an introduction to blockchain technology...(distributed ledger) challenges with a central register...

www.strate.co.za©Strate

www.strate.co.za©Strate

An Introduction to Blockchain Technology

Tanya Knowles - Executive Director, Fractal Solutions, a Division of Strate

Disclaimer (!)

No one will pay money to get from Berlin to Potsdam by train in one hour when he can ride his horse there in one day for free.(King William I of Prussia, 1864)

Strate (Pty) Ltd

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OPERATING DIVISIONS

What is money versus Bitcoin versus Blockchain?

Yap Island – 1500 years ago

Key Attributes of Money

• Scarcity - This is money's most important attribute. The island of Yap did not have limestone - all stones had to be imported from Palau -so stones were very scarce.

• Durability - The stones on Yap could last a very long time without being damaged or requiring maintenance.

• Divisibility - Individual stones were not easy to divide, however large stones could be exchanged for smaller ones.

• Verifiability - Real stones were easily distinguishable and identifiable against fake ones.

• Portability - Most smaller stones could be easily transported.

• Fungibility - On Yap, stones of equal size were equal in value. No one cared which specific stones they had.

But how did they keep track of ownership?

Option 1: Go to the tribal chief as a central authority (who keeps a central ledger)

Option 2: Each islander keeps a mental record reached via consensus (distributed ledger)

Challenges with a Central Register

•Complete trust in a single entity

•Single point of failure

•Vulnerable to corruption / can be tampered with

•Power of a single entity / Monopoly status

•Vulnerable to cyber attacks

•Etc

Option 2 looks very appealing …

Bitcoins - Accident or Genius or Experiment?

≠?

Bitcoin

“Peer to peer electronic cash system which allows online payments directly from one party to another without the burden of going through a financial institution (independent party)”

Blockchain underpins Bitcoin

- Unregulated, censorship-resistant

Shadow currency

- First Blockchain application• Pioneer of Blockchain Technology

But the Blockchain is NOT Bitcoin

… Digital currencies (fiat currencies) different from cryptocurrency

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Blockchain/Bitcoin

What is Blockchain?

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1970’s Mainframe

1980’s

PC

1990’s internet

2000’s social media

2010’s blockchain

Technology Trends

Transfer of Information

Transfer of Value / Asset

VideoVoice

TC/IP and HTTP Blockchain ?

The World Wide Web

Source: Credit Suisse Research

Some consider Blockchain to be the “Missing Piece” of the Internet

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Don’t rely on Government or Regulations to protect your business!

Areas Ripe For Disruption

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Collaborative Lab / Rachel Botsman 2014

Complex Industries

Broken Trust Redundant Intermediaries

Limited Access

Blockchain Catch Phrases

Bitcoin Database Assets

Computer network

Decentralised Shared Ledger

Consensus Peer to peerPublic /

transparent

No central Authority

Immutability Provenance

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Blockchain Key Phrases

Database Assets

Single Shared Ledger

(Decentralised)

No central authority

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Blockchain

• Peer to peer transacting

• Open source technology on the web with no central authority (like the internet)

• Blocks of data – records a batch of transactions

• Electronically chained together with advanced cryptography to create a permanent and public record of every transaction that cannot be altered

• Secure, tamper proof and easily accessible

• Shared record of transactions (ledger) and data distributed over a vast network of users

• Miners are like librarians – cataloguing information

• Near instantaneous settlement at ‘peer’ / beneficial ownership level

• Public versus private blockchains

What does a Single (Shared) Distributed Ledger actually mean?

(Distributed Ledger Technology DLT)

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Simplification of the current equities process (securities only)

Equities on a Blockchain Simplified

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Single ledger

Near real time settlement

Encrypted data

No reconciliations

No single point of failure

Broker CSDP

Mary Jane ABC Brokers CSDP No 1

John Smith YXZ Brokers CSDP No 2

Alice Jones MNO Brokers CSDP No 6

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Regulatory, Central Bank and Industry

Body Developments

• A number of International securities regulators have announced that they will be ‘studying’ blockchain and

the impact on securities markets around the world as follows:

• International Organization of Securities Commissions (IOSCO) Board agreed on 22 February 2016 to

“intensifying work on technological change with particular relevance for securities regulators,

including blockchain”

• European Securities and Markets Authority (ESMA) has issued a blockchain paper requesting market

input

• The International Securities Services Association (ISSA) and a group of CSDs have formed a blockchain

working committee respectively

• Public announcements have been issued by a number of central banks on the topic including the

European Central Bank, Federal Reserve Bank, Central Bank of England and the Japanese Central Bank.

What does this mean and what are the

possibilities?

Our World Today

• Independent parties verifying the transaction

• Control / keep a record (legal) assets

• Levy fees for the services

• They are a single point of failure that could lose those

assets / be corrupted

Our World Today cont

Alice’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money / Cash

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Alice’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Sally’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Jane’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Mary’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

SharesLiam’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Ron’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Jen’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Mike’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

John’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money

Qualifications

Digital Identity

Jewelry

House

Music

Shares

“The” Blockchain

Peer to peer

No legal hassles

No Intermediaries

Immutable record

“Free” / Cheap

Speed

Alice’s Assets

Marriage

Art

Medical Records

Electricity usage

Motor vehicle

Money / Cash

Qualifications

Digital Identity

Jewelry

House

Music

Shares

Real life examples

• “The” Blockchain may never exist

• No standards / governance

structures

• Technology is in its infancy

• No laws, regulation, taxes governing

the system

• Dispute resolution

• Its not free! The computing power /

electricity to run the Bitcoin

blockchain alone is enough to power

half the country of Ireland daily

#FOMOUS$ 1 billion in 2015

???Up to US$ 10 billion in 2016

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Any company not making the investment in adopting this technology will cease to exist, and even adopting it is no guarantee that they'll survive.By Roger Arnold

How long before this becomes real?

•Diamonds on the blockchain• Everledger is a permanent ledger for diamond

certification & related transaction history•Over 1 million diamonds have been issued onto

the Everledger blockchain •14 metadata reference points on the diamond•Aims to solve a £45 billion loss in insurance

fraud

www.strate.co.za©Strate

www.strate.co.za©Strate

Tanya Knowles

Executive Director, Fractal Solutions

Strate (Pty) Ltd)

tanyak@strate.co.za