Blockchain Revolution

Blockchain Revolution
Don Tapscott and Alex Tapscott
Penguin Random House. 2016

The following is not so much of a book review – more like a Cliff-notes, since I am essentially repeating what I learned from the book. This is the best blockchain book of all so far. Highly recommended. These are just some of the main points

Why should it take days or weeks for transactions to settle? As much as technology has progressed we are still paper based. Erik Voorhees of ShapeShift tells us we suffer from the productivity paradox – layering new technology over existing infrastructure.

First 4 decades of the Internet brought e-mail, the World Wide Web, dot-cons, social media, the mobile Web, big data, cloud computing. Along comes Blockchain - distributed, public, encrypted. The ledger itself is the foundation of trust.

And now we have the Internet of Things, (IoT). We register our devices, assign them an identity and coordinate payment among them without using, multiple fiat currencies. You can define new business cases using existing network infrastructure without having to bootstrap a new blockchain.

The bitcoin blockchain takes 10 minutes to clear and settle. Every 10 minutes all the transactions are verified, cleared, and stored in a block which is linked to the preceding block creating a chain. It's a Poisson process. While that is certainly better than days by banks, it is much too slow for the IoT. Latency of Litecoin is 2.5 minutes. Ripple and Ethereum are engineered to take seconds.

Blockchain can result in an economy of peers with institutions that are truly distributed, inclusive, and empowering and legitimate. Or it could be constrained or crushed. Worse, it could become a tool powerful institutions use to entrench their wealth, or if hacked or controlled by governments become a platform for a new surveillance society. With cryptology, autonomous agents, and artificial intelligence involved it could get out of control.

An increase in the money supply debases the currency.

Blockchain lowers the cost of transmitting funds:

• no bank account is required
• no proof of citizenship
• no birth certificate
• no home address
• no stable local currency

Seven design principals of the Blockchain economy:

• Networked integrity. Trust is intrinsic. Integrity is encoded in every step and distributed, not vested in any single member.
  
• Distributed Power. Peer-too-peer, no single point of control
  
• Value as incentive. The system aligns the incentives of all the stakeholders
  
• Security. Must use cryptography, no single point of failure. 
  
• Privacy. There's is no identity requirement in the network layer. The blockchain doesn't need to know who anybody is.
  
• Rights preserved. Ownership rights are transparent and enforceable.
  
• Inclusion. It works for everyone.
  
  

How cryptography provides security. Digital currency is not stored in a file, it's represented by transactions indicated by a cryptographic hash. uses hold the crypto keys to their own money and transact directly with one another.

Credit card type of transactions are very identity centric allowing personal information to be stolen every time there is a data breech.. Check out startup Personal Black Box Co, LTD. Deploys PKI on the back end so that only consumers have access to their data through private keys. Like the Internet where a TCP/IP address is not identified to a public ID.

Also, governments can subpoena ISPs and exchanges for information related to you, what devices you use and what you do, but they cannot subpoena the blockchain.

Blockchain's proof of work is also a time stamp for transactions so that only the first spend of a coin would clear and settle.

A smart contract provides a means of assigning usage rights to another party. The code of the contract would include all the terms, such as duration and termination.

Concerns:

Bitcoin is meant to circulate and will reach its max limit by 2140. As number of users go up price goes up like gold. But much of bitcoin is lost or held. Our current rules-based monetary policy is intended to prevent inflation triggered by arbitrary and discretionary decisions. Low or no inflation motivates users to hold bitcoin rather than spend it. A number of users are now holding bitcoin as an investment hoping it will go up in price.

Problems to overcome:

• infrastructure is unevenly distributed
• security not ready for mainstream usage, (volume)
• inaccessible to average user
• finite quantity
• high latency
• behavioral change (rely on digital security and storage)
• societal change (money is social)
• lack of legal recourse (irrevocable transaction and unavoidable smart contracts)

Hashing, the process of running pending transactions through the secure hash algorithm 256 (SHA-256) to validate them and solve a block uses a lot of electricity, a lot of computing power, all with a large carbon footprint. New Republic in 2015 advised that processing and protecting the more than $3 billion worth of bitcoin in existence required more than $100 million in electricity per year. But, says Erik Voorhes, all forms of money have a relationship to energy.


Alternative consensus algorithms:

• Ethereum – proof of state while retaining decentralization. 2nd largest and fastest growing public blockchain.
• Ripple – uses a federated model, a small controlled group like SWIFT. Aimed at wholesale banking.
• Bram Cohen founder of Tor – proof of disk where owners of disk storage space defines the economic set of users.

Proof of work = new area of computer science.

Satoshi Nakamoto, “You will not find a solution to political problems in cryptography”

What will legislators, regulators, and adjudicators around the world make of blockchain technology?

The bitcoin blockchain was designed for moving Bitcoins, not for handling other financial assets. But the technology is open source, inviting experimentation. Innovators are developing separate blockchains known as altcoins. Others are looking to build “spin off” or sidechains that can be “colored” to represent any asset or liability, physical or digital.

Two-way peg to a cryptographer means transferring assets off the blockchain and back again without a 3rd party exchange.

The so-called “Golden Eight” of financial services:

• authenticating identity and value
• moving value
• storing value
• lending value
• exchanging value
• funding & investing
• insuring value & managing risk
• accounting for value

What Wall St. really wants is to be able to quickly, cheaply, and securely process any trade from beginning to end.
The life cycle;

• execution
• netting of multiple trades against each other
• reconciliation

With distributed ledger, traceability, searchability, automatic settlement, and immutable timestamp allows regulators or managers to see what’s happening and to set alerts so they don’t miss anything.

Blockchain is entirely open and permissionless. Permissioned or private blockchains require users to have certain credentials.


New Frameworks for Accounting and Corporate Governance are coming.

Problems with modern accounting:

• Relies on managers to swear their books are in order. Could lead to cronyism, corruption, and false reporting
• Human error
• New rules like Sarabanes-Oxley growing complicated
• Traditional accounting method cannot reconcile new business models, e.g., most audit software allows for two decimal places – useless for micro transactions.