The Weekend Read: May 15

1. “The DAO” Jonesing

[High five self for NY Post style headline pun]. The DAO public crowdsale that isn’s an equity raise continues to gobble up investors and Ether (already over 13% of the float!). CoinDesk did a great job this week of summarizing both the goals of The DAO and the inscrutable semi-organizational structure behind it. I also asked The Swanny to give me two paragraphs on the topic, which in his world means a whole blog post, which you can read in full here.

Overall this is a fascinating experiment, as a few have put it, but one that is being done WITH MONEY, particularly OPM. Is this a result of folks not knowing or more likely not caring about the time value of money, since real rates are so low? What would be an investor’s time horizon to realize returns, as the VC rule of thumb is ~7 year time frame? When you consider that Angellist put roughly $70m to work in public syndicates in 2015, The DAO would need quite a few years to put its money to work, and that would only start the clock on the investment…

Isn’t this like “Ether squared” from a risk perspective? Since you need to believe that Ether will be stable to higher AND that DAO tokens will be stable to higher AND that using a global censorship resistant computer to allocate investment capital will outpace the returns of other investments (opportunity costs). It most definitely could work and give great returns to those who have invested, but with a VERY unclear risk profile. There will be lots of good and bad (and definitely worthwhile) lessons that come out of this experiment, I am just happy that I don’t have to fund it.

2. A Warm Regulatory Embrace

CFTC Commissioner Giancarlo preceded our panel at Markit’s annual customer conference to give another pro-innovation speech Blockchain: A Regulatory Use Case

This speech reiterated the commissioner’s belief that “we need DLT to succeed” and highlights five steps for a “do no harm” approach. It also has a nice shout out to Corda. The speech also discussed “Regulatory Sandboxes” such as the UK FCA. Speaking of the FCA, they announced a “Fintech Bridge” with the Monetary Authority of Singapore (MAS) earlier this week.

3. Even More Links

Vitalik Buterin’s recent post on settlement finality is a volley in a gentleman’s debate with our Tim Swanson. The Swanny’s article argued that public blockchains by design cannot definitively guarantee settlement finality. Vitalik breaks the argument down into three sections: 1. issues from probablistic finality (such as forks) 2. the interestingly named “law maximalist” position and 3. the economic argument (if value traded >> price of tokens, then attack). Dense stuff but very readable, as is usually the case with Vitlalik’s writing.

CoinDesk’s always interesting State of Blockchain: Q1

The SWIFT Institute (not to be confused with SWIFT itself) released a whitepaper entitled The Impact and Potential of Blockchain on the Securities Transaction Lifecycle. The authors interviewed 75 organizations in post-trade and tech, taking a similar cautious tone and “cold water” approach to other recent papers via market intermediaries.

Nice quick interview with Massimo Morini on his recent paper and the challenges/opportunities facing banks.

IB times profile of David Rutter.

Gideon Greenspan discusses four blockchain use cases: lightweight financial systems, provenance tracking, inter-organizational recordkeeping, multiparty aggregation.

And finally, Fran Strajnar has an interesting post on protocols and standards, a topic that we discuss quite a bit at R3 HQ:

We believe it is too early to tell exactly how things will pan out, but can reflect back to the Internet days and take away the following insights:

Standards/Protocols are inevitable and required.

Networks ALWAYS end up demanding inter-operability.

It took 15 years to shake out the ideas and protocols that solidify the Internet we use today. It will take at least 5-7 years for Distributed Ledger Technology to be implemented commercially on a global scale by enterprise – i.e., using some form of blockchain to replace the SWIFT network, or back-end infrastructure for inter-bank or even inter-branch settlements.

We expect to see proposals rise and fall and flip-flop as solutions and standards evolve, so don’t count on anything proposed today becoming the de facto operating standard. Whatever happens, we know one thing for sure: Millions will be spent, burned, made, and the world will only remember the victors. 

The Weekend Read: Jan 30

Early prototype from Satoshi

Early prototype from Satoshi

1. RegTech (cont.)

It feels odd to say that regtech is a la mode, but much of the talk at our recent European Members Conference revolved around the (mostly positive) involvement of regulators in distributed ledger innovation. A recent speech by Minouche Shafik, Deputy Governor at Bank of England, highlights the potential role for distributed ledger tech within the evolution of the RTGS payments network:

The emergence of various forms of Distributed Ledger Technology (DLT) poses much more profound challenges because it enables verification of payments to be decentralised, removing the need for a trusted third party. It may reshape the mechanisms for making secured payments: instead of settlement occurring across the books of a single central authority (such as a central bank, clearing house or custodian), strong cryptographic and verification algorithms allow everyone in a DLT network to have a copy of the ledger, and give distributed authority for managing and updating that ledger to a much wider group of agents.

2. Blockchain Longreads

DTCC released a much-discussed paper on the opportunities, risk and hype around distributed ledgers. The report suggests leaving alone the “not-broken” segments of the market to instead focus on “white space” application areas such as master data management. The report is worth a read in full. I also very much appreciate their endorsement of the R3 model:

This is the opportunity to create an industry-wide initiative to develop the right architecture, prioritize the infrastructure building blocks and support focused and collaborative experiments to help the technology mature.

CoinDesk released their annual State of Bitcoin (now with Blockchain!) report. Among the many icons and charts, these two are the most sobering:

Deloitte adds to the consultant thinkpiece library with a longish report on blockchain opportunities. Much of it treads the same ground of other reports, but its addendum on a KYC use case for banking is interesting, both as a review of the cadre of startups now attacking the space and for the stat that only 17% of the SWIFT banking universe have signed up to their KYC shared service. In the end, identity may turn out to be the killer app of blockchain. Many hard problems in distributed identity remain (the DTCC report called out a few) yet they are problems worth tackling.

Early prototype from the R3 working groups

Early prototype from the R3 working groups

Finally, Forbes’ Laura Shin files a thorough overview of companies (including R3) in the bitcoin+blockchain space, across five areas: Bitcoin, Fintech, Enterprise, Consortia, Infrastructure. Interesting perspective, and due to the Barry Silbert “Homer-mobile” shout out for R3, it allows me the chance for yet another Simpsons pic. Have a great w/e.


The Weekend Read: Sep 13

1. Permissioned validators and permissionless innovation

IB Times featured an interview with Smart Contract godfather (and oft-cited Satoshi candidate) Nick Szabo entitled If banks want benefits of blockchains they must go permissionless:

Szabo reiterated the point: to remove vulnerability banks also have to remove individual human control and the individuals in charge or with root access. Banks naturally hate that loss to their power. But they don’t have any choice if they want to gain the benefits of having an army of independent computers that rigorously, constantly and securely check each others’ work, he said.

Szabo’s argument is that any level of permissioning makes a system more vulnerable and less secure, and that it introduces a slippery slope back to the current, sub-optimal infrastructure. Tim Swanson and others have argued the converse of this, with the argument that regulated financial entities both want and need some trust and permissioning in order to properly conduct their business.

One key distinction needs to be made: it is possible to have ‘permissionless innovation’ with a system or network that has permissioned validators. From a tech development perspective, the focus should be on the openness of the code, the vibrancy of the developer community, the transparency of the network’s standards. Those are the biggest determinants of the success or failure of the innovation. Outside of a rhetorical confusion due to the similar wording, the status of validators on a network should not have any impact at all in determining the likelihood of permissionless innovation! The ‘permissioned validator’ crowd would be best served to rebrand. Ideas welcome.

2. Conference wraps


Coindesk’s Consensus conference this past week hit all the usual notes with a very packed ‘put a Blockchain on it’ agenda. I had very high hopes for the Future of Innovation on the Blockchain panel (pic above), yet the esteemed panelists only had 30 minutes to chat. It proved to be too little time for any substantive debate or outrageous comments. You can find a review of the sessions here and here.

Many of the attendees of the Consensus conference headed straight for Montreal and the Scaling Bitcoin summit, which is still ongoing. In typical hacker fashion, the full transcripts can be found online.

3. Bitcoin Winter Blockchain Spring

As we discussed previously, the end of the summer doldrums should usher in a few interesting data points on the blockchain funding climate. And this week we got two. First, Bitcoin remittance app (or Mugging-as-a-service if you are snarky) Abra announced a $12m Series A round. That news was somewhat overshadowed by announcing a $30m funding round made up of strategics such as Nasdaq, Visa and Capital One. The company was profiled in a longer Forbes piece as well:

Says Nasdaq Chief Executive Bob Greifeld, “[Blockchain] is the biggest opportunity set we can think of over the next decade or so.” [snip] “We know if we find a good way to deliver value to the customers in the industry, the numbers will follow. … It’s really about, ‘Let’s find the proper use for it–where we can change the world–and then the investment returns will follow.’ ”

The Weekend Read: July 24

Count me among the ‘many’:

1. Gimme a Blockchain…hold the Bitcoin

The “you can’t have blockchain without bitcoin” debate continues…Fred Wilson of USV kicks things off in this short post, in response to a room full of VCs sitting on their hands when asked if they would invest in a Bitcoin startup: “Maybe the distinction is bitcoin vs blockchain. I understand that. But bitcoin and blockchain are joined at the hip. You don’t get one without the other. So I’m still scratching my head.”

Ryan Shea of Onename picks up this thread with another short read, making the valid distinction between a blockchain that is permissioned vs permissionless.

Gideon Greenspan wades in with the confident-sounding title Ending the bitcoin vs blockchain debate:

In bitcoin anonymous miners must perform expensive useless computations, and are incentivized to do so by the block rewards (and transaction fees) denominated in the blockchain’s native currency or token. Do we have any other options?

It turns out that we do. We can have a closed list of permitted miners, who identify themselves by signing the blocks that they create. Rules about distributed consensus (or “mining diversity” as we call it in MultiChain) provide a different way of preventing minority control of the blockchain, so long as you can accept that miners are pre-approved. Of course for bitcoin this is not acceptable, because part of the point is to permit anonymous mining, so there is no way to censor transactions centrally. But if, say, we had a highly regulated financial system, in which bitcoin’s model was inapplicable, perhaps we could accept a pre-approved list of miners after all? If we had enough of them, and spread them well enough between institutions, and had legal contracts with all of them, are they really likely to gang up and undermine the network they depend on, when doing so will land them in jail?

We close with the latest post by Richard Brown, riding to the rescue once again to save this debate, with his adapted speech Bitcoin and Blockchain: Two Revolutions for the Price of One?:

So… the blockchain revolution is so fascinating because it could actually be TWO completely different revolutions… both profound in their implications:

  • Censorship-resistant digital cash providing a new platform for open, permissionless innovation driven from the margins
  • And industry-level systems of record driving efficiencies for incumbents.

Neither of these are “sure things”… they are both high risk speculative bets… but they’re also very DIFFERENT bets…

2. Blockchain on Wall St. (cont.)

Greenwich Associates releases their survey Bitcoin, the Blockchain and Their Impact on Institutional Capital Markets, highlighted in this Bloomberg article:

Greenwich Associates found 94 percent of respondents say blockchain — the ledger that drives bitcoin — could be used in finance, according to a report to be released Wednesday. The software is touted as a way to speed up and simplify how trades of everything from stocks to loans and derivatives are processed.

“Revolution in the making — that’s what this feels like,” Kevin McPartland, a co-author of the study with Dan Connell, said in a phone interview. “There’s a real opportunity for some change here.”


Barclays Blockchain (and Beard Groomer) Subject Matter Expert Simon Taylor has a nice, wide ranging piece on the potential of distributed ledgers:

The key gap is education, we often conflate “The Blockchain” and “A Blockchain”. This terminology is especially tricky because the technology is so new, terms are emerging daily to try and understand and make sense of it.

This is a nascent technology and while the opportunities are exciting, certain obstacles will need to be overcome before some of these use cases can come into being. It’s also clear that the security and controls associated with blockchain technology will need development before many of these applications can become mainstream.

That said, the opportunities are so significant that it’s a question of when, not if, these applications will emerge. In order to smooth the way for greater development and adoption, financial service providers and start-ups will need to collaborate closely.

Level39’s Eric Van der Kleij backs up the assertion that banks are keenly interested in this interview: “The real powerful work being done in fintech is blockchain. I can tell you now with certainty that every major western bank we’ve spoken to, and some eastern ones, are looking at blockchain technology.” Level 39 resident and UBS Crypto 2.0 Lead Alex Batlin gives another excellent rundown of the inherent potential:

Bank’s operating efficiency is also likely to improve as you exercise the previously mentioned inversion of control – technology debt is replaced by common rails. If you couple that with a reduced need for intermediaries due to the smart and distributed nature of blockchain and thus cut market participation costs, you can improve margins and reduce customer fees at the same time.

As a bonus you reduce operational risk, as you no longer have a single point of attack and failure in a peer-to-peer network i.e. safer and more reliable systems that are always there when you need them.

Last but no least, as regulators can now see in near real-time all transactions, they can analyse system risk in a way that has never been possible before. They can also validate that asset’s business logic supports regulation as intended.

3. Bitcoin Bull and Bear Corner

r/bitcoin Redditors are cyber-high-fiving over this report from IB Times that BNP is considering adding Bitcoin to one of its currency funds. Meanwhile, the Winklevii have evidently filed for their (still to be opened) Gemini exchange to receive a NY trust charter. Meanwhile, the Justice Department has arrested the founders of Bitcoin exchange, accusing the two gentlemen with “[facilitating] transactions for hackers who would prevent innocent computer users from accessing their devices unless they paid a ransom.” Sounds like a fine business model.

4. And in case you missed it

Here is the R3 feature story from CoinDesk. Could have done with another choice of words than ‘plot’…makes us sound like employees!