they are all ‘consensus ledgers’ -- definitional debate over what is / is not a ‘blockchain’ • Limited: many other projects announced and developed post-March 2014 (after the diagram was made)
  5. 5. Brown’s mental model of a smart contract
  6. 6. Working definition “A smart-contract is an event-driven program, with state, which runs on a replicated, shared ledger and which can take custody over assets on that ledger.”
  7. 7. A shared, cloud-based robust calculator... “And now you have something really interesting: neither of you have to go to the effort of reimplementing the terms of the contract in your own systems: you both know that this single piece of code satisfies both your purposes. And because it is running on this shared, replicated ledger and using it as its source of information, you can both be sure that whatever the program outputs will be the same for both of you.” “It’s as if this program isn’t just a computer program: it’s an actor in its own right. It responds to the receipt of information, it can receive and store value – and it can send out information and send out value.”
  8. 8. What can this be used for?
  9. 9. Practical use-cases (on paper) ● Cross Border Settlement / B2B international transfers ◦Rebuilding SWIFT (PayWise) ◦Can use a blockchain/CaaS to move in seconds/minutes ◦Biggest challenges are liquidity/settlement with market makers as well as compliance in jurisdictions ● Central clearing / settlement (e.g., derivative clearing) ◦Prime case for “multi-party payments” and netting/clearing. Could be on a ledger (autonomous) but if participants “fail” then move to centralize the credit risk which was the purpose of CCPs in the first place ◦Complying with existing laws such as Dodd-Frank are a hurdle/challenge ● Mortgages (may be more relevant for CDOs)
  10. 10. Larsenian use-cases ● CDO/CLO/CMO/ABS ◦Smart contracts based on assumption that banks are not to be trusted to pass on all cash flows received in the “waterfall.” Alternatively, build competing platforms where you set up “smart contract” (special purpose vehicle) that automatically pay through waterfall. Problem is on enforcement of loans in case of non-payment. ● Collateralized / Guaranteed Lending ◦A bank, borrower and potentially a 3 rd party providing collateral or guarantee. Though without identity, credit checks/worthiness the promise of decentralization may not do much. ● Letter of Credit ◦Multiple parties involved, trust is low, cost is high. Incumbents are strong, little incentive to change, requires central changing (with “crossing the chasm” problem) and most importantly multiple jurisdictions.
  11. 11. • Top 2 platforms through 2014 were: • Ripple from Ripple Labs (Stellar initially used a similar consensus ledger) • Counterparty (also has spin-off called “Medici” though part of that team has split off to create another fintech startup) • NXT (problems found by Garzik?) • Omni/Mastercoin (little traction relative to XCP) • Bitshares (from Invictus, uses DPOS) • Open Transactions (not ‘fully’ released) • Coloredcoins (Coinprism, Coinspark, Chromaway, Colu) Current “2.0” Platforms
  12. 12. • Ethereum (Proof of Work) • Tezos (POS) • Tendermint (POS, DC ledger?) • Pebble (Proof of Processing, TC ledger?) • Nimblecoin (Merged Mining) • Eris (‘application-specific blockchain template’) • Factom, formerly Notarychains (POE/MSC) • Proof of Existence, Block Sign • SKUChain (DPOS/DPOW) / PurchaseChain • BlockTrace (digitally fingerprinting diamonds) • ArtCOA (proof of provenance for art), mine.NYC • Hyperledger (PBFT) • Filecoin (~Bitcoin, see also Permacoin) Future “2.0” protocols and/or coins
  13. 13. Future cont’d • Augur prediction market (part of hub/spoke of Truthcoin, DC ledger) • Secure Asset Exchange / SmartContract.com • Codius (developed on Ripple system by Ripple Labs) • Tillit (based on Ripple-like system) • Tembusu (based on Ripple, creating TRUST framework) • Treechains (first seen in Viacoin as “ClearingHouse”) • Sidechains (several proposals, largest is Blockstream effort) • PeerNova (software stack on top of a cryptocurrency platform) • Several other niche projects (Zerocoin/Zerocash, La’zooz)
  14. 14. • Clearmatics (forthcoming from Robert Sams’ team) • Eris (Preston Byrne-led team unveiling December 17) • Hyperledger (beta since July 2014) • Hyperdex (from Emin Sirer, NoSQL system) • Medici (“used” Counterparty, early beta, assuming it is not based on Bitcoin) •Mirror (formerly Vaurum, escrow and other services) • Pactum - BitSapphire effort (still in pre-Alpha phase; uses HL, Codius, DPOS, OT) • Other consensus ledgers (Ripple via Codius/Trustlines) • Stellar had a forking issue recently (new version Q1 from David Mazières?) Vendors “pitching” financial & govt institutions
  15. 15. Tech for tech sake, is this all just “Solutionism”?
  16. 16. “In practice, Proof of Authenticity, Proof of Existence, Proof of Audit and Proof of Custody require no blockchain database. Any proof of physical data or transaction status just needs a database and trust in the database manager which can be completed with transparent reporting and auditing. In these circumstances intermediaries matter and are good enough. Blockchains are really about asset rights management which removes the intermediary from custody of the asset rights. This is what we get from using the Bitcoin blockchain in new approaches. If we can prove we do not control the asset rights, then we have disruptive innovation that is not yet good enough and requires further blockchain innovation. Asset rights control problems are great candidates for blockchains.” • Taariq Lewis, CEO of Digital Tangible
  17. 17. With all of these blockchain/ledger projects, is there any other point of view?
  18. 18. Not being built in vacuum: real competition • ‘Neobanks’: GoBank (Greendot), Simple, Acorns, Moven, Ixaris, Numoni, Balance Financial (prepaid MasterCard from WalGreens) • Branchless banking coming from all major banks (Kashmi, DBS Paylah! in SEA) • Listed on AngelList: • 1,586 Payment startups • 947 Mobile Payment startups • 106 P2P Money Transfer startups • 250 mobile money services in over 80 countries, half of them in sub- Saharan Africa (M-Pesa, Orange Money) • Ecuador has launched domestic non-Bitcoin digital currency project • Philippines is publicly looking for vendors
  19. 19. Efforts from incumbents • Large institutions: Fedwire, CHIPS, SWIFT, ACH, EPN • SEPA initiative, EMV, Chip & Pin rollout (Ross Anderson says is broken?) • Existing private web companies: AliPay, TenPay, PayPal • Existing virtual / digital currency projects: Amazon Points, frequent flier miles, SecondLife Linden Dollars, ISK from EVE Online, WoW gold, WebMoney (Russia) • No longer around: E-gold, Liberty Reserve Notable new(er) efforts: • ApplePay, Google Wallet, Square, Venmo, Braintree, Transferwise, Xoom • Softcard (AT&T, T-Mobile, Verizon) and CurrenC/MCX – developed by retailers (CVS & RiteAid) to compete with ApplePay NFC-based tap-to-pay
  20. 20. What does the overall fintech space look like?
  21. 21. Just because you have "smart" investors… • … doesn’t mean the startup or space will be successful • Notable “payments” examples: • Beenz, founded 1998 – raised ~$100 million including Larry Ellison and Vivendi Universal • Flooz, founded 1999 – raised ~$50 million, alliance with Microsoft and promoted by Whoopi Goldberg • DigiCash, founded in 1990 by David Chaum, courted by Visa and Microsoft, bankrupt in 1998 • Clinkle, founded 2011, SV’s largest seed round ($25mil)
  22. 22. Measuring some traction among cryptocurrencies
  23. 23. If it is the most popular distributed consensus- based database, how much volume can it currently handle in a production environment?
  24. 24. Mandatory gobbledygook sources of increase • Mining rewards • –Some pools like Eligius payout directly from coinbase reward creating extra transactions • Mixing / laundering of funds • –CoinJoin / CoinShuffle / DarkWallet / SharedSend • Blocksign / Proof of existence • P2SH (multisig) • Counterparty (XCP) and Mastercoin (MSC) • –Crowdsales on these platforms (e.g., ‘Gems’ sale) • OP_RETURN • –Chromaway and Coinprism • –Advertisement spam (see pics)
  25. 25. Pay to script hash (P2SH) • ‘Created in 2012 to let a spender create a pubkey script containing a hash of a second script, the redeem script’ • January 2014: 0.014% of all bitcoins are stored using P2SH • February 2015: 7.69% Reasons why: • USMS (Bitcoin Investment Trust), Xapo and Ripdice (?) recently switched to P2SH for cold storage –Note: Counterparty uses “old school” method of multisig
  26. 26. Top Heavy • Metaprotocols that utilize and sit on top of Bitcoin blockchain provide disproportional rewards ◦XCP/MSC are effectively piggy backing and free riding off seigniorage rewards ◦Also happens with colored coins and Dogeparty ◦E.g., Apple shares (total market cap = $710 billion USD) issued as metacoin. Will Bitcoin security suffice to keep the market in Apple shares trading secure? • In long run, miners are probably not destroying enough capital to ultimately secure metacoin assets, making the network less secure
  27. 27. There is no such thing as a free lunch for sustainable network security
  28. 28. • June 2014, Kerem Kaskaloglu illustrated the “ideal scenario” of the seamless switch from block rewards (seigniorage subsidy) to transaction fees (donations) • As of February 2015, the very opposite has occurred, fees to miners has declined which is “not ideal” • Leads to “dark hashing inventory” after block halving Retcon won’t fix collective action problem
  29. 29. • Example: • A Hyperledger consensus pool can be implemented in different ways • Some pools may exist of only known entities, like banks, but more public pools can have their own node membership requirements, like an extended SSL certificate from a Certificate Authority to prevent Sybil attacks Is token agnosticism viable?
  30. 30. • “Whenever SPAM comes up, people seem to be quick to jump to the easy solution of "if we charge a little bit then it will go away" without thinking of the damaging consequences this could have to adoption and legitimate use cases. Let's take email for example, charging 1c an email would be pretty negligible, but what happens to newsletters? Alert systems? Notifications? Now imagine it's not 1 cent but 1 emailcoin. Would email have overcome the early barriers to adoption to become the universal communication system it is if you had to purchase a new currency just to use it? The solution to SPAM is better software; blacklisting, greylisting, rate limits, etc. Gmail is free but I get 0% SPAM in my inbox. Snail mail costs a stamp but nearly 100% percent of my letterbox is unsolicited.” • Dan O’Prey, co-founder of Hyperledger TCPIPcoin/emailcoin
  31. 31. Can you remove the token from the chain?
  32. 32. • Meher Roy’s IoM proposal • A Decentralized Exchange Protocol (DEP) for exchanges between 2 ledgers • A Real Time Gross Settlement Protocol (RTGSP) for transfers between 2 ledgers • A Deferred Net Settlement Protocol (DNSP) also for transfers between 2 ledgers • A Static Liquidity Payment Processing Protocol (SLPPP) for peer to peer payment processing between 2 ledgers Unbundling and decoupling the token from the ledger (BINO is unnecessary)
  33. 33. What are the business requirements?
  34. 34. Has interest in Bitcoin peaked?
  35. 35. Conclusion • Anyone claiming that there will just be “one winner” that encompasses all use-cases is probably wrong in the short run (RB and MR: is there a “Grand Unified Theory” of Cryptofinance?) • Every business, institution and customer has different wants and needs that will dictate actual adoption of technology and not the other way around • Entrepreneurs, developers and investors cannot assume market will adopt their own narrative any more than shipwreck survivors can “assume a boat” • Blockchains and consensus ledgers may find traction outside of niches only if they satiate mass consumer appeal, not just hobbyist interest
  36. 36. • tim@melotic.com • Twitter: @ofnumbers • Melotic.com / OfNumbers.com Contact

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