Rethinking Finance as a spot and future contingency management system for assets and liabilities. Blockchains are an improved form of contingency management (precision, automation, lower-risk). The Internet transfers information, and now value; the Internet becomes a contingency management system with programmable money, smart contracts DACs, distributed ledger transactions. Ultimately, blockchain financial networks can automatically and independently confirm and monitor transactions, without central parties like banks or governments.

1. Washington DC, October 2, 2015
Slides: http://slideshare.net/LaBlogga
Melanie Swan
Economic Theorist
New School, New York NY
melanie@BlockchainStudies.org
Blockchain
Financial Networks

2. October 2, 2015
Blockchain Financial Networks
Blockchains: Overview
1
What is it?
Blockchains are secure
distributed ledgers and financial networks
Why is it important?
The next phase of the Internet (value transfer)
(1) Already here: rapid institutional uptake
(2) Pervasive: includes all cash, instruments & contracts
(3) High stakes: re-shuffles existing financial system

3. October 2, 2015
Blockchain Financial Networks
Blockchains: Overview
2
Benefits:
 Quicker (immediate)
secure asset transfer
 Decrease Risk
 Reduce Cost
 Improve Liquidity
 Instill Trust
Risks:
 Foreseeable
 Scalability1, monopolies,
too early, technical issues,
low adoption, hacking
scandals
 Unforeseeable
 Security
 Ecosystem
1Particularly scalable independent consensus protocols; http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
http://www.slideshare.net/lablogga/blockchain-consensus-protocols

4. October 2, 2015
Blockchain Financial Networks 3
Melanie Swan
 Economic Theorist, New School, New York
 Founder, Institute for Blockchain Studies
 Instructor, Singularity University; Affiliate Scholar, Institute
for Ethics and Emerging Technology (IEET); Contributor,
EDGE
Traditional Markets Background Economic Theory Leadership
http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
Book: Blockchain:
Blueprint for a New
Economy

5. October 2, 2015
Blockchain Financial Networks
Fintech Investment
4
https://newsroom.accenture.com/news/fintech-investment-in-us-nearly-tripled-in-2014-according-to-report-by-accenture-
and-partnership-fund-for-new-york-city.htm
$9.89 billion in 2014, up from $3.39 billion in 2013

6. October 2, 2015
Blockchain Financial Networks
R3 CEV Distributed Ledger Announcement
Shared distributed ledgers $28 Tn in assets
 Secure financial-grade ledger, ‘fabric,’ scalable to
hundreds of billions of transactions per day
 Benefits: fast-moving, reduce system-wide risk, core
infrastructure development, high-profile, cost savings; could
facilitate regulatory compliance, transparency to consumers
 Risks: exclusionary access, fees-to-play; HFT or EDI?; greater
world market interconnectedness and systemic shocks?
5
DTCC annual revenue $1.5 bn; CLS Bank $0.8 bn, http://www.huffingtonpost.com/stephen-g-cecchetti/virtual-frenzies-
bitcoin_b_8228444.html; CEV: Crypto 2.0, Exchanges, Ventures (R3’s business lines)

7. October 2, 2015
Blockchain Financial Networks
What is Blockchain Technology?
 Secure (cryptographic) distributed ledger system
 A ‘giant Google doc spreadsheet’ database of transactions,
independently confirmed and validated by the software system
 Secure, transparent, accessible, auditable, available 24/7
 Batches (blocks) of transactions posted sequentially (chain)
 Prevents double-spend of digital cash
6

8. October 2, 2015
Blockchain Financial Networks
Phased Roll-out of Blockchain Technology
 Decide: public or private, centralized or decentralized?
 Centralized confirmation by U.S. Treasury
 Private internal test implementation; modernize current
operations; move traditional ledgers to cryptographic ledgers
 Public-facing hybrid implementation; digitize interactions with
external parties; centralized confirmation
 Decentralized confirmation by blockchain financial
networks
 Automated secure financial network operations obviate need
for centralized intermediaries; software-confirmed transactions
7
Phase II: Automate
Phase I: Modernize

9. October 2, 2015
Blockchain Financial Networks
U.S. Department of the Treasury Mission:
Maintain a strong economy and create economic
and job opportunities by promoting the conditions
that enable economic growth and stability at home
and abroad, strengthen national security by
combating threats and protecting the integrity of the
financial system, and manage the U.S.
Government’s finances and resources effectively
Operate and maintain systems that are critical to
the nation's financial infrastructure
8

10. October 2, 2015
Blockchain Financial Networks
U.S. Treasury Application Areas
9
 Currency and Coinage Operations
 Government Operations: managing federal finances
 Revenue/Expenditure: revenue/tax collection; payment
disbursement and bill-paying
 Managing government accounts and the public debt
 Securities operations: federal borrowing
 Supervisory and Oversight
 Supervise national banks and thrift institutions
 Consumer protection
 Safeguarding Financial Systems
 Policy advisory; national security: monitoring, investigation,
enforcement; international interactions

11. October 2, 2015
Blockchain Financial Networks
Blockchain Financial Applications
Examples
10
 Cash replacement/complement: issue digital
cryptocurrency (e.g.; UScoin, UStoken)
 Blockchain Treasury securities operations
 Securities: Treasury bonds, bills, notes, TIPS
 Register and administer as blockchain-based smart-assets
possibly via smart-contract DACs: issuance, exchange,
redemption, tracking, audit, attestation, interest payments
 Secure accounting ledger operations
 Internal and governmental operations (Federal Reserve,
Government-sponsored Enterprise (FNMA, FHLMC, SLMA))
 Back-office: clearing, settlement, compliance, audit, QA
 Front-office: cash, payment, securities operations, contracts
DAC: Distributed Autonomous Corporation – package of smart contracts executing programmed functions as an entity

12. October 2, 2015
Blockchain Financial Networks
Application
Digital Identity System
 Blockchain-based digital identity cards,
passports
 Identity confirmation, validation, assurance
 Unify: identity, payment, insurance information
 Financial payments, transfers
 Income tax, social security transfer payments
 Automated pay-in, pay-out
 U.S. securities investment
 Link to digital health wallet
 Technical details
 Public and private keys
 Data hashing
 Multi-factor authentication
11

13. October 2, 2015
Blockchain Financial Networks
Blockchain Financial Applications
Advanced
 Forecasting, budgeting, reporting
 Growth, inflation, monetary policy, sector activity, consumption
 Inflows/outflows: tax receipts, transfer payments
 Blockchain-based Ricardian contracts
 Ricardian contract: A type of value for issuance over the internet, a
contract that defines a set of conditions for the instrument that can be read
by both humans and computers and is signed with the Issuer’s public key
 Real-time economic indicators
 Economic data and statistics collection and aggregation as
distributed ledger meta data
 Open risk-models (transparent, anticipative, big data-predictive)
12
http://www.systemics.com/docs/ricardo/issuer/contract.html

14. October 2, 2015
Blockchain Financial Networks
Rethinking Risk per non-linear
causality: Risk Regimes
13
Lloyd’s of London
Sea-faring Trade
Black–Scholes
CAPM, Beta
Efficient Frontiers
Support Vector Machines
Complexity Math
Docker VM Containers
Deep Learning Algorithms
Blockchain
Decentralized
Risk Models1
Black Swan
Risk Models
Classical Portfolio
Theory Risk Models
Traditional Mutuality
Risk Models
Mutual Insurance:
Liability, D&O, Auto,
Life, Health
Actuarial Tables
Extreme Value
Analysis
‘Global warming for Markets’
Higher-magnitude,
increasingly frequent
unpredictable outsized events
‘World is flat’ interconnected
financial markets
New forms of
Exchange
Emergent self-
determined
economies
Economic Model
Plurality
Minimize/maximize
downside/upside exposure
to black swan events
Value-at-Risk
Open Risk Models2
1http://ieet.org/index.php/IEET/more/swan20150914; 2http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2320562
Machine Learning Algorithms
Distributed Consensus
Algorithms
Portfolio Theory
Trinomial Trees
Heteroscedasticity
Convexity
Big Data Crunching
Eigen Values & Matrices
Analysis Tools:
Reflexivity

15. October 2, 2015
Blockchain Financial Networks
Rethinking Finance
Internet of Information -> Internet of Finance
14
http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
 What is Finance?
 Spot and future contingency management system for
assets and liabilities
 Blockchains: improved form of contingency
management (precision, automation, lower-risk)
 Internet transfers information, and now value
 Internet becomes a contingency management system
with programmable money, smart contracts DACs,
distributed ledger transactions
 Blockchain financial networks automatically and
independently confirm and monitor transactions,
without central parties like banks or governments

16. October 2, 2015
Blockchain Financial Networks
 Distributed ledgers allow a more serious move into the
Automation Economy, via secure value transfer
previously unavailable with the Internet
 Fair and orderly transition from the Labor Economy to
the Automation and Actualization Economy
Bigger Picture: Automation Economy
15
Information &
Entertainment
Manufacturing Health
Economics &
Finance
Government &
Legal
Internet: Transfer of Information
Internet: Secure
Transfer of Value
Sectors

17. October 2, 2015
Blockchain Financial Networks
Evaluating Blockchain Ecosystem Risk
16
Network Infrastructure
Organizational
Paradigm
 Bitcoin and blockchain consensus mechanisms are the
initial but perhaps not final positions in the build-out of
the decentralized value-transfer infrastructure
Decentralization
Consensus
Mechanism
Blockchain-based
Distributed Ledgers
Cryptocurrency
Value-exchange Token
Bitcoin
Platform Level: Current Leader:

18. October 2, 2015
Blockchain Financial Networks
Blockchains: Overview
17
What is it?
Blockchains are secure
distributed ledgers and financial networks
Why is it important?
The next phase of the Internet (value transfer)
(1) Already here: rapid institutional uptake
(2) Pervasive: includes all cash, instruments & contracts
(3) High stakes: re-shuffles existing financial system

19. October 2, 2015
Blockchain Financial Networks
Blockchains: Overview
18
Benefits:
 Quicker (immediate)
secure asset transfer
 Decrease Risk
 Reduce Cost
 Improve Liquidity
 Instill Trust
Risks:
 Foreseeable
 Scalability1, monopolies,
too early, technical issues,
low adoption, hacking
scandals
 Unforeseeable
 Security
 Ecosystem
1Particularly scalable independent consensus protocols; http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
http://www.slideshare.net/lablogga/blockchain-consensus-protocols

20. Washington DC, October 2, 2015
Slides: http://slideshare.net/LaBlogga
Melanie Swan
Economic Theorist
New School, New York NY
melanie@BlockchainStudies.org
Blockchain
Financial Networks
Thank you! Questions?

21. October 2, 2015
Blockchain Financial Networks
Private and Public Blockchains
20
http://www.slideshare.net/lablogga/blockchain-consensus-protocols
Charts per: http://www.ofnumbers.com/wp-content/uploads/2015/04/Permissioned-distributed-ledgers.pdf
Public Permissionless Ledgers
• Censorship-resistant (pseudonymous)
• Anonymous validators (network
vulnerable to anonymous attack)
• “Car”
Private Permissioned Ledgers
• Identity known/confirmed, legally-compliant
• Value transfer VPNs, Decentralized SaaS
• “Better horse”
Stellar

22. October 2, 2015
Blockchain Financial Networks
Byzantine Generals Problem, Byzantine Fault
Tolerance (BFT), Byzantine Agreement (BA)
 Distributed network security problem
 Problem: achieving consensus in a distributed network
with potentially faulty nodes
 How to coordinate among distributed nodes to come up with a
consensus (a truth state; a common view of the world) that is
resistant to attackers trying to undermine that consensus
 How to add new nodes
21
Swan, M. Blockchain Consensus Protocols, 2015, http://www.slideshare.net/lablogga/blockchain-consensus-protocols

23. October 2, 2015
Blockchain Financial Networks
Approaches to Consensus/BFT
22
 Byzantine Agreement Protocol (synchronous)
 Microsoft/Lamport: Paxos (state machine replication)
 Google: Chubby (serve strongly consistent files)
 POW (Bitcoin) ‘Nakamoto Consensus’ – expensive,
high latency
 POS (Tendermint) – requires resource ownership, risk
of ‘nothing-at-stake’ attacks per revoked escrow
 Pebble: ARBC (Asynchronous Randomized Byzantine
Consensus)
 UT: BAR (Byzantine, altruistic, rational) protocol
 Stellar: SCP Quorum Slicing
 Other: Prediction Markets (Augur), Meta (Factom)
http://research.microsoft.com/en-us/um/people/lamport/pubs/paxos-simple.pdf
http://www.cs.utexas.edu/users/lorenzo/papers/sosp05.pdf

24. October 2, 2015
Blockchain Financial Networks
POW ‘Nakamoto Consensus’ Shortcomings
 Sybil attack-resistant compromise for
decentralized consensus but not the final
solution for distributed network fault-tolerant
security for scalability and performance, key
issues:
1. Expensive, excessive energy consumption
2. Poor scalability for widespread blockchain use
especially for IOT
3. Slow: high latency (1-10 minutes to confirm
transactions); only eventually consistent
23
https://medium.com/a-stellar-journey/on-worldwide-consensus-359e9eb3e949
http://crypto.stanford.edu/seclab/sem-14-15/williams.html

25. October 2, 2015
Blockchain Financial Networks
Pebble: Asynchronous Randomized
Byzantine Consensus (Concept)
24
http://crypto.stanford.edu/seclab/sem-14-15/williams.html
https://www.youtube.com/watch?v=8iEgjqIMtVQ
 Asynchronous Byzantine consensus for
decentralized networks using cryptographic
randomness, combine
 Nakamoto chains (randomness source, Merkle
roots log) with …
 conventional consensus techniques (produce
consensus by agreeing upon data transitions
through a new generation of highly-tuned and
optimized conventional consensus protocols) to …
 produce fast and scalable decentralized networks

26. October 2, 2015
Blockchain Financial Networks
Pebble: Asynchronous Randomized
Byzantine Consensus (Method features)
25
FLP: Fischer, Lynch and Patterson Friedman et al. 2003. Simple and efficient oracle-based consensus protocols for asynchronous
Byzantine systems. http://ieeexplore.ieee.org/xpl/articleDetails.jsp?arnumber=1353024 Maji et all. Exploring the limits of common
coins using frontier analysis of protocols. 2011. http://dl.acm.org/citation.cfm?id=1987298
 Asynchronous (resist attack)
 Fully asynchronous (no timing assumptions) and
leader-free (no one node orchestrates)
 Randomized (improve efficiency)
 Address FLP impossibility result (in asynchronous
networks, if only one node fails, cannot be sure
remaining nodes will reach consensus)
 Randomized protocols get around this by
terminating with a probability approaching 1
 Need a common source of randomness, so use
blockchains (constant source of randomness;
cannot predict who finds the next hash) to organize
the network
 Use deterministic homomorphic threshold
signatures to create cryptographic randomness
without having a trusted dealer

27. October 2, 2015
Blockchain Financial Networks
Pebble: Asynchronous Randomized
Byzantine Consensus (Example)
26
http://crypto.stanford.edu/seclab/sem-14-15/williams.html
https://www.youtube.com/watch?v=8iEgjqIMtVQ
 Fast-throughput (achieve scalability)
 Run massive numbers of binary leader-free
asynchronous randomized consensus protocols
in parallel to quickly agree a combined data set
from the inputs of large numbers of processes
 Proof of concept
 Focus on messaging efficiency, decentralized
network scalability and confirmation speed
 Enable 500 distributed processes to
simultaneously present their data sets to the
group and quickly reach strongly consistent
agreement on an accepted superset
 Pass only 0.5-1MB of protocol messages
 A network reaching consensus every 5
seconds would have spare bandwidth to
process many thousands of transactions per
second

28. October 2, 2015
Blockchain Financial Networks
Stellar: Quorum Slicing (Concept)
27
https://medium.com/a-stellar-journey/on-worldwide-consensus-359e9eb3e949
 Objective: distributed consensus
 Nodes update their states/ledgers
 Avoid Byzantine failure (when individual nodes act
arbitrarily, maliciously or not)
 Distinguish between
 Quorum: the set of nodes required to reach
agreement across the whole system
 Quorum Slice: the subset of a quorum that can
convince one particular node of agreement
 Result: federated network of quorum slices,
continually testing the network
 Do not need to trust the whole system/network, just
your neighbors, you do not know who to trust
initially, join the network, and try before you trust, the
system grows organically, each party makes a slice
of others from the whole to trust

29. October 2, 2015
Blockchain Financial Networks
Federated Quorum Slice Network
28
https://medium.com/a-stellar-journey/on-worldwide-consensus-359e9eb3e949
 Resilient network
 Overall network health is preserved even if there are a few
bad nodes, and some good nodes slicing the bad nodes
 Unanimous consent from the complete set of system nodes is
not required to reach agreement, or tolerate faulty nodes

30. October 2, 2015
Blockchain Financial Networks
Stellar graphic novel explains Quorum Slicing
29
https://www.stellar.org/stories/adventures-in-galactic-consensus-chapter-1/

31. October 2, 2015
Blockchain Financial Networks
Stellar: Context of Byzantine Agreement
30
https://medium.com/a-stellar-journey/on-worldwide-consensus-359e9eb3e949
 Traditional Byzantine agreement protocol (BAP)
 Membership is set by a central authority or closed
negotiation (Sybil attack-resistant)
 Update BAP for decentralized group admission
 Ripple: publish a ‘starter’ membership list that participants
can edit for themselves
 Divergent lists invalidate network safety; users fail to update
 Tendermint: base membership on proof of stake
 Ties trust to resource ownership; revoked escrow attacks
 Stellar: open membership, participants affirm trust
 Quorum is still vulnerable to Sybil attack, malicious parties can join
many times and outnumber honest nodes. So majority-based quorums
do not work, but a federated network of quorum slices can
 Each node selects and tests quorum slices based on safety and
liveness; voting to accept statements (of network state)

32. October 2, 2015
Blockchain Financial Networks
Stellar: Consensus Protocol Comparison
31
SCP: Stellar Consensus Protocol
https://medium.com/a-stellar-journey/on-worldwide-consensus-359e9eb3e949

33. October 2, 2015
Blockchain Financial Networks
Enterprise Blockchain Apps by Sector (selected)
32
http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
Crucial Blockchain Properties
• Cryptoledger
• Decentralized network
• Trustless
counterparties
• Independent
consensus-confirmed
transactions
• Permanent record
• Public records
repository
• Notarization time-
stamping hashes
• Universal format
• Accessibility
Government
& Legal
• Transnational orgs
• Personalized
governance services
• Voting, propositions
• P2P bonds
• Tele-attorney services
• IP registration and
exchange
• Tax receipts
• Notary service and
document registry
Economics
and Markets
• Currency
• Payments &
Remittance
• Banking & Finance
• Clearing &
Settlement
• Insurance
• FinTech
• Trading & Derivatives
• QA & Internal Audit
• Crowdfunding
IOT
• Agricultural & drone
sensor networks
• Smarthome networks
• Integrated smartcity,
connected car,
smarthome sensors
• Self-driving car
• Personalized robots,
robotic companions
• Personalized drones
• Digital assistants
• Communication
(messaging)
• Large-scale
coordination
• Entity ingress/egress
• Transaction security
• Universal format
• Large-scale multi-
data-stream
integration
• Privacy and security
Real-time
accessibility
Health
• Universal EMR
• Health databanks
• QS Data Commons
• Big health data
stream analytics
• Digital health wallet
• Smart property
• HealthToken
• Personal
development
contracts
• Large-scale
infrastructural
element for
coordination
• Checks-and-
balances system
for ‘good-player’
access
• Community
supercomputing
• Crowd analysis
• P2P resourcenets
• Film, dataviz
• AI: blockchain
advocates, friendly
AI, blockchain
learners, digital
mindfile services
Science,
Art, AI