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Lapine blockchain introduction 10/04/2018

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Chuck Bair
Chuck Bair

Lapine's introduction to blockchain technology, written for a business leader audience and containing a few unconventional perspectives.

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©2018 Lapine Group. All rights reserved. This material contains confidential and proprietary information of the Lapine Group and may not be reproduced, distributed or disclosed, in whole or in part, without its express consent. Blockchains: an Introduction 10/4/2018 Chuck Bair, Partner
1 Blockchain Fundamentals For business managers, understanding the answer to four key questions can provide clarity on the potential value and impact of blockchain technology on their industry. What does a blockchain do? SPECIFIC CONCEPTUAL PLATFORM APPLICATIONS What are current examples of blockchains in use? What are expected future uses for blockchains? How does a blockchain work?
2 Blockchains Clear and Record Transactions What does a blockchain do? Although the technologies that make blockchain networks work is complex, the fundamental capability they deliver is relatively straightforward Valid transactions are added to digitally signed blocks that form an immutable record of all transactions ever processed. Transactions can include: • Exchanging digital currency • Changing records of ownership • Proving authenticity (similar to notarization) • Smart contract execution • Recording events in a secure manner • Any other exchange that requires authenticating identity and/or ownership What makes blockchains special is that they can do this without the need for a trusted 3rd party. A blockchain network can verify the digital identities of parties to the transaction and also verify the ownership of any resources involved.
3 Example: Eliminating Middlemen As an example of eliminating 3rd parties, here is the high-level process for a payment by check versus a similar blockchain payment. Payer writes check Recipient deposits at their bank Recipient bank makes pending credit Check sent to reserve bank or clearinghouse Payer bank deducts funds Credit finalized when transaction is fully cleared Payer submits payment request to blockchain network If valid, the request is added to a block of transactions waiting to be added to the blockchain Once the block is added to the blockchain, the payment is complete CheckPaymentBlockchainPayment
4 Current Blockchain Applications: Cryptocurrencies Cryptocurrencies were the original use case for blockchains. Although there is much enthusiasm and interest around other applications of the technology, few ideas are actually in use and none have yet come close to the transaction levels of major cryptos. Ethereum is newer and already handling more transactions – at it’s peak it topped 1.3mm per day Bitcoin launched in 2009 and now handles hundreds of thousands of transactions per day. Although there have been high-profile thefts and user errors, no major cryptocurrency blockchain has ever been directly hacked. Charts provided by Blockchain.com, Etherscan.io However, several popular cryptocurrency blockchains have encountered scaling issues. The communities that support them are working to address the problem.
5 Are Cryptocurrencies Really Money? The answer to this question depends greatly on how we define money. It is a provocative question, but it is important to remember that the terminology we use will have no effect on the current or future uses of cryptocurrencies. Definitions of Money Cryptocurrency Fit Medium of Exchange “whatever can be used to settle payments” Unit of Accounting “a way to set prices” Store of Value “preserve purchasing power for the future” Note that cryptocurrencies are not a complete financial or banking system on their own. They are the digital equivalent of physical cash. Legal Tender “medium of payment recognized by law” Intrinsic Value “worth something on its own” Scarce Resource “there is a limited amount available” Yes: Although use is relatively limited, cryptocurrencies have been used as a means of payment Maybe: Currently, where cryptocurrency is used for payment prices are usually tied to a national currency. There are exceptions, but thus far none have not demonstrated stable value. Maybe: Cryptocurrencies have proven to be robust in terms of securing balances, but their “exchange” values fluctuate wildly and their future stability and worth is unknown. No: No cryptocurrency is yet recognized as a medium of payment by the government of any major economy. (Although many are considering issuing their currencies on a blockchain in the future.) Maybe: As with all post-gold-standard currencies, the value of a cryptocurrency is mostly based on recognition and scarcity. But, some like Ether also provide access to blockchain services. Yes: The supply for most cryptocurrencies is tightly controlled by blockchain code, and protected from tampering by consensus requirements.
6 Expected Future Uses for Blockchains As of now, there are very few examples of blockchains in use beyond supporting cryptocurrencies. However, there is a high level of interest and exploratory activity across a range of functions and sectors. Privacy-centric Digital Identities Meet Know Your Customer and similar requirements without requiring participants to directly provide personal information. Digital Records of Ownership Manage ownership records for intangible assets like stock shares and of physical assets through tokenization Social Media & Internet of Things Large-scale sharing of personal data while leaving individuals in control of access Smart Contracts Contracts written as code that is automatically executed by the blockchain when conditions are met Decentralized Exchanges Allow participants to directly buy and sell digital assets without the need for an exchange or related services Auditing / Regulatory Compliance Provide a single source of records and enable real-time compliance and auditing capabilities Voting Highly secure and low-cost platform for voting, potentially for public sector elections and for corporate governance. Supply Chain Blockchains have the potential to facilitate financing and validate the authenticity of products
7 How Blockchains Work: Supporting Technologies Blockchain technology was invented to support the Bitcoin cryptocurrency. It combined a set of existing technologies and concepts to deliver a secure yet fully decentralized infrastructure. Open-source code Private Key Cryptography Hash Functions Peer-to-peer Networking Low-cost Data Storage Any participant can review the code for the blockchain to verify that it will behave as promised. The blockchain code runs on multiple computers called nodes which synchronize with each other meaning that if any node attempts to alter data the others will detect and reject the discrepancy. The easy availability of high-capacity storage enables each node to store the entire transaction history of the blockchain, allowing transactions and balances to be audited by any participant. Access to balances and other privileges on the blockchain are based on addresses, which are publicly visible, and private keys which prove that a particular participant owns each address. Agreements are processed in batches called blocks. Each block is ”signed” using a one-way hash function which ties it to all prior blocks to prevent tampering.
8 How Blockchains Work: Transaction Flow Users of blockchains submit cryptographically signed transaction requests which are verified by nodes on the blockchain network and then executed in sets called “blocks”. Create and sign a transaction request, e.g. “Send 23 LapineCoins to address xyz123” Verify that the signature is authentic Verify that the sender has an adequate balance Add the transaction request to the current block of transactions that are waiting to be signed Nodes compete to sign the block by solving a cryptographic puzzle. The winning node shares the signed block of transactions with the peer-to-peer network making the new transactions part of the blockchain history BlockchainParticipantBlockchainNodes Mining/Forging Node

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Lapine blockchain introduction 10/04/2018

  • 1. ©2018 Lapine Group. All rights reserved. This material contains confidential and proprietary information of the Lapine Group and may not be reproduced, distributed or disclosed, in whole or in part, without its express consent. Blockchains: an Introduction 10/4/2018 Chuck Bair, Partner
  • 2. 1 Blockchain Fundamentals For business managers, understanding the answer to four key questions can provide clarity on the potential value and impact of blockchain technology on their industry. What does a blockchain do? SPECIFIC CONCEPTUAL PLATFORM APPLICATIONS What are current examples of blockchains in use? What are expected future uses for blockchains? How does a blockchain work?
  • 3. 2 Blockchains Clear and Record Transactions What does a blockchain do? Although the technologies that make blockchain networks work is complex, the fundamental capability they deliver is relatively straightforward Valid transactions are added to digitally signed blocks that form an immutable record of all transactions ever processed. Transactions can include: • Exchanging digital currency • Changing records of ownership • Proving authenticity (similar to notarization) • Smart contract execution • Recording events in a secure manner • Any other exchange that requires authenticating identity and/or ownership What makes blockchains special is that they can do this without the need for a trusted 3rd party. A blockchain network can verify the digital identities of parties to the transaction and also verify the ownership of any resources involved.
  • 4. 3 Example: Eliminating Middlemen As an example of eliminating 3rd parties, here is the high-level process for a payment by check versus a similar blockchain payment. Payer writes check Recipient deposits at their bank Recipient bank makes pending credit Check sent to reserve bank or clearinghouse Payer bank deducts funds Credit finalized when transaction is fully cleared Payer submits payment request to blockchain network If valid, the request is added to a block of transactions waiting to be added to the blockchain Once the block is added to the blockchain, the payment is complete CheckPaymentBlockchainPayment
  • 5. 4 Current Blockchain Applications: Cryptocurrencies Cryptocurrencies were the original use case for blockchains. Although there is much enthusiasm and interest around other applications of the technology, few ideas are actually in use and none have yet come close to the transaction levels of major cryptos. Ethereum is newer and already handling more transactions – at it’s peak it topped 1.3mm per day Bitcoin launched in 2009 and now handles hundreds of thousands of transactions per day. Although there have been high-profile thefts and user errors, no major cryptocurrency blockchain has ever been directly hacked. Charts provided by Blockchain.com, Etherscan.io However, several popular cryptocurrency blockchains have encountered scaling issues. The communities that support them are working to address the problem.
  • 6. 5 Are Cryptocurrencies Really Money? The answer to this question depends greatly on how we define money. It is a provocative question, but it is important to remember that the terminology we use will have no effect on the current or future uses of cryptocurrencies. Definitions of Money Cryptocurrency Fit Medium of Exchange “whatever can be used to settle payments” Unit of Accounting “a way to set prices” Store of Value “preserve purchasing power for the future” Note that cryptocurrencies are not a complete financial or banking system on their own. They are the digital equivalent of physical cash. Legal Tender “medium of payment recognized by law” Intrinsic Value “worth something on its own” Scarce Resource “there is a limited amount available” Yes: Although use is relatively limited, cryptocurrencies have been used as a means of payment Maybe: Currently, where cryptocurrency is used for payment prices are usually tied to a national currency. There are exceptions, but thus far none have not demonstrated stable value. Maybe: Cryptocurrencies have proven to be robust in terms of securing balances, but their “exchange” values fluctuate wildly and their future stability and worth is unknown. No: No cryptocurrency is yet recognized as a medium of payment by the government of any major economy. (Although many are considering issuing their currencies on a blockchain in the future.) Maybe: As with all post-gold-standard currencies, the value of a cryptocurrency is mostly based on recognition and scarcity. But, some like Ether also provide access to blockchain services. Yes: The supply for most cryptocurrencies is tightly controlled by blockchain code, and protected from tampering by consensus requirements.
  • 7. 6 Expected Future Uses for Blockchains As of now, there are very few examples of blockchains in use beyond supporting cryptocurrencies. However, there is a high level of interest and exploratory activity across a range of functions and sectors. Privacy-centric Digital Identities Meet Know Your Customer and similar requirements without requiring participants to directly provide personal information. Digital Records of Ownership Manage ownership records for intangible assets like stock shares and of physical assets through tokenization Social Media & Internet of Things Large-scale sharing of personal data while leaving individuals in control of access Smart Contracts Contracts written as code that is automatically executed by the blockchain when conditions are met Decentralized Exchanges Allow participants to directly buy and sell digital assets without the need for an exchange or related services Auditing / Regulatory Compliance Provide a single source of records and enable real-time compliance and auditing capabilities Voting Highly secure and low-cost platform for voting, potentially for public sector elections and for corporate governance. Supply Chain Blockchains have the potential to facilitate financing and validate the authenticity of products
  • 8. 7 How Blockchains Work: Supporting Technologies Blockchain technology was invented to support the Bitcoin cryptocurrency. It combined a set of existing technologies and concepts to deliver a secure yet fully decentralized infrastructure. Open-source code Private Key Cryptography Hash Functions Peer-to-peer Networking Low-cost Data Storage Any participant can review the code for the blockchain to verify that it will behave as promised. The blockchain code runs on multiple computers called nodes which synchronize with each other meaning that if any node attempts to alter data the others will detect and reject the discrepancy. The easy availability of high-capacity storage enables each node to store the entire transaction history of the blockchain, allowing transactions and balances to be audited by any participant. Access to balances and other privileges on the blockchain are based on addresses, which are publicly visible, and private keys which prove that a particular participant owns each address. Agreements are processed in batches called blocks. Each block is ”signed” using a one-way hash function which ties it to all prior blocks to prevent tampering.
  • 9. 8 How Blockchains Work: Transaction Flow Users of blockchains submit cryptographically signed transaction requests which are verified by nodes on the blockchain network and then executed in sets called “blocks”. Create and sign a transaction request, e.g. “Send 23 LapineCoins to address xyz123” Verify that the signature is authentic Verify that the sender has an adequate balance Add the transaction request to the current block of transactions that are waiting to be signed Nodes compete to sign the block by solving a cryptographic puzzle. The winning node shares the signed block of transactions with the peer-to-peer network making the new transactions part of the blockchain history BlockchainParticipantBlockchainNodes Mining/Forging Node