Blockchain: What it Is, How it Works, and Why It’s a Big Deal

Blockchain: What it is, How it
works, and Why it’s a big deal
January 8th, 2018

Agenda
• What is a Blockchain and How Does It Work? – Exercise
• Why it’s a Big Deal – the potential impact of blockchain tech
• Questions

What is a Blockchain and How Does It Work? – Exercise
• Objective: Simulate how Bitcoin, or any blockchain, actually works
• Who is involved?
• Everyone in the room is a “User”
• We will take a look at a subset of four Users’ transactions for the exercise
• There are also several “Miners”
• What is the scenario?
• Everyone at the start of the exercise has $100 put into the system, recorded on the ledger as Bitdollars
• During the ensuing periods, the selected Users will send and receive money
• The Miners will each keep an updated ledger, to be broadcast to the whole room each period
• The whole room will vote on which ledger to follow at the end of each period
• This will all make more sense as we go along!

Block 1
Simulation of the ‘Bitdollars’ blockchain
User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1

Block 1
User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1
• “Alice sends Mark 10 Bitdollars.
Signed, Alice.”
• “Bill sends Judy 40 Bitdollars.
Signed, Bill.”
User Bitdollars
Alice
Bill
Judy
Mark
STARTING LEDGER –
BLOCK 2

Block 2Block 1
User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1
Signed, Alice.”
Signed, Bill.”
User Bitdollars
Alice 90
Bill 60
Judy 140
Mark 110
STARTING LEDGER –
BLOCK 2

Block 2Block 1
User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1
Signed, Alice.”
Signed, Bill.”
• “Bill sends Alice 10 Bitdollars.
Signed, Bill.”
• “Bill sends Mark 20 Bitdollars.
Signed, Bill.”
• “Judy sends Alice 530
Bitdollars. Signed, Judy.”
• “Mark sends Bill 50 Bitdollars.
Signed, Mark.”
User Bitdollars
Alice 90
Bill 60
Judy 140
Mark 110
STARTING LEDGER –
BLOCK 2
User Bitdollars
Alice
Bill
Judy
Mark
STARTING LEDGER –
BLOCK 3

Block 3Block 2Block 1
User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1
Signed, Alice.”
Signed, Bill.”
Signed, Bill.”
Signed, Bill.”
Signed, Mark.”
User Bitdollars
Alice 90
Bill 60
Judy 140
Mark 110
STARTING LEDGER –
BLOCK 2
User Bitdollars
Alice 100
Bill 80
Judy 140
Mark 80
STARTING LEDGER –
BLOCK 3

User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1
Signed, Alice.”
Signed, Bill.”
Signed, Bill.”
Signed, Bill.”
Signed, Mark.”
• “Alice sends Judy 20 Bitdollars.
Signed, Alice.”
• “Judy sends Mark 80 Bitdollars.
Signed, Mark.”
• “Judy sends Bill 30 Bitdollars.
Signed, Judy.”
User Bitdollars
Alice 90
Bill 60
Judy 140
Mark 110
STARTING LEDGER –
BLOCK 2
User Bitdollars
Alice 100
Bill 80
Judy 140
Mark 80
STARTING LEDGER –
BLOCK 3
User Bitdollars
Alice
Bill
Judy
Mark
STARTING LEDGER –
BLOCK 4

User Bitdollars
Alice 100
Bill 100
Judy 100
Mark 100
STARTING LEDGER –
BLOCK 1
Signed, Alice.”
Signed, Bill.”
Signed, Bill.”
Signed, Bill.”
Signed, Mark.”
• “Alice sends Judy 20 Bitdollars.
Signed, Alice.”
• “Judy sends Mark 80 Bitdollars.
Signed, Mark.”
• “Judy sends Bill 30 Bitdollars.
Signed, Judy.”
User Bitdollars
Alice 90
Bill 60
Judy 140
Mark 110
STARTING LEDGER –
BLOCK 2
User Bitdollars
Alice 100
Bill 80
Judy 140
Mark 80
STARTING LEDGER –
BLOCK 3
User Bitdollars
Alice 80
Bill 110
Judy 130
Mark 80
STARTING LEDGER –
BLOCK 4

Blockchain Exercise – Additional Items
This example strips out most of the complex details of how blockchain achieves:
• Security
• Cryptography
• Digital signatures (simplified)
• Confirmation thresholds
• Trust
• Proof of work (simplified)
• Open-source transparency
• Synchronous, decentralized consensus
• Cost efficiency
• Low costs via revolutionary decentralized incentive structure (no centralized overhead, OpEx)
• However, Bitcoin is massively energy inefficient (and lacks a clear governance mechanism)

Blockchain Exercise – Implications
• The same result: trust
• A centralized authority is no longer the only way to create trust
• You can trust the decentralized consensus of computational work
• A fraction of the cost to achieve
• Order of magnitude cheaper
• In place of an entity, there’s just the cost of independent actors running software on their computers
• Suddenly, credit cards, banks, and other trust intermediaries are incumbents facing disruption

The components of a blockchain summarized
A blockchain is a DISTRIBUTED LEDGER formed by a CONSENSUS of SYNCHRONIZED,
SHARED and ENCRYPTED digital data, recorded in unchangeable packages called blocks
•Traditional systems rely on central
authority to generate trust
•In distributed ledgers, trust is
generated from the process itself
TODAY– CENTRALISED LEDGERS DISTRIBUTED LEDGERS

This is still the very beginning of blockchain’s economic value
Digitization of assets
Illustrative
economic
impact
Today
Time
Bitcoin
invention of blockchain &
first use case (currency /
store of value)
Ethereum
abstracts Bitcoin’s protocols
for financial transactions to
programmable rules for all
contracts (Smart Contracts)
2009 2013 2017
ICOs disrupt VC & launch dApps
IOTA introduces Tangle protocol for Internet of Things
Ecosystem development: Segwit, Lightning Network,
IPFS, Ark SmartBridge, NEO Smart Economy build out
infrastructure functionality & scalability
Cross-chain interoperability
Decentralized governance
Next-gen scalability
Mainstream applications
Unforeseen innovations

The Internet of Information
Blockchain’s potential is on the same scale as the Internet
“Blockchain could soon give rise to a new era of the Internet even more disruptive
and transformative than the current one.
Blockchain's ability to generate unprecedented opportunities to create and trade
value in society will lead to a generational shift in the Internet's evolution, from an
Internet of Information to a new generation Internet of Value.”
– World Economic Forum, June 2017
The Internet of Value
The internet today Blockchain added

Blockchain market predicted to grow dramatically
Source: Historical data from Coinmarketcap; 2022 estimate from Michael Novogratz, billionaire former manager of Fortress Investment Group; 2025 estimate from Deloitte + World
Economic Forum collaboration (stated 10% of global GDP by 2025; 2013 global GDP was $75T, assumed $80T for 2025 GDP)
Oct 2017
1100% CAGR
(Oct 16 – Oct 17)
64% CAGR
(2017 – 2025E)
MASSIVE MARKET EXPANSION IN 2016-2017… …MAY BE THE BEGINNING OF A MUCH LARGER TREND
We may be in 1995 for the Internet of Value

‘Fat Protocols’: Value capture in the blockchain Internet of Value
Source: Union Square Ventures

TCP / IP
Global fiat
Blockchain protocol
Cryptocurrency
Global fiat
The internet
economy
today…
Blockchain
today…
Application layer
Protocol layer:
Application layer
Protocol layer:
A blockchain platform’s cryptocurrency is the required medium of
exchange for the entire economy built on that protocol
No ownership
possible
Possible to take an
ownership stake in the
value of the entire
economy by owning
the protocol’s
cryptocurrency

What does this mean for you?
•As businesspeople
•As investors

Consider how your business will be impacted
Is network value key to my business?
Is my core business based on trust?
(e.g., contract execution, value exchange, intermediation)
Yes
No
No Yes
High chance of
disruption – take
action
Low chance of
disruption
• Investment banks
• Credit cards
• Venture capital
• Retail banks
• Insurance
• Lawyers
• Google
• Distributors
• Retailers

In terms of investing, selecting the right assets is challenging in
this new and fast-evolving space
+2000 more crypto assets

Very few assets generate all the blockchain market returns
Source: Woobull Cryptocurrency Investment
All crypto assets performance since launch Performance of median asset by launch year

Summary of key points
• Trust via decentralized consensus
• No need for centralized authority to create trust between counterparties
• The Internet of Value
• Blockchain will be the foundation of the Internet of Value
• We may be in 1995 for this Internet of Value
• ‘Fat Protocols’
• In blockchain, value will be captured by the protocol layer (as opposed to the application layer)
• Possible to own a slice of the protocol layer (because the cryptocurrency is the medium of exchange)
• Blockchain will disrupt many established business models by:
• Disintermediating trust institutions
• Enabling lower cost operating models

Contact info
Jesse@theProtocolFund.com

Hewlett Packard POV on blockchain similarities to the Internet

Major investors are betting on blockchain; industry incumbents
beginning to leverage blockchain tech
INVESTORS ALLOCATING CAPITAL TO BLOCKCHAIN ENTERPRISES BUILDING BLOCKCHAIN CAPABILITIES
“[Blockchain] gives us, for the first time, a way to transfer a unique
piece of digital property, such that the transfer is guaranteed to be
safe and secure. The consequences of this breakthrough are hard
to overstate.”
– Marc Andreessen
“As these technologies develop, we can imagine total transformation
of the banking system, using blockchain, in a world where banks
don't really exist anymore.”
– Barclay’s
“Blockchain-based market networks will replace existing networks.
Slowly, then suddenly. In one thing, then in many things.”
– Naval Ravikant
“We see the new network models and data analytics capabilities [of
blockchain] as an exciting opportunity to reinvent treasury
management to better meet the needs of clients.”
– Capital One

An aside: Miners have two incentives
Coins commonly introduced to system as “block rewards” for Miners Transaction fees
• When users send a
transaction, they
include a small “tip” to
incentivize a miner to
include the transaction
in the next block
• Usually ~0.1%
+
Incentive in our exercise

Blockchain: What it Is, How it Works, and Why It’s a Big Deal

Recommended

Recommended

More Related Content

More from Tahoe Silicon Mountain

More from Tahoe Silicon Mountain (20)

Recently uploaded

Recently uploaded (20)

Blockchain: What it Is, How it Works, and Why It’s a Big Deal