Share Published on Apr 5, 2016 This presentation (originally done for an event that Harris Partners has organised with Bank of America Merril Lynch in March 2016) covers basics of blockchain (definitions, features, establishing consensus, public key cryptography, public vs.private blockchains, permissionless vs.permissioned blockchains), as well as descriptions of Bitcoin, and other current use cases of the blockchain technology ... Technology 0 Comments Statistics Notes Views Actions 0 Embeds 0 1.Blockchain: It’s much more than Bitcoin 2.Agenda  Eren Ercan (Harris Partners, Data Scientist) - What is a Blockchain - What is Bitcoin - How does a Blockchain get built - How does a Blockchain get verified - Weaknesses of Blockchain technology - Value - Current applications - Future applications  John Biggs (Freemit, CEO; Techcrunch, East Coast Editor)  Q&A, discussion 6:00-7:00 7:00-7:30 7:30-8:00 3.

Blockchain defined A blockchain is a type of distributed database specifically suited for processing time-ordered data  It is a vehicle for transferring value and holding records  Does not involve a central authority, computers that store the blockchain are decentralised and not owned by a single entity  Every block is connected to the prior one, the ledger contains the record of every transaction 4.bitcoin yourstoryBitcoin is a peer-to-peer digital currency system  Decentralised and pseudo- anonymous transactions  Publicly disclosed linked ledger of transactions is stored in a blockchain  Reward driven system for achieving consensus (mining) based on proof-of-work for helping secure the network  Deflationary currency with an eventual cap of 21M bitcoins 5.linux ubuntu bitcoin mining

Features of Bitcoin  Reward cut in half every four years, so the supply is limited  Bitcoins can be irrevocably destroyedFinite  Nearly infinitely divisible currency  Currently supporting eight decimal places  0.00000001btc is known as a “Satoshi” Infinitely divisible  Nominal transaction fee’s paid to the network  Cost to send $1 is the same as $1,000,000  Consensus driven Infinitely divisible  Cannot add coins arbitrarily  Cannot double-spend Counterfeit resilient  Once it’s gone, its gone  No recourse and no one to return sent tokens Non- repudiatable 6.bitcoin documentary redditWhat is of Bitcoin worth?bitcoin paper wallet private keyBut what does the champ think?bitcoin banque du canada

"In a few years from now bitcoin and other digital currency are going to be a normal part of our monetary systems” 8.Establishing consensus in a blockchain, how do you decide which transactions are valid?How do you get everyone in the room to agree on a single time to meet? Simple solution: have people shout a time  First person to shout determines the time  In distributed networks, there can be many firsts  Depends on where you are standing and how long the signal takes to propagate  As a result, the crowd won’t reach a single consensus on the time 9.litecoin best mining rig Another approach: give everyone in the room a random number generator which determines how many minutes they must wait before shouting  As long as the interval between each number is longer than the time needed to propagate the signal across the network (room), most of the time, only one person will shout the time first  This is a distributed way of arriving at a time, there is no central decision maker  However, there is a flaw: If one of the people in the room is dishonest and wants to set the time, then they can cheat an shout out the time earlier than their random number generator tells them How do you get everyone in the room to agree on a single time to meet?

 A better, but not perfect solution: give each person a difficult task to perform, then find a string that a hash functions converts to the time they want to meet  This problem is difficult, and will take a different amount of time for each person to solve, even if they start at the same time  The result is that the time to complete is more or less random, and on average, only one person will shout the answer first  Not only that, but by providing the string that solves the problem, they prove they have done the work and not cheated  It is also difficult to see how the process could be subverted by a group of people at a large scale How do you get everyone in the room to agree on a single time to meet?Public key cryptography  Public key cryptography - A method of encryption that prevents unintended people from reading it - A digital signature, verifying the identity of the sender  There are many different methods and algorithms, some of the most popular include RSA, AES 12.

Public key cryptography: illustrative example You write a message and lock the box, then you send it to me I have a locked box, I cannot open it, I put my own lock on the box, and send it back to you You now have a box with two locks on it; You remove your own lock and send it to me again Now I have a box, with your message in it, and only my own lock on it, I remove my own lock from the box, and can read your message  We want to send messages to each other without anyone else seeing the message  Think of the message as being inside of a box 1 2 3 4 13.Blockchain is the core innovation behind the currency  Key design element of blockchains – embedded security  This is one way they are differentiated from ordinary scalable distributed databases such as MySQL and MongoDB  Permissionless public blockchains such as Bitcoin are the most developed, but presents regulatory compliance issues  Many of these issues potentially addressed by private, permissioned blockchains 14.

Types of blockchains: public vs.private  Blockchain in which direct access to blockchain data and submitting transactions is limited to a predefined list of entities Public Private  Blockchain in which there are no restrictions on reading blockchain data (which may still be encrypted) submitting transactions for inclusion into the 15.Types of blockchains: permissionless vs.permissioned  Blockchain in which there are no restrictions on identities of transaction processors (i.e.users that are eligible to create blocks of transactions)  Open, decentralised ledger which records the transfer of value  Every transaction is cryptographically chained to the previous one  Permanent, immutable, verifiable record of truth that everyone can see Permissionless Permissioned  More appealing to enterprise and financial services  Transaction processing performed by a predefined list of entities 16.

Why does blockchain technology matter? Blockchains are an attractive replacement for existing solutions utilised by financial institutions  Global fintech investment tripled from US$4 billion in 2013 to US$12.2 billion in 2014  According to a survey report by World Economic Forum, first tax collected by a government using the blockchain technology is expected to occur in 2023  The same report suggests that 10% of global gross domestic product will be stored in blockchains by 2027 17.What are advantages of blockchain? When investors currently buy and sell debt and equity securities, or transact derivatives, they generally rely on settlement and registration systems that sometimes take several days Speed and efficiency Disinter- mediation Reduced transaction costs Improved market access  Blockchain automates trust  It eliminates the need for trusted third-party intermediaries  In the traditional market, buyers and sellers can’t automatically trust one another  With blockchain, the decentralised ledger offers this trust  Eliminates the need to use settlement and registration systems, and other intermediaries  There is significant potential to reduce transaction costs for investors and issuers  Global markets have the potential to become even more easily accessible to investors and issuers 18.

Blockchain provides the efficiency of a central database and the robustness of a clearing house for complex transactions, without the costly middleware Architecture Settlement process Speed Transaction cost Benefits Limitations Internal Transaction Systems Middleware/ Messaging Clearing Houses Blockchain Centralised internal database Internal Real-time Internal IT Speed, cost, relative simplicity Committing transactions with third parties/across networks Secure inter-party messaging Independent (but enabled by messaging) Up to 3-5 days External provider + settlement costs Secure transaction between external, standard data formats Data errors, slow transactions, flexibility Third party agent-in- possession Via clearing house Days (transaction dependent) Third-party service Reduced settlement risk/DVP Complex and cumbersome, expensive Distributed ledger with cryptographic integrity Consensus Near real-time to minutes Similar to internal databases Enables third-party transaction to be as simple and efficient as internal transactions Tech maturity, integration with existing systems/workflows 19.

Other applications: smart contracts  Imagine a contract you sign, where all the key clauses could automatically execute  This is the idea behind smart contracts  Imagine a scenario where blockchain technology is helping keep records in sync between multiple parties, (e.g.which shipping container which television is in)  Smart contracts are the logic layer on top of that, which allow for “if this, then do that” conditions to be activated directly from the agreement 20.Other applications: smart contracts (cont.) Another example, what if the current buyer had agreed to buy 100 televisions from the seller, as long as the market price for televisions stayed above $1? A smart contract would record this clause, in the same way a paper contract would  The difference however, is if the price of a television fell below $1 the smart contract could change the owner of the television back to the seller 21.

Everledger is an application that uses blockchain as an immutable ledger for diamond certification  In the past, different stages of a diamonds value chain have tended is be disparate and paper based - Producer - Shipping - Insurance  All recorded using pieces of paper, all of which can be lost of forged at any point  Everledger consolidates tracking across stages using blockchain technology, providing an immutable record which allows individual jewels to be indentified  Insurance companies, law enforcement agencies can access specific history  Currently live technology with close to a million diamonds being tracked on their blockchain 22.R3 CEV has developed a reference architecture based on blockchain technology for financial industry  Works in conjunction with a consortium of 42 partner banks around the world including CBA and NAB  Focused on identifying potential applications and implementation  Key aspect of this work is collaborating on protocols to standardise and make interoperable, common, core processes for distributed ledgers  On January 20th R3 announced the launch of a private distributed ledger that connects 11 member banks using Ethereum technology and is hosted on a virtual private nework in Microsoft Azure’s Blockchain as a Service 23.

The ASX is building a blockchain for Australian equities  ASX working with Digital Asset to build a blockchain that will run in parallel to the existing CHESS system, which connects almost 120 parties for settlement and clearing. This process currently takes three days  ASX is looking at using distributed ledger technology to reduce complexity and risk for brokers who currently have to lodge margin with ASX daily to manage the markets settlement risk  Many other areas of research, especially reducing back-office costs and the burden of AML/KYC regulation 24.Freemit is a bitcoin based remittance system  Charges for transferring money across borders are high and / or it takes a long time  The market is large: remittances cost is ~$50B annually, and hidden FX fees in tourism are ~$40B  Typical $500 transfer from the US to Europe - Western Union 9% (3-4 days) or 11% in minutes - Wire transfer 11% (1-2 days) - PayPal 5% (3-4 days) - TransferWise 1% (5-6 days)  Freemit uses Bitcoin as a store of value to deliver: - Instant transfers - Published exchange rate - Lower cost through automation and process transparency