Blockchain and cryptocurrencies – from hype to reality to disruption

well good morning let me start out with we have 30 minutes and I probably need to explain to you one of the most disruptive and probably hyped concepts we have seen in in any industry for quite a bit of time very quick show of hands before we get into into it um who has participated in an IC o—- an initial coin offering Wow one person – okay good who has who has or holds crypto assets Bitcoin that kind of stuff all right and who thinks he actually understands the blockchain okay right so what I'm going to do is fantastic you know fantastic so what we're going to do is I want to tell you a little bit about what the blockchain actually is we'll talk a bit about crypto currencies I'll touch lightly on icos on initial coin offerings and we'll do this in three ways first I'm going to give you the 101 so my aim is for you to walk out of here to have a decent understanding of what this whole thing is about and then the second part is we are going to debunk a whole bunch of the bunch of the myth and the hype around this and then I'm showing you why it still is probably one of the more disruptive technologies we've seen in our in our lifetime and before we get there I want to take you back to you the 31st of October 2008 who knows which monumental life-changing event happened on this day any ideas really come on is this a talk about blockchain you need to know some of it so all right so let me tell you we bought this horse is my wife is my horse probably more important is this literally on this day probably more importantly a person called Satoshi Nakamoto published a white paper called Bitcoin a peer-to-peer electronic cash system this white paper highly recommend is only nine pages long describes a decentralized cryptocurrency based on a new protocol a new software called the blockchain and here's the first interesting insight into this set person Satoshi Nakamoto this is Satoshi Nakamoto @la resident by the name Satoshi Nakamoto who by the way is not the inventor of blockchain because we don't know who invented the blockchain or in Bitcoin there's a Australian entrepreneur who claimed he is the inventor of the blockchain by the way if you ever see someone coming up out of like a mysterious new technology being founded by a mysterious new entity called Satoshi Nakamoto and someone comes up and says I am that person is most likely a fraud and then some people say this was actually invented by the Russians to destabilize the world economy so we see and here's an interesting insight in this which is one of the most disruptive technologies comes from a person or a group of people we don't know like nobody knows who is actually this person or group of people a lot of people say it's actually a group of people but we're getting ahead of ourselves a little bit I want to do a tiny what we call in there in the u.s. at 101 like when you go into u.s. a new college like your first college class on any subject is called the 101 and the first really important point to understand a lot of people don't get this is the differentiation between Bitcoin and the blockchain the blockchain is a piece of technology which I will explain to you in just a few minutes on how this whole thing works the Bitcoin is a cryptocurrency implementation of the blockchain in this white paper which you just saw from a Satoshi he describes both he describes this idea of a new peer-to-peer currency which is based on this new technology but these are two different concepts so we will explore those in in more detail and quite frankly if you forget everything everything I tell you just make one note what blockchain does to you is it makes trust obsolete and if you think about the impact that has all our lives all our interactions our transactions and the vast amount of your industry and many other industries by the way such as supply chain for example is based on the idea of trust either implicit I trust you that we can make an transaction I trust that ten US dollars is worth anything or explicit where I pay money to establish the trust I go to a notary to establish trust I go to a bank to establish trust etc the economist calls us the trust machine it's a great article highly recommend this so let's talk about blockchain again blockchain is the underlying technology of all this important to understand I get this a lot of people get this wrong they think there is a blockchain like the Internet we are all on the same Internet whereas blockchain is actually block chains there's a gazillion of these block chains blockchain itself is a technology protocol which established transaction in a trustless system and appear to appear trust the system what this means is this today if you want to store any type of information let's say a transaction or even storing a picture what you do is you use a centralized approach you have a piece of information and you store it in a database if you then replicate this database on to the edge which we call for example cloud computing you get to a distributed system what blockchain does is and this is the real interesting part is it decentralized this is the way this works is very simple this is like the simplest explanation I can give you you take a piece of information and then there's a quick cryptography some math some complex math which basically takes the the digital information and creates a fingerprint of it which is unique to this file so I give a file I run some math on it it creates a fingerprint what the blockchain now does is in its most simplest or a form is now if I add a transaction to this ledger what I'm doing is I'm taking the hash it's called the hash the the fingerprint and I put it underneath my new transaction so I have a catch a my link these two together and then I create a new hash for the original new document as well as the old information what you create though is with that is you create the chain so you've got blocks on the chain which is the individual transaction with the cryptography underneath it and then you link them together and what this means is that once you have this established I cannot make changes to that chain because if I were to make a change somewhere in the middle of that chain I break the chain because these hashes these these little fingerprints don't add up anymore so this prevents Enron very simply speaking in accounting terms this prevents Enron I can't go back into my books and fudge my books it gets a little bit more complex there's something called the Merkel tree where what we're doing on the blonde the bin the Bitcoin blockchain is actually we're not just looking at the last transaction and putting like the fingerprint from the last transaction into our new transaction we're looking at a kind of like a complex math of all the transactions which were before and put that into our into our new block again this establishes trust in a world where Trust is expensive this creates security I mentioned to you you can't change the blockchain it's impossible to go into the blockchain and just like remove one of these blocks or change one of these blocks because you break the whole chain which comes afterwards and because the system is decentralized this means we're sending copies of this whole blockchain to many many computers which now can verify and can say hey there is a change in the blockchain over here but 50 other copies of the blockchain aren't changed so we have a consensus behind this saying that a 50 of those are and changed and this one has changed this must be fudge this must be illegal right so we create a really interesting safe system there's a wonderful video is like I love this this was on the John Oliver show so if you're watching the the last week to night show which is the best show on US television by far they found a clip to explain how trust security on the blockchain works and let me just quickly play this for you think of it is that a blockchain is a highly processed thing sort of like a Chicken McNugget and if you wanted to hack it it'd be like turning a Chicken McNugget back into a chicken now someday someone will be able to do that but for now it's gonna be tough so first of all I love the the moderators face when he was like talking about the chick magnet is like what but it's true what you do is you take effectively these little pieces and process them to an extent that it's impossible to like reconstruct them so you create a highly secure system the second thing you solve with the blockchain and this is unique in digital assets is you solve what is called the double spending problem the double spending problem is in cryptocurrencies for example before the blockchain it is very hard to establish that if I give you a crypto asset let's say I give you a coin and then I give the same coin to a second person it is really hard to establish who owns the original who owns the actual coin and who owns just a mere copy of the coin the blockchain by the fact that you have this constant algorithm behind it where you have the majority of the network needs to approve that this coin was the true transaction you solve for this problem is a really big asset so that's the blockchain on top of the blockchain we then build crypto currencies so these are digital currency assets and the first version of a crypto currency of course was the actual Bitcoin this is the thing which was described in the paper Bitcoin today is about a hundred forty billion US dollars worth in circulation so people actually store value in this and belief in it to a certain extent an interesting aspect of Bitcoin is that Bitcoin by the way the algorithm is written by the way the software is written they can only be 21 liyan coins in circulation in total in eternity so what we do is we create new coins as a process called mining which creates new coins but it tops out at 21 million coins which if you're an economist now was that you know back in the day I was a trained economist it creates an interesting asset which is we're creating an economy which is deflationary because we cannot print money this is another interesting aspect of this which is different than like a normal fight fiat currency where like the US central bank for example can print dollars if they want to print dollars you cannot mint more coins than these 21 million coins and of course it leads to these weird fluctuations currently right this is a very common job a boy asks is Bitcoin investing debt for one Bitcoin and the dad says like what 15,000 what do you need fifteen thousand five hundred forty four dollars for fourteen thousand dollars is a lot you make that you are to keep etc the Bitcoin is highly fluctuating like highly volatile at the moment but then something interesting happened to the crypto community we came to a version two of crypto assets this is like weird programmer guy called Vitalik boo terrain and Vitalik this is his official about page Vitalik might very well be the person who is up ending a good chunk of the way we think about currency and the way we think about asset management it's a pretty much remarkable feat for a kid who literally on his website wrote I was playing the game of Warcraft and one day I realised that Blizzard change something in the code and I realized that centralized systems are doomed so I went out and wrote a new cryptocurrency so in November 2013 Vitalik wrote and released a piece of software called aetherium aetherium at its core is a cryptocurrency but what aetherium allows you to do is it allows you to attach code software code to your cryptocurrency what this does is you can create what is called smart contracts a smart contract there's nothing else if if you use a subscription service today if you've got to make a zine or something and you allowed them to pull out money out of your bank account every month when the magazine comes that's a smart contract like every month automatically the magazine basically pulls money out of your account now I can take an a digital asset and attach software code to it I can do stuff like if I'm selling this to you and you confirm that it's arrived at your location automatically I will get paid and this creates really interesting business opportunities particularly in areas like the the supply chain but also asset management and we'll get there in a minute and then very lastly let's talk about what is called icos or initial coin offerings ico has come in two flavors the one is the more traditional version where you attach an equity like an equity stake in a start-up for example to a coin so it is nothing else than basically using a token a coin a digital asset as a representation of my equity stake and then I can I can trade them a little bit like stock the other way is to think about icos and a lot of i SEOs are what we call utility tokens the easiest way to think about this is if I open a coin laundry and I go out and before I start my coin laundry I say I I meant a million of these coins for my coin laundry and now I'm selling them on the market before my coin laundry even started and you buy them you buy this token now I have a economy of these token out there because you can choose to use them in my car laundry but you can also trade them with other people so I create a marketplace for it that's literally essentially what an IC o—- is so here's your summary this is just like the key takeaways for the blockchain it's a couple of rich core assets you need to understand the blockchain is unchangeable and it has a full history of all transactions which have happened and it's unchangeable because it's cryptography driven security in there I cannot change it if I've even if I want to and even if I bribe someone I cannot change it it is shared among many parties then that basically distributes trust out of a single system it has a consensus mechanism behind it which means that the vast majority of the network needs to say I believe this transaction to be true and otherwise it is not true and then you can credential II additionally can create these smart contracts that's not true for all assets not all blockchains but increasingly is true for many of them so let's debunk a little bit the hype so first of all there's a sheer madness we haven't leaked currently in my market and I'm pretty sure you heard about this let's start with this this is the first item which was ever being bought using Bitcoin literally a pizza from a place called Pappa sorry I think it was Papa John's Papa John's if you from the US is a pretty mediocre pizza place and the program has basically went online and said I give 10,000 bitcoins to the person who delivers me a Papa John's and some kid basic said like okay I go to Papa John's and deliver you 10,000 so I deliver you two pizzas from Papa John's for 10,000 bitcoins the transaction was recorded on the blockchain at the heights of the blockchain craziness this was a hundred seventeen 97 million u.s. dollars so Papa John's Pizza isn't that great it surely isn't worth a hundred 797 million dollars I hope that the kid who like delivered the pizza had a good fat payday then something interesting happens so this is just came out in the u.s. one in five students invests their student loans into a cryptocurrencies so probably not the smartest way for a lot of people to invest your money cryptocurrencies also are really really really abundant so there is Bitcoin which we probably know of there's a cryptocurrency called ether which a lot of people know it that's the the cryptocurrency which is tied to aetherium but there's more than about 2000 of those cryptocurrency this is a cryptocurrency exchange where you can see all of them listed so there's a ton of these credit cards and the reason why we have so many is because the source code the code which drives the cryptocurrencies open source I can take a copy of it and can just create my own coin if DWS wants to create their own coin that can create the DWS coin just by copying the code and going out to you and convincing you that's a great idea too by this coin they're also incredibly volatile this is one of them the better card currencies it's called golem this is a single day trade 60% volatility in this single day trade so if you were to buy that coin in the morning and sell it in the evening you would have made 60% upside trading volume on this day was 355 million US dollars it's not a small trade and if you ask yourself what is this coin actually about um golem is building a distributed cloud computer basically like an Amazon Web service which is distributed out to many many other things this is pretty wild it gets worse there is a coin which you can buy called the dogecoin the dogecoin was created based on a internet meme there's a meme you notice you're laughing there's an intimate net meme called the Doge this guy here or this this dog here is a she be she booyah is something like this it's a it's a Japanese dog and the owner of the dog took this picture put it on the internet and then the Internet thought it was really funny so they started doing you know photoshopping this picture into all kinds of pictures a kid on the internet said oh this is really funny I'm creating a coin in memory of this meme of the Dodge and created dogecoin and literally when you go to the website for dogecoin you can buy dogecoin today when you go to the website of doctrine it says this coin has no value whatsoever do not buy this I just created this as a joke well dogecoins market kept topped out at 2 billion US dollars it's currently at about 750 million dollars and God knows I hope that kid is is cashing in on us it's a wild world and then something other happens is there's a company called the Long Island iced tea company they're making literally iced tea and one day they wake up and they rebrand themselves into the long blockchain corporation and their stock price goes up 6 x 6 x stock price increase by simple fact of name change they didn't even tell people what they were doing they literally said like we're going and buying some servers and we do some crypto mining but we don't kind of know what we're actually doing six times stock price up here's the important thing a lot of people think that crypto assets particular crypto currencies is something we trade in because it's a currency right after all well actually that's not true so the amount of transactions in Bitcoin is minuscule for good reason Bitcoin the Bitcoin network tops out at 420 transactions per minute it's tiny like Bitcoin is actually not made to transact by sheer virtue of the way the code is written so there's only about 200,000 Bitcoin transactions every single day which is tiny if you compare this to a Visa and MasterCard or any other trading platform it's also really expensive to trade and in Bitcoin the average price per transaction on a Bitcoin is 60 US dollars it cost me pennies to transact on the Visa or MasterCard Network on Bitcoin at $60 which leads to stuff like this there's a major Bitcoin conference this was kind of like one of the jokes recently and they accepted of course they needed to accept Bitcoin for people to buy the ticket and they've switched it off they said like it's too expensive and takes us too long to process the the transaction because the math behind validating a Bitcoin transaction I mentioned to you there's a cryptography involved is so intense it takes as the energy consumption of a full household for one week to transact a single Bitcoin transaction the Bitcoin network is now one of the largest energy consumers in the world which said totally bizarre and then you've got this other issue which is if you can't transact in Bitcoin you still need to transact in fiat right you need to transact in Euros and yours dollars so what you need to do is you need to take your fiat currency transact it into Bitcoin and then do whatever you want to do in Bitcoin and then you need to transact it out of fiat currency which is a massive issue and then there's a whole bunch of stuff which is truly just plain problematic just watch this video this is a promotion video for an ICO an initial coin offering which at best can be described as a Ponzi scheme these guys raised 660 million dollars on a video which is an obvious Ponzi scheme rather than and of course what they did is they took all the money converted it back into fiat currency because you're smart and then just disappeared they're also unregulated right like the SEC currently as well as puffins etcetera hasn't fully regulated these things so that creates really interesting behaviors there's a currency called tether so tethers claim is that for every tether coin they have a US dollar in store so basically it's kind of like the gold standard type of idea now tethers market cap is two billion US dollars at the moment which I can guarantee you they will not have two billion US dollars in store somewhere so we're creating what was back in the US you might remember the Wildcat banks like where we had unregulated banking and banking we just created currency without any value store behind it and then there's an interesting challenge which is when you go into the world of smart contracts what happens with the smart contract is because the smart contract remember the blockchain is immutable I can't change the blockchain what this also means is that when I do a smart contract and I put it onto the blockchain I cannot change the software so if you have a buck in that tree in that software I can exploit that buck these become million dollar back about bounties for people to exploit these bucks because it's really hard to fix those as a set it's like there's people who tell you that the decentralized nature of smart contracts will become unmeasurable and uncontrollable risks and then lastly there's something called the 50% fallacy so the idea is you remember we talked about the idea of a consensus algorithm right at a transaction on the blockchain it needs to be validated by at least in the case of Bitcoin by 50% of the computers which are part of this network now if I control 50% of those computers I can validate any transaction that's a dangerous position particularly if you're in blockchain situations where there isn't that many computers I give you an interesting insight if you hold Bitcoin today the vast amount of computers on the Bitcoin network which validate those transactions called miners are controlled by three Chinese companies we'll see so with all that being said let me tell you why I'm incredibly optimistic about this whole space because I believe it will disrupt deeply disrupt the way we do our businesses in many areas remember these are these five properties which are really important about the blockchain and where those make it difference we will see disruption and I want to talk about what I call the magnificent seven seven areas where we'll see blockchain doing really interesting stuff the first is we talked about this we eliminate trust if you run a notary today I believe your business will be gone tomorrow because we don't need you anymore I don't need the trust if you have a business where you make money on establishing and documenting trust I replace you with a public trust ledger if you think about stuff like titles land titles particularly in emerging economies and emerging economies in some countries we've got 80% of land titles are not recorded the moment I establish a system which is unfertile and is public I solve for this problem the country of Georgia just currently converted all their land title database onto the blockchain for this particular reason there's a startup called harbor which takes physical assets and puts them on the blockchain in exactly this way so think about if you're an asset management today if you're managing physical infrastructure buildings physical infrastructure you know etc you will use very most likely you will use the blockchain to manage those buildings going forward also we will start digitizing and making use of assets here's an interesting challenge if you have a Kindle today if I buy a book on the Kindle I cannot borrow this book to you for a simple reason of course because it's digital if I were to borrow it to you I give you a copy and Amazon has no way to tell if that copy is a copy or an original I can lend I booked to all of you at the same time the moment I put it into a digital asset I tokenize it I have full control over this and it will revolutionize the way we think about assets digital assets there is a competitor side to YouTube called D tube which started to doing this so a lot of people who make money on YouTube today by advertising flock to D tube where they can go out and say I give you this video but for you to watch that video you need to do a little micro payment using a coin based system probably the biggest disruptor we will see it vary in the very short term is supply chains you might have heard that Walmart just started trying out blockchain literally this morning yesterday night last night when I was on the way here to Berlin I read an article from Walmart that they're now expanding this pilot to most of their supply chain Walmart started this out with mangoes they could now tell using the blockchain throughout their supply chain so effectively when you have a farmer they start like they put the crate of mangoes somewhere and record it on this private blockchain at at Walmart and then it goes to the middleman and it goes to the shipper etc and every single time you add a transaction to the blockchain and you have full transparency what they now can tell you for each of these mangoes within two seconds is where the mango came from not just where it came from literally from which farm when it was harvested etc this took them six days before think about what this means for product recalls if you do a product recall they can literally go out and say this crate of mangoes is the one we need to pull out of the shelf instead of all the mangoes we have in every single store there's an interesting challenge if you're drinking cold-pressed olive oil today this is a well-known fact 50% sir sorry there is two times more cold-pressed olive oil being sold then there is produced in the world so if you if you spend a lot of money on cold-pressed olive oil like there's a really good chance at what you're getting there is not cold-pressed olive oil the blockchain will solve for this smart contracts so we talked about smart contracts smart contracts actually really interesting in a machine to measure in transaction in the future when you get into your Tesla and you find yourself in a traffic jam like this and you need to get to the airport your Tesla will negotiate with the car in front of you to pull over and let you go through digitally series is going to happen and then what happens is they establish a digital contract and by the moment your car pulls over like the contract gets fulfilled and your car does a micro payment to my car for letting you through so we'll see these machine machine interactions based on the blockchain currencies will actually happen Venezuela launched a currency called the petrol which is built on there on the oil reserves probably not a good idea to invest into but a new currency came up called basis this is a cryptocurrency where they use a algorithmic central bank to stabilize the currency so they use an AI we heard this earlier in this in the session where they use an AI to simulate a central bank to manipulate the supply and demand and trading will become really interesting if you haven't heard of Numa right I think you really want to freak out so what numerate does is this is a bunch of data scientists they are in the business of hedge funds and what they saw is most hedge funds all hedge funds have probably 20 data scientists if you're really crazy you've got probably 58 data scientists what they did is they found a way to take the information hedge funds operate on and anonymize it and then they give these these data sets to a group of data scientists and say find local optima in these data sets and then report them back to us and we execute rates based on this and as a as a incentive we make we give you a crypto asset which basically has you participate in the upside you're creating they now already they're just launched they have 4,000 of the world's best data scientist hacking on these data sets this is crazy like there's no hedge fund who has got as many data scientists working for them it's a really interesting world we're moving into and everything is changing so question for you should be how do you use this what is but what does it mean if you want to use blockchain in your company I think these are the questions you want to ask yourself so the question is like is blockchain the right mechanism it's not the Heil all there's a good chunk of systems where centralized systems makes way more sense and then you need figure out like what are the scenarios who are the players whom can you operate with blockchain as a system requires an ecosystem it only makes sense if you're doing this with many other players if you want to invest into blockchain you know a crypto asset or something you should ask yourself is that if the thing you're investing into has answered those questions and make no mistake we're really really early this is like the Internet in the 1995's like everything like we're so early it's as clear that we're like everything is crazy at the moment we're starting to see some standardized efforts so there's something called r3 which comes out of IBM which is a blockchain standard so it's easier for us to build products there's something called hyper ledger which makes which is a similar in competing effort we are also solving a lot of the problems in the blockchain using new algorithms iota which is a which is company in the space uses in this new type of algorithm if you ever want to see like a really weird guy explain this to you go to youtube you'll find it let me close with the last thought Hemingway wrote in the Sun always rises a really interesting quote and it said how did you get bankrupt Sam asks bill two ways bill responds gradually and then suddenly and I think this is what we're seeing in technology technology moves on this weird line which is gradually and then suddenly it it takes off I've seen this over and over again in every technology we've ever covered and I think the same is true for blockchain and crypto assets it we're clearly in the gradual face it's still like early days and it's crazy and weird but it will come and it will come pretty hard so with that I'm at the end of my time I'm at the end of my session thank you so much and I think we'll have a little bit of time for a Q&A session later right Thank You Pascal what a 101 I have to say are you teaching a course on this anytime soon yes at the singularity yes yes very cool and so just a quick question I think so many questions but if you know I think a lot of I come from Zurich from Switzerland and what I understand from especially the banking world is privacy is everything and now suddenly we have this world which is all about openness you mentioned it with number I am the reason they are powerful is because they're open so how do you feel about or what is your advice to banks that want to take some of the first steps balancing on one hand their whole legacy that is so much based on privacy and at the same time realizing that in order to move into the future you need to be in some ways absolutely more open yeah I think it's an interesting question so I think there's there's two aspects particularly when you look at the blockchain to this the one is there's a whole part around the book the back office right now highly recommend you work with your technology vendor of choice to figure out how can you leverage blockchain in the back office to get to efficiency gains on the bus this morning I read an article that BBVA I believe is a bank they just did the first eighty million dollar loan completely transacted on the blockchain and they said that it cut down the the loan process from weeks to two days all right so that's a that's a very concrete step which is not scary it's just like in a classic upgrading of your back-end infrastructure I think the second part is and the speaker before me made that point very very clearly is figuring out like where does banking go and where does asset management go etcetera and figuring out how can you leverage blockchain for that and I think I absolutely concur you need to go back to first principles and figure out like what does your customer actually want and then create that product

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