Permissioned Ledgers And The Case For Blockchains Without Bitcoin - Tim Swanson

Tim Swanson recorded this in June 2015 - an important addition to the Bitcoin blockchain debate:
One topic that is guaranteed to cause heated discussion among cryptocurrency enthusiasts is the idea that blockchains can be controlled by known validators and function without an underlying cryptocurrency. Some think this is a non-sensical idea fabricated by those spineless enough to want to appease regulators and but clueless enough to miss the whole point of cryptocurrencies. But others believe that Bitcoin is unsuited for a lof of ‘Bitcoin 2.0’ applications and that permissioned ledgers have wide-reaching potential to increase efficiency and transparency.

Tim Swanson takes part in an important discussion of permissioned ledgers. He’s among their best-known proponents and has recently published a whitepaper discussing how they work and looking at different startups in the space.

Topics covered included:
– Why the ‘blockchains without bitcoin’ idea is so controversial
– Why it is strange that KYC is done widely on Bitcoin users but not on the validators
– Why even semi-decentralized blockchains can provide big efficiency gains
– Why the 51% attack possibility is an obstacle for the use of the Bitcoin as a settlement network
– Why financial institutions don’t care about censorship resistance but do care about irreversibility

Links

• Tim Swanson: Permissioned Distributed Ledgers Whitepaper
• Tim Swanson: Needing a Token to Operate a Distributed Ledger is a Red Herring
• Robert Sams: No, Bitcoin is not the future of securities settlement
• JP Koning: Why bitcoin has failed to achieve liftoff as a medium of exchange

Discussion here:

https://epicenterbitcoin.com/podcast/084/

Bitcoin to be the world's sixth largest global reserve currency?

Bitcoin is going to be the world’s sixth largest global reserve currency, a new study has found, as blockchain becomes increasingly important to mainstream lenders.

Interviewing 30 leading bitcoin companies, mergers and acquisitions adviser Magister Advisors found that over the next 15 years bitcoin is set to soar in popularity as a reserve currency, a currency held by governments and institutions in large amounts, as part of their foreign exchange reserves.

Today, the US dollar is the most popular reserve

Bitcoin has been having a bullish month, with the price soaring to a 2015 high last week, and trading at $374 today. The cryptocurrency was also boosted by the European Commission’s recent decision to exempt it from VAT, effectively accepting it as a currency.

But the real game changer, the study argues, is likely to be the technology that bitcoin builds upon: the distributed ledger known as the blockchain.

Magister Advisors estimates that the top 100 global financial institutions will invest over $1bn on blockchain-related projects in the next two years. Major banks, including Barclays, and UBS are increasingly experimenting with blockchain to keep up with the developing technology.

Jeremy Millar, a partner at Magister Advisor, said:

"We have now reached a fork in the road with bitcoin and blockchain. Bitcoin has proven itself as an established currency. Blockchain, more fundamentally, will become the default global standard distributed ledger for financial transactions."
Read the full article here

Blockchains: The great chain of being sure about things

The (Blockchain) technology behind bitcoin lets people who do not know or trust each other build a dependable ledger. This has implications far beyond the bitcoin cryptocurrency.
"The blockchain began life in the mind of Satoshi Nakamoto, the brilliant, pseudonymous and so far unidentified creator of bitcoin—a “purely peer-to-peer version of electronic cash”, as he put it in a paper published in 2008. To work as cash, bitcoin had to be able to change hands without being diverted into the wrong account and to be incapable of being spent twice by the same person. To fulfil Mr Nakamoto’s dream of a decentralised system the avoidance of such abuses had to be achieved without recourse to any trusted third party, such as the banks which stand behind conventional payment systems.

It is the blockchain that replaces this trusted third party. A database that contains the payment history of every bitcoin in circulation, the blockchain provides proof of who owns what at any given juncture. This distributed ledger is replicated on thousands of computers—bitcoin’s “nodes”—around the world and is publicly available. But for all its openness it is also trustworthy and secure. This is guaranteed by the mixture of mathematical subtlety and computational brute force built into its “consensus mechanism”—the process by which the nodes agree on how to update the blockchain in the light of bitcoin transfers from one person to another."

"...a world with record-keeping mathematically immune to manipulation would have many benefits. If blockchains have a fundamental paradox, it is this: by offering a way of setting the past and present in cryptographic stone, they could make the future a very different place."

Read the full article in the Economist here
Leader article: The promise of the blockchain -The trust machine

A Brief Introduction to Smart Contracts

A Brief Introduction to Smart Contracts
By Charles Hoskinson
YouTube video presentation here

Why and How Banks should embrace Blockchain Tech

"A recent flurry of media reports and surveys have touted that some banking and financial services sector players are undertaking interesting projects with blockchains and decentralized ledgers in particular. But this burst of activity is hardly enough to prematurely claim victory on behalf of the few banks who have publicized such initiatives.

It is naive to assume that the blockchain will make the most impact where it is to be adopted early. Rather, it will make the most impact where change is hardest to achieve, and that might take a little longer, realistically.

The blockchain and its derivative technologies are one of the biggest opportunities for reengineering financial services. It’s a looming tsunami, and the big question is whether the banks will fail to reinvent themselves as they did with the Internet, or if they will dare to induce a self-inflicted shake-up and embrace the future."

"The blockchain is not perfect, but it is that perfect catalyst for business process changes, and this type of opportunity doesn’t present itself that often. The last time it came was with the Internet. Let’s hope the banks see this as a big opportunity for change, not just a small one."

Read the 3 full articles by William Mougayar:
1.  Bitcoin: Another Banking Headache
2.  Dear Big Bank CEO, Re: Blockchains: Obliterate don't Automate
     (Also: Coindesk edited version) 
3.  The 8 Steps to becoming a Bitcoin-Savvy Bank

Blockchain in the Banking Industry - Bloomberg Markets Most Influential Summit 2015 London

Here is a video of the panel speaking on:
"The Future of Finance: Blockchain in the Banking Industry"
at Bloomberg Markets, Most Influential Summit 2015, London. 

The panel of speakers were:
Jon Matonis (Bitcoin Foundation), Richard Brown (R3 CEV), Oliver Bussmann. UBS), and Daniel Marovitz (Earthport); the moderator was Ed Robinson who is a senior writer with Bloomberg Markets.

The panel discussed the opportunities and challenges of the blockchain – the code behind bitcoin – and it's potential impact on the banking and financial services industry.

After 32 mins, listen to a key Blockchain/blockchain question posited by Michael Parsons @BlockchainABC @BitcoinByte and expertly answered by @jonmatonis
Video here:
Future of Finance: Blockchain in the Banking Industry- Bloomberg Business

Private blockchains are not “just” shared databases

To state that a private blockchain is just a shared database is like saying that HTML and HTTP are “just” distributed hypertext. It’s wrong in two ways. First, the semantic one: private blockchains are a technology that enables shared databases, like pens enable writing and HTML/HTTP enable distributed hypertext. The bitcoin blockchain and its primary application cannot be meaningfully separated, because one could not exist without the other. But this equivalence does not apply to private blockchains at all.

Yes, private blockchains are just a way to share a database. But they enable a new type of shared database, with huge implications for the financial world and beyond.

Read the full article by Dr Gideon Greenspan to find out exactly why

Blockchains and Banks

There’s a conundrum concerning blockchains: Bitcoin bundled together various existing technologies in a unique fashion to create something genuinely new — an almost unhackable, replicated database with no master server, via updates which are based on quickly verifiable effort rather than permission. Blockchains (permissioned chains) remove the genuinely new bit, but they are the current focus of activity in the Financial Services sector. Why?

Bitcoin created an awareness of a mechanism that could conceivably disrupt both banks and existing banking infrastructure providers via a financial network without either middle men or trusted entities. This created the incentive for strategic investment to look into blockchain applications. These replace banking infrastructure providers with software that doesn’t need to be run by a separate entity (e.g. SWIFT), and lower internal costs but still keep the requirement for trusted entities (banks themselves).

What blockchains achieve could have been done before, albeit in a less elegant way, but there wasn’t the alignment of incentives to produce the applications that will create a de facto reality.
Even without the advantages of the Bitcoin (Blockchain) approach, this will stimulate the creation of Internet era banking infrastructure. With them, we could see the web of money and, more generally, any kind of contract.

Now, internet era Banking Technology has found its best ‘Ecosystem fit’ in the form of blockchains.

Read the full article By David Galbraith
Link Here 

Blockchain Design is Academic Work?

Blockchain design is academic work and shouldn't just be decided by banks, suggests Dr Gideon Greenspan, who is the founder of Coin Sciences and MultiChain.  Dr Greenspan believes that the fundamentals of blockchain design constitutes "academic work" and is probably not something that should just be decided by banks alone. 

He continues; "...rather, I think this is work that should be done by experienced computer scientists and system architects, wherever they might happen to be."

Read the full article here

Blockchain in an Investment Bank

What does blockchain technology mean for an investment bank?

"Blockchain is a disruptive technology platform that uses cryptography and a distributed messaging protocol to create a shared ledger between trading counterparties. The idea is to allow for a simple transfer of asset ownership or more complex transactions using “smart contracts" 

Blockchain technology was originally leveraged by cryptocurrencies (Bitcoin being the first and most successful) whose popularity gave
rise to the idea of Blockchains as a means of building consensus. To that end, there are many functions within capital markets and other industries which can be simplified and enhanced by the order and validation in a distributed ledger via Blockchains."

Source: Read full article from Accenture here

Distributed Ledgers

Distributed ledgers

The Blockchain is just one type of public, permissionless, proof-of-work, peer-to-peer distributed ledger. Distributed ledgers are probably the future of financial services. 

Consider this statement from the Bank of England (2014 Quarterly Bulletin Q3): “Although the monetary aspects of digital currencies have attracted considerable attention, the distributed ledger underlying their payment systems is a significant innovation. The potential impact of the distributed ledger may be much broader than on payment systems alone. The majority of financial assets — such as loans, bonds, stocks and derivatives — now exist only in electronic form, meaning that the financial system itself is already simply a set of digital records.”

Concepts of trust arise in many philosophical puzzles. Mutual distributed ledgers look like becoming the system of trust in shared economies. If mutual distributed ledgers displace trusted third parties, they will change the systems outside them, most notably today’s financial services.

Read the full article by Professor Michael Mainelli: Unblock the Shared Economy

Blockchains Without Tokens

Is there any value in a Blockchain without a cryptocurrency (token)? 
And can these “tokenless shared ledgers” be called blockchains at all?

Dr Gideon Greenspan, of Coinspark - Coin Sciences Ltd, explains and debates the issue:
https://www.linkedin.com/pulse/ending-bitcoin-vs-blockchain-debate-gideon-greenspan

What are Colored Coins?

Colored Coins: 

Due to the nature of the Bitcoin blockchain, bitcoins are not inherently fungible: every single coin mined can be uniquely identified and its entire history tracked. The smallest identifiable, indivisible, unit is known as a “satoshi.” A single “bitcoin” is a collection of 100,000,000 satoshis; thus the price of a satoshi is very low: about $0.0000026 at current market rates.

This lack of fungibility, though potentially problematic, opens the door to the implementation of ledgers on top of the Bitcoin ledger. If several parties agree to attach meaning to a particular satoshi and to recognize its control as representative of the ownership of some other asset — potentially existing outside of the blockchain — then they can use the decentralized consensus offered by the Bitcoin blockchain to track ownership of the asset and permit secure transactions. The antecedent is crucial. The asset can only be tracked on the blockchain insofar as its physical custodians, or the relevant authorities, agree to recognize the legitimacy of the colored coin. The mere technological ability to track an asset, from common stocks to parcels of land, does not magically translate into the ability to form an authoritative record of ownership. All too often is that obvious fact sacrificed upon the altar of hype.

Assuming such an agreement is in place, these tiny, identifiable, pieces of bitcoin can be used to represent and track assets. Such a coin is known as a “colored coin.” In addition to the ownership tracking abilities inherited from the Bitcoin blockchain, small amounts of data can be embedded in the blockchain, allowing for potentially more complex mechanisms.

Read the full article by ArthurB:
"Making Sense of Colored Coins"

Blockchain Technology Will Transform the Practice of Law

The blockchain will not replace the need for lawyers. It will, however, change how lawyers approach contract drafting, administration and enforcement among other aspects of the practice.

In the future, transactional lawyers may draft contracts that resemble how developers code software applications. In fact, future lawyers will likely need basic-to-intermediate training in coding in order to implement smart contracts based on the blockchain — a phenomenon that is already taking hold in the general population. In addition, lawyers will need to understand the intricacies of how these systems work in order to counsel clients on potential pitfalls and best practices in utilizing these systems for their business. Countries, like Honduras, have already committed to replacing their existing real estate records with blockchain technology — which one day could allow for its citizens to sell or buy a house via an iPhone app.

This (blockchain technology) has significant implications for lawyers and the business of law. Ultimately, however, this technology offers a great opportunity for those firms who can innovate. Those firms that are willing to adapt and embrace this technology will be able to provide more effective and efficient services, which will lead to a competitive advantage over those firms who do not evolve.

By Joe Dewey, Partner, and Shawn Amuial, Associate, Attorneys at Holland & Knight

Read the full article here

Banks and Exchanges Turn to Blockchain

The Blockchain — the technology that underpins bitcoin — has been called “the future for financial services infrastructure”. Now banks, clearing houses and exchanges are becoming increasingly excited at the prospect of blockchain fundamentally transforming their business models.

Banks and exchanges see a ledger updated in minutes as saving millions in collateral and settlement costs to third parties.

“Blockchain technology continues to redefine not only how the exchange sector operates, but the global financial economy as a whole,” says Bob Greifeld, chief executive of Nasdaq.

Read the full article published by the FT here:

http://tinyurl.com/BlockchainBanks

Comment:
The Blockchain and its derivative technologies are one of the biggest opportunities in the last 30 years to re-engineer banks and financial services. The key question is whether the banks will fail to reinvent themselves as they did with the Internet, or if they will dare to induce a self-inflicted shake-up and embrace a "Blockchain Banking" technological future with significantly lower costs, less friction and faster settlement and clearing times. 

FT Explainer: 

At present, when one bank sends money to another, no physical currency changes hands. Banks and settlement systems use central electronic ledgers to track assets. But they can be slow and inefficient, often relying on faxes or manual input. That not only wastes time but racks up fees. The system is also open to hacking and fraud.

Proponents say a ledger updated in minutes could savemillions in collateral and settlement costs, while also automating banks’ creaky and expensive back office systems. Collateral could also be moved around the system faster, to meet new rules on derivatives markets implemented after the financial crisis.

Full article here:

The blockchain and financial markets 

————————————————————

Interview with Gideon Greenspan
"Crucially, banks want permissioned ledgers so they can say who can connect to the network, who can send, who can receive and who can confirm transactions."

"While the bitcoin network expends vast amounts of collected computation power to prevent a 51% attack, private blockchains can employ simple but effective security enhancing techniques such as forced rotation mining patterns.

Greenspan explained: "If there are ten permitted miners (Ed: ie. validators) we could insist that at least eight of them mine in rotation."

Full article from IB Times:

What do banks want from blockchains?

What is a Smart Contract?

Smart Contracts

Smart contracts are self-executing automated digital contracts stored and operated in a distributed blockchain.

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. 

(An excellent definition of a Smart Contract by Richard Gendal Brown)

 
Smart contracts refer to defined services which are enacted by code on a censorship-proof ledger system - the blockchain. 
Smart contracts are able to securely execute a wide range of services including for example, financial exchanges, voting systems, property (land) registers, crowdfunding platforms, insurance, decentralised auction sites, a decentralised personal identity system, other self-enforcing contracts and intellectual property.

Main features of smart contacts are:

Data Driven Verification
Smart Contracts provide proof of performance by tracking verifiable data, eliminating the risks inherent in traditional paper contracts.

Fully Automated Enforcement
Smart Contracts can be written to execute their own conditions, eliminating the risk of relying on someone else to follow through on their commitments.

Securely Stored in the Blockchain
Smart Contracts are self-executing contractual states, stored on the blockchain, which nobody controls and therefore everyone can trust.

Public or Private Blockchains?

Bitcoin is the first iteration of a public decentralized Blockchain, controlled by no-one and cartel free.
What other options are there? To summarize, there are generally three categories of blockchain-like database applications:

• Public blockchains: a public blockchain is a blockchain that anyone in the world can read, anyone in the world can send transactions to and expect to see them included if they are valid, and anyone in the world can participate in the consensus process – the process for determining what blocks get added to the chain and what the current state is. As a substitute for centralized or quasi-centralized trust, public blockchains are secured by cryptoeconomics – the combination of economic incentives and cryptographic verification using mechanisms such as proof of work or proof of stake, following a general principle that the degree to which someone can have an influence in the consensus process is proportional to the quantity of economic resources that they can bring to bear. These blockchains are generally considered to be “fully decentralized”.
• Consortium blockchains: a consortium blockchain is a blockchain where the consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 15 financial institutions, each of which operates a node and of which 10 must sign every block in order for the block to be valid. The right to read the blockchain may be public, or restricted to the participants, and there are also hybrid routes such as the root hashes of the blocks being public together with an API that allows members of the public to make a limited number of queries and get back cryptographic proofs of some parts of the blockchain state. These blockchains may be considered “partially decentralized”.
• Fully private blockchains: a fully private blockchain is a blockchain where write permissions are kept centralized to one organization. Read permissions may be public or restricted to an arbitrary extent. Likely applications include database management, auditing, etc internal to a single company, and so public readability may not be necessary in many cases at all, though in other cases public auditability is desired.

Source: read full article:

On Public and Private Blockchains - ethereum blog 
by: Vitalik Buterin

Forbes 9 September 2015: Bitcoin’s Shared Ledger Technology: Money’s New Operating System
See also -IB Times UK, by Ian Allison, 8 September 2015:

Nick Szabo: If banks want benefits of blockchains they must go permissionless
Extract:

"Legendary cryptographer Nick Szabo says the only way to realise seamless, automated, and global financial integrity is if banks embrace permissionless blockchains, like the system Bitcoin runs on.

If banks were to embrace permissionless blockchains they could participate as well or better than the newcomers.

"But their bureaucracies are so heavily invested in the expertise and importance of local regulations and standards that it's extremely difficult for them to cut the Gordian knot and implement seamless global systems."
See also:

"There are many benefits to permissioned ledgers, but the cost of immutability provided by the most popular unpermissioned blockchain is so low, that it makes sense for even a permissioned ledger to utilize it as insurance.

By using the same SHA encryption technology that protects bitcoin balances, I would argue that either the central point (i.e. permission giver) and each of the players in a permissioned blockchain can create a full hash of their blockchain and record it in the Op_Return of a unpermissioned blockchain.  In fact I can see a future where permissioned ledger wallets/nodes vary their chatter to the decentralised network dependent on the level of risk they perceive in the permissioned ledger environment.

By treating a permissioned blockchain almost as a mutable coloured coin asset on a decentralised blockchain, this cheap insurance policy will act to strengthen the immutability of the permissioned ledger, along with the prestige and reputation of the global blockchain."

Read the full article: Permissioned versus un-permissioned Blockchain ledgers?

FT article:
Blockchain promises back-office revolution
"For now the market remains split between three core system approaches: private blockchains such as R3CEV and DAH, known as permissioned ledgers, which make use of trusted networks; open-ended blockchains such as Ethereum, which stay faithful to bitcoin’s original design but improve on the smartness of the ledger technology; and applications designed to take direct advantage of the prevailing bitcoin network."

Definition of Blockchain

What is a Blockchain?

Video: Bitcoin's blockchain technology explained in 2 minutes

Blockchain Definition from Financial Times Lexicon

Blockchain description

A Blockchain is a peer-to-peer public ledger maintained by a distributed network of computers that requires no central authority or third party intermediaries. It consists of three key components: a transaction, a transaction record and a system that verifies and stores the transaction. The blocks are generated through open-source software and record the information about when and in what sequence the transaction took place. This “block” chronologically stores information of all the transactions that have taken place in the chain, thus the name blockchain. In other words, a blockchain is a database of immutable time-stamped information of every transaction that is replicated on servers across the globe. 

Blockchain technology is the foundation of and underpins bitcoin, a decentralized digital cryptocurrency.
In traditional transactions such as money transfers or foreign currency, there is usually an intermediary or a centralized entity that records the transmission of money or currency that exist apart from it. In a blockchain, the token or digital coin itself is what has value, which is determined by the market. This is what makes the system a truly decentralized exchange. When people buy or sell bitcoins, a secret key or token is broadcast to the system. “Miners” use nodes, computers or devices linked to a network, to identify and validate the transaction using copies of all or some information of the blockchain. Before the transaction is accepted by the network, miners have to show “proof of work” using a cryptographic hash function –a special algorithm- that aims to provide high levels of protection. Miners receive some form of compensation for their computing power contribution, avoiding the need to have a centralized system. Newer protocols such as Ripple rely on a different consensus process that does not need miners nor proof of work and can agree on the changes to the blockchain within seconds. 

Blockchain disruption in banking and finance

The first levels of disruption would seem more likely in the payments space where traditional transactions such as money transfers, credit and debit card payments, remittances, foreign currency and online payments, require an intermediary such as a clearing house or a financial institution. In these cases the transaction would occur directly between the buyer and the seller without any intermediary and the validation of the transaction would happen in a decentralized way or “distributed ledger”. This would result in significant infrastructure savings for banks by allowing them to bypass payment networks that are oftentimes slow, cumbersome, and expensive.

However, the biggest potential impact of a public ledger may extend beyond the payment system. Given that the majority of financial assets such as bonds, equities, derivatives and loans are already electronic it may be possible that someday the entire system is replaced by a decentralized structure. In fact, the latest innovations are using tokens to store and trade assets like shares, bonds, cars, houses and commodities. These so-called “colored coins” attach additional information on the asset, generating “smart property” or the ability to record and transact these assets using “smart contracts”, which are enforced by complex algorithms, through distributed platforms without a centralized register, thereby increasing efficiency. In this environment, the current system where financial institutions record individuals’ accounts in a centralized fashion and the banks’ reserves are stored by the central bank (ie. The Federal Reserve or The Bank of England) would be replaced by the “internet of money” or the “internet of finance” – a fully decentralized and independent financial system. 

Source: read full article:
Blockchain Technology: The Ultimate Disruption in the Financial System 
...published by BBVA research

And, what about the Blockchain future?
“blockchain technology…is presented as a piece of innovation on a par with the introduction of limited liability for corporations, or private property rights, or the internet itself” (The Economist)