Blockchain (1 of 3) – a digital frontier

Blockchain (1 of 3) – a digital frontier

As I immerse myself in the blockchain ecosystem I often feel like I’ve been drawn into a science fiction movie, Tron Legacy for instance:

“I tried to picture clusters of information as they moved through the computer. What did they look like?  Were the circuits like freeways?”

As you dip a toe into this world, you’re assaulted with foreign concepts like Bitcoin,cryptocurrency, consensus, distributed ledgers, smart contacts and trustless interactions. The amount of misinformation, subterfuge and conspiracy theories means it’s hard to separate fact from fiction. Real from unreal.

The real question you want to answer is: what is the promise of blockchain beyond that digital frontier? Or put differently:

“How can blockchain transform the finance industry, my career, my company and the future?”

To think beyond that frontier, is to understand a set of principles at the heart of blockchain with the potential to revolutionise the way we interact with companies, machines and each other: trust is inbuilt and doesn’t need to be verified. In time, we may look back at this as a great leap on the scale of the wheel, the steam engine and the internet.

If all this seems hyperbolic, read on and judge for yourself. At the very least, in this two part article, you will get an understanding of blockchain technology and its potential to transform the Australian wealth management industry.

The principles

In essence, the blockchain is a shared database that enables trustless interactions via consensus. Lets break down the key parts of this sentence:

  • shared: a network of computers provides the processing power for a blockchain. In this way, the network infrastructure is distributed amongst the participants in the network.
  • database: the database is a ledger of all transactions that have occurred on the blockchain. The accuracy of the database is verified by the participants of the network who contribute processing power to confirm that transactions have been validly executed.
  • trustless: participants in the blockchain are assigned a unique identifier (a private key) that they use to sign encrypted transactions. The private key protects the identity of the participant but enables the blockchain network to record the counterparties to any transaction. This is where things get really interesting.
  • consensus: in order to prevent fraudulent transactions and malicious behaviour by network participants, the blockchain provides incentives for network participants to verify transactions. If a majority of network participants agree that a transaction has been validly executed then the database record is updated irrevocably and cannot be altered or manipulated. Read about the Byzantine Generals Problem in the Deloitte article at the bottom to understand in more detail why this is so important.

Just as we trust the internet to connect us to information, blockchain technology has the potential to deliver trust within the information itself. These principles are the foundation for the blockchain ecosystem and are illustrated rather elegantly in the below:

0072a49e-80c4-11e5-8095-ed1a37d1e096 (1)

Source: Banks seek the key to blockchain – Financial Times 

The potential

To understand blockchain and its potential better, compare the formative stages of blockchain technology to the development of the internet. The internet now connects billions of people around the world who intuitively understand how to use it but have very little concept of the technology layers underpinning it (DNS, TCP/IP, HTTP etc).

This is because for most people, the technology doesn’t really matter. What matters is what the technology enables people to do. Think of blockchain as a building block that can enable:

  • computers and devices to exchange data regardless of the hardware provider (i.e. no more locked in ecosystems such as Apple vs Android);
  • individuals to interact with companies without exposing their identity or personal information (i.e. your credit card details don’t need to be transmitted to every vendor that you buy from);
  • alternative forms of value-exchange and market economies including reputation-based systems and funding of social initiatives by a community and its beneficiaries;
  • companies that will operate autonomously without human employees and contracts that execute automatically once the coded pre-conditions have been fulfilled; and, most famously
  • the issuance and use of digital currencies (e.g. Bitcoin) which represent the democratisation of what was once only the purview of nation states’ central banks.

These aren’t just theoretical applications, the blockchain is enabling new and different ways to exchange value right now, and not just in finance. A report by GrowthPraxis has identified 20 non-financial use cases for blockchain technology where start-up companies are already in operation:


Source: Blockchain Use Cases: Comprehensive Analysis & Startups Involved

If you’re still struggling to grasp how the blockchain enables new ways of transacting and interacting with one other, watch the video linked at the bottom from Into Bitcoin.

The frontier

The use cases for blockchain in the Australian wealth management industry are manifest and developing right now. Technology leaders and finance companies are seeing blockchain as a key part of the infrastructure that will deliver:

  • peer-to-cash transfers
  • distributed share and unit registers
  • frictionless settlements and asset transfers
  • virtual custody without custodians
  • pre-programmed financial instruments and corporate actions.

In part 2 of this article, I’ll be delving into these use cases in more detail whilst surveying the blockchain leaders and making some predictions about the future of blockchain in the Australian wealth management industry.

Read the other articles in this series:

Blockchain (part 2 of 3): the pillars of trust

“Blockchain (part 3 of 3): the autonomous revolution”

Watch (5 minute primer on the blockchain):

The real value of bitcoin and crypto currency technology – The blockchain explained” from Into Bitcoin

Further reading (the Byzantine Generals Problem):

Beyond bitcoin: Blockchain is coming to disrupt your industry” from Deloitte University Press

Blockchain (2 of 3) – pillars of trust

Blockchain (2 of 3) – pillars of trust

Originally, I imagined writing a single article describing blockchain’s disruptive potential.  As I delved deeper into this digital frontier, it became apparent that I needed three articles to do the topic justice:

  • the first (available here) to explore the principles of blockchain technology
  • a second (this article) to describe the enablers of the technology; and
  • a third and final (available here) to survey the current and future blockchain landscape in the Australian wealth management industry.

Previously, in part 1 of this series, we saw that the principles underpinning blockchain revolve around embedding trust within transfers of information and removing the need for trusted third party authorities. These principles have the potential to enable new exchanges of value and deliver efficiencies to many layers of the Australian wealth management industry.

Lets now translate this all into something tangible and answer the question that everyone starts to ask once they finally understand these concepts:

“How can I actually see or experience the blockchain with my own eyes?”

This is the question that stops most people and most companies from exploring blockchain more deeply than a cursory review of the concepts and technology. My empirical experience suggests there’s three pillars to the blockchain ecosystem that inform most people’s understanding of the technology:

  1. transacting on a public blockchain (the Bitcoin path)
  2. building or using a private blockchain (the Ripple path)
  3. coding a smart contract (the Ethereum path).

Lets examine each of these pillars individually.

The alpha – Bitcoin’s public blockchain

 The original and most famous expression of blockchain technology, Bitcoin is an open source peer-to-peer currency. Bitcoin operates on a public blockchain which means anyone is able to connect to the network, make transactions on the network, participate in the consensus process and read the database. Bitcoin has the largest number of network participants, the most distributed available computer processing power and therefore the lowest long-term probability of malicious participants causing systemic failures (e.g. forking and 51% attacks explained further in the notes below).

By connecting to the Bitcoin network (usually through a Bitcoin wallet provider) and making a Bitcoin transaction, an individual or company gets its first taste of blockchain technology in action. The majority of blockchain usage today comes from Bitcoin (or similar digital currency) transactions. The downside to the dominance of Bitcoin lies in the negative publicity that has been associated with it (examples such as Silk Road and Mt Gox are detailed in the notes below). However, it should be noted that the ability to execute illegal transactions with Bitcoin presents no greater inherent risk than the ability for physical currency to be laundered or used for illegal activities.

Interest in blockchain technology has grown rapidly despite the controversies associated with Bitcoin. However, banks and other large financial companies have been less enthused by the open source and egalitarian nature of a public blockchain.

The delta – Ripple’s private blockchain

The drawbacks of public blockchains have spurred the development of a different beast, the private blockchain where access to the underlying network is more tightly controlled and the ability to modify or even read the database is restricted to a smaller number of users. Private blockchains still confer benefits of decentralisation and authenticity but at the cost of re-introducing a network controller or intermediary that users must first authenticate with before they can participate in the consensus process.

Ripple represents the most widely used private blockchain and was developed as a competitor to the SWIFT protocol of international monetary transfer. Ripple harkens back to an ancient value transfer system (Hawala) which enabled money transfer to occur over large distances without the physical exchange of currency, see below:

Source: Ripple Explained: Medieval Banking with a Digital Twist

Ripple extends the Hawala principles further by allowing anything of value to be exchanged through a network of trusted agents transmitting electronic IOUs (in the form of a cryptocurrency called ripples) . The magic of Ripple lies in the algorithmic way it rapidly establishes trust between two counterparties that don’t know each other. Ripple does this using a combination of trusted agents, blockchain-based consensus methods between these agents and the use of ripples as a currency of last resort for the network.

Permissioned networks like Ripple appeal to banking institutions due to the additional level of control and security they can introduce. In many ways though, this tendency to introduce greater levels of control can be counter-productive to new blockchain banking entrants because it:

  • assumes that blockchain technology has matured to a point where an ideal or universal blockchain protocol has been agreed and can be adopted between banks and similar institutions
  • limits the ability for different intermediaries (e.g. non-banks) to participate and influence the development of the private blockchain network
  • inhibits the blockchain participants from introducing new customer-focused blockchain innovations beyond the primary purpose of the private blockchain network (which is typically money transfer).

The omega – Ethereum’s decentralised platform

Enter, Ethereum – the most comprehensive expression of blockchain technology to date. Ethereum is a decentralised platform that enables individuals or institutions to create and program their own blockchain-based decentralised applications (dApps).  Once programmed, these dApps can autonomously execute on the Ethereum network without the potential for manipulation or interference by malicious third parties.

Ethereum unlocks the potential of smart contracts on the blockchain (i.e. contracts written in computer code that are fulfilled without the active involvement of human counterparties). The smart contracts on Ethereum are fuelled by the network currency of choice (ether). Anyone on the Ethereum network that wants to create and run a smart contract or dApp will need to either earn ether (by participating in the consensus process) or buy it. This fabulous infographic describes this all more elegantly than I ever could.

To emphasise how important Ethereum is becoming to the blockchain ecosystem, consider the change in market value of Bitcoin (BTC), Ripple (XRP) and Ether (ETH) respectively. BTC has suffered sharp falls in early 2016, whilst ETH has climbed prodigiously to a market cap of $160m (trailing XRP for the number 2 cryptocurrency position by just $12m).

This rapidly developing importance stems from the fact that Ethereum provides the most comprehensive mechanism to innovate at every layer of the blockchain technology stack, as illustrated below:

Source: Ethereum Blog – On Silos

By examining these layers more closely, through Ethereum, we begin to understand more deeply how the evolution of blockchain parallels the development of the internet. Namely, that the potential applications of blockchain may be manifest but the technology won’t be meaningful until:

  • there is wide-scale adoption and acceptance of its underlying principles
  • there are new human-centered experiences that blockchain makes possible.

Pillars or principles?

This isn’t the case of which model will win. Each of these blockchain pillars (and their many variants) are underpinned by the same principle of trust through consensus. These pillars should be viewed through the same lense as the internet was viewed whilst it developed. The principles of the internet were only fully realised over time, as many disparate and private intranets connected with each other to form a truly global internet.

Taking this comparison further,

whilst the internet created a global network of connectivity, the blockchain will create a global network of trust.

In the third (and final) part of this article I’ll detail some human-centered experiences that blockchain will enable for Australian wealth consumers along with surveying the current and future landscape of blockchain technology in the Australian wealth management industry. In the meantime, please continue the conversation by commenting below.

Read the other articles in this series:

“Blockchain (part 1 of 3): a digital frontier”

“Blockchain (part 3 of 3): the autonomous revolution”

Technical reading (Forking and 51% attacks):

“What is Bitcoin fork?” from CEX.IO blog

“Bitcoin attacks in plain english” from Coding In My Sleep blog

Interesting articles (Silk Road and Mt Gox):

“The Rise and Fall of Silk Road” from Wired

“The Inside Story of Mt Gox: Bitcoin’s $460 million Disaster” from Wired

Blockchain (3 of 3) – the autonomous revolution

Blockchain (3 of 3) – the autonomous revolution

Three revolutions, simple but overwhelmingly strong, have governed our lives (to paraphrase Bertrand Russell):

  1. the Agricultural Revolution: where the cultivation of land and food powered the formation of cities and economies for the first time
  2. the Industrial Revolution: where machines transformed our productive capacity and drove community-wide improvements in the standard of living
  3. the Digital Revolution: where computers and the internet saw the creation of a whole new economy beyond the physical realm.

In this article, I make the case that we are at the dawn of a fourth revolution:

the Autonomous Revolution:where blockchain will enable autonomous technology to transform our concept of value and wealth

For a refresher on blockchain, please revisit my previous articles in this series:

  • part 1 (here) a primer on the fundamentals of blockchain technology
  • part 2 (here) an overview of the blockchain technology enablers.

The Australian blockchain landscape

Until recently, blockchain has been very much a fringe technology in the Australian financial services landscape. The common perception of it has been heavily influenced by the more colourful episodes in Bitcoin’s history.

In 2016, blockchain is going mainstream. If you want proof of this, you only needed to click on the Sydney Morning Herald (SMH) website last Saturday. Right there on the front page was this:

Source: Blockchain and how it will change everything

How has blockchain reached this tipping point? The answer lies in two cross-border blockchain-focused collectives that Australian financial services companies have increasingly tapped into:

  1. COALA: the Coalition of Automated Legal Applications, a regulatory-focused think-tank undertaking collaborative research into blockchain, smart contracts and decentralised applications.
  2. R3 CEV: a global blockchain project whose participants include some of the world’s largest banks, including Australian giants CBA, NAB and my own Macquarie.

The burgeoning visibility of blockchain in the Australian public consciousness is owed largely to the work and experimentation being driven out of these collectives and their participating organisations.

Two recent examples have received broad media coverage:

  1. 11 banks completed an experiment using R3’s private blockchain to simulate trading with each other. R3’s blockchain has been built using Ethereum (read more on Ethereum in part 2 of my series) and hosted on a virtual private network in Microsoft Azure’s Blockchain as a Service module.
  2. ASX is building a blockchain for Australian equities and has taken a 5% equity stake in Digital Asset Holdings (a blockchain start-up headed by former JP Morgan executive and inventor of the credit default swap, Blythe Masters). Blockchain is seen as a credible and potentially superior alternative to the ASX’s existing clearing and settlement system (CHESS).

To reinforce the increasing ubiquity of blockchain, regulators are paying close attention too. In relation to blockchain, Greg Medcraft (Chairman of ASIC and the IOSCO Blockchain Taskforce) has been quoted as saying: “institutions should harvest the opportunity and mitigate the risk.

What will be the water cooler moment for blockchain?

In December last year, I was lucky enough to attend COALA’s inaugural Australian blockchain workshop in Sydney. More than anything, I was struck by how many smart and intelligent people truly believed in the transformative potential of blockchain. Quotes such as “Blockchain is the biggest innovation since the internet” (Lawrence Lessig, Professor of Law at Harvard Law School) were thrown around casually as though this was a truth as self-evident as gravity or relativity.

Despite this, conversations about blockchain are still confined to a niche space of the financial services industry. You definitely won’t hear blockchain being discussed around the water coolers and coffee tables of the general population…yet.

Imagine, it’s 2017 and you’re browsing the latest articles on SMH again:

An evolutionary security lists on the ASX

Robocorp (RCP) listed today, representing the first evolutionary security to trade on the ASX’s newly built blockchain exchange. RCP is a decentralised autonomous organisation with fully transparent corporate milestones and an automated dividend payment policy. RCP’s digital prospectus states that:

  • shareholders receive $1 per share once RCP’s gross profit reaches $100m
  • a 3 for 1 share split will occur once RCP reaches a $500m market cap
  • all fully paid ordinary shares in RCP will be converted to hybrid notes if the corporate debt/equity ratio exceeds 75% for more than 2 quarters.


You scroll a little further on your iPad and see a flashy advertisement:

Smart Will: the autonomous digital will

Tired of scrawling all your dying wishes onto reams of paper? Tired of lawyers with million dollar smiles and 3 piece suits? Tired of your grandchildren squabbling amongst themselves? Then you need Smart Will.

Using secure, transparent and irrevocable blockchain technology, Smart Will allows you to create an autonomous digital will to distribute your assets in accordance with your wishes without the hassle and mess of big, complex legal documents. With Smart Will, you can choose to automatically distribute your assets when you reach a certain age; when your estate gets to a certain value; or upon your death. 

Your Smart Will executes automatically as the conditions are fulfilled and verified by the blockchain network. Picture this, once your Smart Will has confirmed your untimely demise with the Registry of Births, Deaths and Marriages it will arrange for your prized van Gogh portrait to be released from our secure vaults and transported to the NSW Art Gallery, in accordance with your wishes. Smart Will: easing your troubles, today. 

What is the key to unlocking the autonomous revolution?

As these futuristic examples illustrate, the blockchain will accelerate the autonomous revolution across a number of robotic channels. From artificial intelligence and self-driving cars to smart contracts and autonomous corporations, blockchain will provide the infrastructure to enable computers and internet-enabled devices to continuously interact with each other without the need for trust as we currently understand it.

However, the real key to unlocking blockchain’s potential and transforming our concept of wealth and value lies in a little known project called the Interledger Protocol: The idea is to create a single worldwide network that can not only unite all digital currencies, but all companies and individuals who use those currencies.”

Whilst the project is specifically focusing on payments, its power lies in the philosophy behind it – creating a global protocol layer that allows any blockchain network to communicate in the same language:

“The Internet can move almost any financial instrument as easily as it moves texts and emails. We just need consensus on how this should happen.”

Source: The Plan to Unite Bitcoin with All Other Online Currencies

In 2016, I predict blockchain will move from being a conversation about “what’s possible” to a conversation about “what’s next”. Financial services organisations (from the big banks to a dizzying array of fintech start-ups) will increasingly experiment with blockchain. For now though, blockchain’s water cooler moment will have to wait until greater consensus is reached. Bring on 2017 and the dawn of the autonomous revolution.

Please comment below to share your thoughts on blockchain’s potential to transform the Australian wealth management landscape in the coming years. What do you think will be the first blockchain water cooler moment and when will it happen? Is blockchain the key to unlocking the autonomous revolution?

Revisit part 1 and 2 of this series:

“Blockchain (part 1 of 3): a digital frontier of trust through consensus”

“Blockchain (part 2 of 3): the pillars of trust”