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The Weekend Read: Feb 19

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by Todd McDonald

R3 in the News

Our CEO David Rutter sat down with Financial News for a very entertaining (and paywalled, sorry) interview that gives more than a few anecdotes on R3 and how we attempted to surf the blockchain hype cycle…all while trying to not get snared in the ‘reef of inflated expectations’ that hides just below the surface. But as Dave says, it is the hardest any of us have ever worked in our careers and yet the most fun any of us have ever had.

Credit Suisse Corda Hackathon in full flight
Credit Suisse Corda Hackathon in full flight

Over the last two weeks, we have talked about our recent work with Credit Suisse on their triple time zone Corda Hackathon, we were very pleased to announce our newest Regulatory Member: Hong Kong’s Securities and Futures Commission, and to read the lessons learned from Bank of Canada’s Carolyn Wilkins on the work dubbed “Project Jasper”, the collaboration w BOC, Payments Canada, R3 and R3 Member Banks to experiment w a DLT wholesale payments system. I wanted to highlight her take aways for the business case below:

We’ve also gained some other important insights that will be relevant to the business case for this type of DLT application:

1. Most cost savings appear unlikely to come in the core system itself, but rather more likely through reducing bank reconciliation efforts. The initial design is quite collateral intensive while the current system is already highly efficient.
2. There’s the potential for more savings if other applications could be built on top of a core cash payment distributed ledger system (eg financial asset clearing and settlement, trade finance).
3. In an actual production system, trade-offs will need to be resolved between how widely data and transactions are verified by members of the system, and how widely information is shared.
4. While DLT may aim to reduce concentration of risk, a substantial amount of centralization would still be required (eg permissioning of nodes and setting of operational standards) if applied to wholesale payments systems.

And a shout out to my colleague, and provider of Slack-Avatars-as-a-service, Gavin Thomas for his post on how he PM’ed the #### out of the Corda open source release: DON’T LOOK DOWN, A PROJECT MANAGER’S SHORT STORY OF OPEN-SOURCING

Industry News

CoinDesk has continued their reporting on the upcoming announcement of Enterprise Ethereum, with two articles this past week, as the group readies for an official announcement soon. We are glad to see that the enterprise blockchain space, both within Hyperledger and the new Enterprise Ethereum, has started to focus on the core requirements of scalability and confidentiality. To echo what our CEO said above, there will be no shortage of hard work involved as the new group “state channels” their inner cat herder.

In another CoinDesk article, Swift’s Global Payments Initiative (GPI) Program Director Wim Raymaekers describes how the project has aimed to improve the current Swift architecture and make payments more transparent by layering on new business rules and a GUI. Raymaekers provided both hope and shade to the blockchain crowd, saying:

[B]lockchain developers will be given access directly to the GPI as part of a hackathon. “We’re going to open those APIs for fintech and blockchain designers to come up with … new ideas,” Raymaekers said.

Overall, while Raymaekers is optimistic about the possibility that blockchain might improve some products, he ultimately sees the need for the tech as limited. He concluded: “We think blockchain today is not ready for wholesale cross-border payments. We are improving that with GPI, so it’s no longer a problem.”

Lots of Links

Here is a quick rundown of other stories from the last few weeks, which features such FoTWR celebs as The Blockchain Beard, lil’ Buterin, The Swanny, and my Snark Sensei

The Weekend Read: Oct 2

Apologies for the delay, as your author was busy wiping away Bubba Watson-sized tears of joy after watching ‘Murica make the Ryder Cup Great Again.

U.S. Fans cheer on the team at the Ryder Cup

U.S. Fans cheer on the team at the Ryder Cup

Sibo(ast)s

FoTWR’s Simon Taylor used to have a killer out of office message: “I love all your emails equally, and will respond to them as soon as I can.” So with that as inspiration, instead of having to pick, I will love each of the (many) Sibos press releases equally (even our own!) and list them below.

BackspaceChain (cont.)

Accenture’s “editable blockchain” mentioned last week prompted this response by Brian Kelly in CoinDesk:

In my view, for blockchain technology to move beyond “lab experiments”, it is critical that we embrace the features of immutability and use the tool for its intended purpose. A blockchain is a great way to keep a record that you don’t ever want changed – this is the heart and soul of a trustless system – it is a feature, not a flaw.

Interestingly, Accenture decided to respond in the comments section (!) to set (or edit, haha) the record straight:

So Accenture considers immutability very much an asset, and not a flaw. We simply believe that “absolute immutability” will become a challenge when it meets real-world compliance and risk management requirements. There needs to be a technical solution when things go wrong.

Blockchain Hype (cont.)

Vitalik Buterin gets another Vanity Fair-esque profile in this Fortune piece (which also has a bonus pic of our Mike Hearn rocking a v-neck sweater/jumper), in the wake of the second well attended DevCon in Shanghai. Pair this article with this cautionary posting from Nick Tomaino on Irrational Appcoin Exuberance:

Crypto enthusiasts (myself included) want to see these types of projects come to fruition; the visions are alluring. The projects haven’t delivered anything tangible yet though. These fundraises are getting done based on vision rather than any semblance of execution. This has been a problem on Kickstarter for years and I’m fearful we’re going to see a lot of the same in the ICO world.

IBM released a survey of over 200 global banks entitled Leading the Pack in Blockchain: Banking Trailblazers Set the Pace:

It found 15% of bank respondents intend to have fully implemented, full-scale commercial solutions in 2017. Behind them, another 65% indicated they plan to have blockchain solutions in production over the next three years.

Perhaps the report should be checked for proper usage, according to this handy, short guide by Ryan Shea on Blockchain Terminology:

The term “blockchain” is a noun, but it’s important to note the noun types that it can fit into.

Just like the term “rocket”, the term “blockchain” can be used as a concrete noun, but never as an abstract noun, like “genetic engineering”. One can say “I have a rocket”, “I see the rocket”, “there are rockets” and “we’re using rocket technology” but one cannot say “I am focused on rocket”.

Likewise, one can say “I have a blockchain”, “I see the blockchain”, “there are blockchains”, and “we’re using blockchain technology” but one cannot say “I am focused on blockchain”.

What is this Rocket you speak of? Can I get in on the pre-mine ahead of the ICO?? I want Rocket.

The Weekend Read: June 19

1. This Week in CBDC

I asked our Tim Grant for the R3 take on the Cad-coin news (see Canada experiments with digital dollar on blockchain), also know as Project Jasper:

“Tremendous progress this week with our Canadian partners as we saw the first public outing (see FTWSJBloomberg) of our ongoing collaboration with the Bank of Canada, Payments Canada (the artist formerly known as the Canadian Payments Association), BMO, CIBC, RBC, Scotia and TD. Our shared goal is to understand the mechanics, limits and possibilities of distributed ledger technology in an experimental wholesale payment system environment. Very much a proof of concept, we are looking to explore a number of key questions related to access, cost, security and resiliency, collateral management and transparency.”

Bank of England’s Mark Carney has a very well written speech that covers Fintech in general and calls out DLT specifically, full transcript here:

FinTech has the potential to affect monetary policy transmission, the safety and soundness of the firms we supervise, the resilience of the financial system, and the nature of shocks that it might face. It could also have profound implications for the Bank’s secondary objective, as supervisors, to facilitate effective competition between the firms we regulate. 

Mr. Fedcoin, JP Koning, is back with another post on the relative merits of central bank digital currency. The post is worth a read for its “so what” comparison with an unsexy system that just works: Fedwire.

2. DAO Danger

The big headline this week was the hack of TheDAO, the smart contract decentralized autonomous organization that recently raised over a billionty dollars in their initial crowdfunding raise. There have been lots of very good posts on this subject in the last few days; a non-exhaustive list includes posts by Vitalik, Emin Gun Sirer, Matt Levine, a few by Peter Vessenes, Ryan Shea.

The news is moving a bit too quickly for this post to stay current, but one non-tech lesson is clear: the massive capital raise and subsequent attention on TheDAO was too much, too soon. One could argue that the massive price run up in Q4 2013 was the worst thing that could have happened to Bitcoin at that point in the technology’s (and community’s) development/maturity cycle. It was like watching a young hoops prospect going pro too early.

For TheDAO, their rush to ‘market’ and the ridiculous sums that it garnered in the crowd funding did it no favors. Stephan Tual, Slock.it’s founder and one of TheDAO’s creators, had the audacity to claim that “the unthinkable happened” in his post-mortem blog post. Let that sink in. Unthinkable?! You created a $150m+ bounty in your v1 software that was running on an extremely complex and young platform. It would be unthinkable for it not to be attacked. Perhaps in retrospect the first crowd raise could have been a bit smaller than ~1/5th the float of Ethereum…

As a palate cleanser from all the above, please enjoy this mini-profile of Vitalik from earlier this week.

And Happy Fathers Day to all!

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 16

Candid shot from a recent R3 secret meeting

Candid shot from a recent R3 secret meeting

1. Breaking Up Is Hard To Do

Our lead story this week is a break-up note to Bitcoin by one of its early contributors. I am talking of course about Alex Waters, former Bitcoin Core Q/A.

The other Dear John letter, or ‘cri de coeur’ if you fancy the NY Times style guide, came from R3’s Mike Hearn in his personal Medium post The resolution of the Bitcoin experiment:

Why has Bitcoin failed? It has failed because the community has failed. What was meant to be a new, decentralised form of money that lacked “systemically important institutions” and “too big to fail” has become something even worse: a system completely controlled by just a handful of people. Worse still, the network is on the brink of technical collapse. The mechanisms that should have prevented this outcome have broken down, and as a result there’s no longer much reason to think Bitcoin can actually be better than the existing financial system…

There are many talented and energetic people working in the Bitcoin space, and in the past five years I’ve had the pleasure of getting to know many of them. Their entrepreneurial spirit and alternative perspectives on money, economics and politics were fascinating to experience, and despite how it’s all gone down I don’t regret my time with the project. I woke up this morning to find people wishing me well in the uncensored forum and asking me to stay, but I’m afraid I’ve moved on to other things. To those people I say: good luck, stay strong, and I wish you the best.

The resulting kerfuffle has led to a few quite detailed (and somewhat enjoyable) conspiracy theories on The Internets, mainly saying that R3 instructed Mike as part of some coordinated ‘attack’ on Bitcoin. If only we had such control over a brilliant mind like Mike. He is a programmer after all… 

The New York Times expanded on the above piece with a lengthy article that features Mike pictured mid-coding while ensconced in a chenille blanket. The article also attempts to fill in the other side of the debate:

In the late fall, Mr. Maxwell and his supporters tried to engineer a compromise. They organized meetings in Montreal and Hong Kong where the leading developers met to discuss alternative ways to scale the Bitcoin system. Mr. Andresen went to the first of these, where Mr. Maxwell’s allies announced their own, more gradual plan for increasing the network’s capacity. But Mr. Andresen and Mr. Hearn both felt that the recommendations didn’t go far enough. Mr. Andresen, who is not normally given to sniping, began to harden his position.

“It’s likely that the current developers will get fired, and some other team will replace them because they are not listening to their customers,” he said in an interview last week.

Mr. Maxwell was equally dismissive of Mr. Hearn’s camp — saying that they had politicized what should have been a technical decision. Then he suddenly dropped out of the conversation in mid-December. He has not explained his absence, but colleagues say he was tired of the rancor.

How can the whole thing not make you tired, no matter what ‘side’ you are on? And as I have mentioned before, this concept of one side or one approach ‘winning’ over another, or that there even is a contest, baffles me. Success for R3 (or any of the handful of companies in this space) does not need to come at the expense of Bitcoin. It is more likely that traction for either camp would be a massive positive for the other. Put simply: I personally own (a small amount) of bitcoin AND also think that Bitcoin holds little merit for large, regulated financial institutions as it is currently constructed. In the words of William Goldman, “nobody knows anything” but it doesn’t stop us all from giving it a go.

2. The Signal from the Noise

As an antidote to the above drama, I present a murderer’s row of posts from smart people.

First up, Vitalik Buterin’s in depth review on the promise and perils of privacy on a blockchain:

Unlike with scalability, the solutions for privacy are in some cases easier to implement (though in other cases much much harder), many of them compatible with currently existing blockchains, but they are also much less satisfying. It’s much harder to create a “holy grail” technology which allows users to do absolutely everything that they can do right now on a blockchain, but with privacy; instead, developers will in many cases be forced to contend with partial solutions, heuristics and mechanisms that are designed to bring privacy to specific classes of applications.

A companion piece to the above is the latest from Gideon Greenspan, which lays out three use cases for blockchains “given the limitations posed by radical transparency” while also closing on a cautionary note:

So even when the [transparency] technology problem is solved, I think it could still take a long time to overcome the emotional barrier. In the meantime, where does this leave us? With the stark assumption that every participant in a blockchain sees everything else that is going on. While this assumption might restrict the sphere of feasible applications, it will also prevent time being wasted on projects that will never be moved to production. And as others have said before me, 2016 is the year to transition from thinking and talking about blockchains, into building some real applications.

Next up, Alex Batlin gives a great review of his “Blockchain Lenses” approach in filtering out the “put a blockchain on it” method of use case selection. The article is worth a read, but the visual alone is massively helpful.

Couple the above with The Brookings Institute explainer How blockchain could change the financial system and consider your Sunday lessons complete.

Finally, a post by Tony Arcieri of Stripe entitled On the dangers of a blockchain monoculture. The post is fairly dense but has some excellent passages that help cut thru the cloud of hype around the technology:

The only real question is: what can’t you put in the blockchain?

Well, the answer is: not much. [snip] To go beyond that, we need a different protocol. We can’t just throw “blockchain technology” at the problem. The relevant algorithms do not exist in the Bitcoin codebase. We need a different protocol.

[snip] Believe me that I would like to see the craziest fantasies of what people hope to accomplish with decentralized systems realized. But the blockchain is probably not the technology that is going to do it.

In Blockchainiac terms, I don’t want there to be “on-chain” and “off-chain”. I want “sidechains all the way down”. I want systems that are built from the ground up to support that model. Bitcoin doesn’t scale. Decentralize the blockchain!

[snip] I worry the media are giving undue attention to questionable ideas simply because there’s a lot of “buzz around blockchain”. I worry that the hype surrounding the “blockchain” might lead those who award research budgets to favor blockchain-based solutions over those that are blockchain-free. I worry financial institutions might pick a “blockchain”-based solution where a blockchain-free solution might be by all quantitative metrics better in every regard, simply because they’ve heard what a big deal “blockchain” is.

But perhaps my concerns are overblown, and this is just a giant semantic argument. Maybe “blockchain technology” is just becoming a meaningless all-encompassing umbrella term for decentralized protocols. Can it do ledgers? Sure! Data? Why not? Computation? Smart contracts baby!

Perhaps “post-blockchain” protocols will start branding themselves as “blockchain technology” just to stay relevant. “Cyber” is starting to grow on me, so why not “blockchain” too? Who needs a metaverse; I’ll see you on the blockchain.