In this brief presentation (originally from an event that Harris Partners has run with Bank of America Merril Lynch in March 2016) we cover the basics of blockchain and bitcoin, incl. consensus in a blockchain, public key cryptography, public vs. private blockchains, permissionless vs. permissioned blockchains, advantages of blockchain, and some current case studies

1. Blockchain:
It’s much more than
Bitcoin

2. Agenda
 Eren Ercan (Harris Partners, Data Scientist)
- What is a Blockchain
- What is Bitcoin
- How does a Blockchain get built
- How does a Blockchain get verified
- Weaknesses of Blockchain technology
- Value
- Current applications
- Future applications
 John Biggs (Freemit, CEO; Techcrunch, East Coast Editor)
 Q&A, discussion
6:00-7:00
7:00-7:30
7:30-8:00

3. Blockchain defined
A blockchain is a type of
distributed database
specifically suited for
processing time-ordered data
 It is a vehicle for
transferring value and
holding records
 Does not involve a central
authority, computers that
store the blockchain are
decentralised and not
owned by a single entity
 Every block is connected
to the prior one, the ledger
contains the record of
every transaction

4. What is Bitcoin?
Bitcoin is a peer-to-peer
digital currency system
 Decentralised and pseudo-
anonymous transactions
 Publicly disclosed linked ledger of
transactions is stored in a
blockchain
 Reward driven system for
achieving consensus (mining)
based on proof-of-work for
helping secure the network
 Deflationary currency with an
eventual cap of 21M bitcoins

5. Features of Bitcoin
 Reward cut in half every four years, so the supply is limited
 Bitcoins can be irrevocably destroyedFinite
 Nearly infinitely divisible currency
 Currently supporting eight decimal places
 0.00000001btc is known as a “Satoshi”
Infinitely
divisible
 Nominal transaction fee’s paid to the network
 Cost to send $1 is the same as $1,000,000
 Consensus driven
Infinitely
divisible
 Cannot add coins arbitrarily
 Cannot double-spend
Counterfeit
resilient
 Once it’s gone, its gone
 No recourse and no one to return sent tokens
Non-
repudiatable

6. What is of Bitcoin worth?
AUD 9.4B

7. But what does the champ think?
"In a few years from now
bitcoin and other digital
currency are going to be a
normal part of our monetary
systems”

8. Establishing consensus in a blockchain, how do you decide
which transactions are valid?
How do you
get everyone
in the room to
agree on a
single time to
meet?
 Simple solution: have people shout a time
 First person to shout determines the time
 In distributed networks, there can be many
firsts
 Depends on where you are standing and how
long the signal takes to propagate
 As a result, the crowd won’t reach a single
consensus on the time

9. Establishing consensus in a blockchain, how do you decide
which transactions are valid?
 Another approach: give everyone in the room a
random number generator which determines
how many minutes they must wait before
shouting
 As long as the interval between each number is
longer than the time needed to propagate the
signal across the network (room), most of the time,
only one person will shout the time first
 This is a distributed way of arriving at a time, there
is no central decision maker
 However, there is a flaw: If one of the people in
the room is dishonest and wants to set the time,
then they can cheat an shout out the time earlier
than their random number generator tells them
How do you
get everyone
in the room to
agree on a
single time to
meet?

10. Establishing consensus in a blockchain, how do you decide
which transactions are valid?
 A better, but not perfect solution: give each person a
difficult task to perform, then find a string that a hash
functions converts to the time they want to meet
 This problem is difficult, and will take a different amount
of time for each person to solve, even if they start at the
same time
 The result is that the time to complete is more or less
random, and on average, only one person will shout the
answer first
 Not only that, but by providing the string that solves the
problem, they prove they have done the work and not
cheated
 It is also difficult to see how the process could be
subverted by a group of people at a large scale
How do you
get everyone
in the room to
agree on a
single time to
meet?

11. Public key cryptography
 Public key cryptography
- A method of encryption that prevents unintended
people from reading it
- A digital signature, verifying the identity of the sender
 There are many different methods and algorithms, some
of the most popular include RSA, AES

12. Public key cryptography: illustrative example
You write a message
and lock the box, then
you send it to me
I have a locked box, I
cannot open it, I put my
own lock on the box, and
send it back to you
You now have a box with two
locks on it; You remove your own
lock and send it to me again
Now I have a box, with your
message in it, and only my own
lock on it, I remove my own lock
from the box, and can read your
message
 We want to
send
messages
to each
other
without
anyone else
seeing the
message
 Think of the
message as
being inside
of a box
1
2
3
4

13. Blockchain is the core innovation behind the currency
 Key design element of blockchains – embedded
security
 This is one way they are differentiated from ordinary
scalable distributed databases such as MySQL and
MongoDB
 Permissionless public blockchains such as Bitcoin are
the most developed, but presents regulatory
compliance issues
 Many of these issues potentially addressed by private,
permissioned blockchains

14. Types of blockchains: public vs. private
 Blockchain in which direct access to
blockchain data and submitting transactions
is limited to a predefined list of entities
Public
Private
 Blockchain in which there are no restrictions
on reading blockchain data (which may still
be encrypted) submitting transactions for
inclusion into the

15. Types of blockchains: permissionless vs. permissioned
 Blockchain in which there are no restrictions on identities
of transaction processors (i.e. users that are eligible to
create blocks of transactions)
 Open, decentralised ledger which records the transfer of
value
 Every transaction is cryptographically chained to the
previous one
 Permanent, immutable, verifiable record of truth that
everyone can see
Permissionless
Permissioned
 More appealing to enterprise and financial services
 Transaction processing performed by a predefined list of
entities

16. Why does blockchain technology matter?
 Blockchains are an attractive replacement for existing
solutions utilised by financial institutions
 Global fintech investment tripled from US$4 billion in
2013 to US$12.2 billion in 2014
 According to a survey report by World Economic
Forum, first tax collected by a government using the
blockchain technology is expected to occur in 2023
 The same report suggests that 10% of global gross
domestic product will be stored in blockchains by 2027

17. What are advantages of blockchain?
 When investors currently buy and sell debt and equity
securities, or transact derivatives, they generally rely on
settlement and registration systems that sometimes take
several days
Speed and
efficiency
Disinter-
mediation
Reduced
transaction
costs
Improved market
access
 Blockchain automates trust
 It eliminates the need for trusted third-party intermediaries
 In the traditional market, buyers and sellers can’t automatically
trust one another
 With blockchain, the decentralised ledger offers this trust
 Eliminates the need to use settlement and registration
systems, and other intermediaries
 There is significant potential to reduce transaction costs for
investors and issuers
 Global markets have the potential to become even more easily
accessible to investors and issuers

18. Blockchain provides the efficiency of a central database and the
robustness of a clearing house for complex transactions, without the
costly middleware
Architecture
Settlement
process
Speed
Transaction
cost
Benefits
Limitations
Internal Transaction
Systems
Middleware/
Messaging
Clearing
Houses Blockchain
Centralised internal
database
Internal
Real-time
Internal IT
Speed, cost, relative
simplicity
Committing transactions
with third parties/across
networks
Secure inter-party
messaging
Independent (but
enabled by messaging)
Up to 3-5 days
External provider +
settlement costs
Secure transaction
between external,
standard data formats
Data errors, slow
transactions, flexibility
Third party agent-in-
possession
Via clearing house
Days (transaction
dependent)
Third-party service
Reduced settlement
risk/DVP
Complex and
cumbersome,
expensive
Distributed ledger with
cryptographic integrity
Consensus
Near real-time to
minutes
Similar to internal
databases
Enables third-party
transaction to be as
simple and efficient as
internal transactions
Tech maturity,
integration with existing
systems/workflows

19. Other applications: smart contracts
 Imagine a contract you sign, where all the key clauses
could automatically execute
 This is the idea behind smart contracts
 Imagine a scenario where blockchain technology is
helping keep records in sync between multiple parties,
(e.g. which shipping container which television is in)
 Smart contracts are the logic layer on top of that,
which allow for “if this, then do that” conditions to be
activated directly from the agreement

20. Other applications: smart contracts (cont.)
 Another example, what if the current buyer had agreed
to buy 100 televisions from the seller, as long as the
market price for televisions stayed above $1?
 A smart contract would record this clause, in the same
way a paper contract would
 The difference however, is if the price of a television
fell below $1 the smart contract could change the
owner of the television back to the seller

21. Everledger is an application that uses blockchain
as an immutable ledger for diamond certification
 In the past, different stages
of a diamonds value chain
have tended is be
disparate and paper based
- Producer
- Shipping
- Insurance
 All recorded using pieces
of paper, all of which can
be lost of forged at any
point
 Everledger consolidates
tracking across stages using
blockchain technology,
providing an immutable record
which allows individual jewels
to be indentified
 Insurance companies, law
enforcement agencies can
access specific history
 Currently live technology with
close to a million diamonds
being tracked on their
blockchain

22. R3 CEV has developed a reference architecture
based on blockchain technology for financial
industry
 Works in conjunction with a
consortium of 42 partner
banks around the world
including CBA and NAB
 Focused on identifying
potential applications and
implementation
 Key aspect of this work is
collaborating on protocols
to standardise and make
interoperable, common,
core processes for
distributed ledgers
 On January 20th R3
announced the launch of a
private distributed ledger that
connects 11 member banks
using Ethereum technology
and is hosted on a virtual
private nework in Microsoft
Azure’s Blockchain as a
Service

23. The ASX is building a blockchain for
Australian equities
 ASX working with Digital Asset to build a blockchain
that will run in parallel to the existing CHESS system,
which connects almost 120 parties for settlement and
clearing.
 This process currently takes three days
 ASX is looking at using distributed ledger technology
to reduce complexity and risk for brokers who currently
have to lodge margin with ASX daily to manage the
markets settlement risk
 Many other areas of research, especially reducing
back-office costs and the burden of AML/KYC
regulation

24. Freemit is a bitcoin based remittance system
 Charges for transferring
money across borders are
high and / or it takes a long
time
 The market is large:
remittances cost is ~$50B
annually, and hidden FX fees
in tourism are ~$40B
 Typical $500 transfer from the
US to Europe
- Western Union 9% (3-4
days) or 11% in minutes
- Wire transfer 11% (1-2
days)
- PayPal 5% (3-4 days)
- TransferWise 1% (5-6
days)
 Freemit uses Bitcoin as a store
of value to deliver:
- Instant transfers
- Published exchange rate
- Lower cost through
automation and process
transparency