Blockchain and the financial revolution
Dr Hermann Hauser is one of Cambridge’s most illustrious intellects, the guiding light behind some of the city’s key developments and an investor of world renown, but as a speaker he is often under-estimated.
His opening remarks at the Cambridge Blockchain Forum at The Bradfield Centre illuminated a fact only just becoming apparent: the financial crisis is 2007-8 permanently ruined the reputation of the banking sector.
He outlined how new financial architecture based on blockchain – a growing list of records or blocks linked using cryptography – could ensure the excesses that led to that crisis to never be repeated. The restructuring might have been carried out by “very reputable organisations called banks, then in 2008 we found out they’re not so reputable, in fact they’re disreputable, and they got away with it – none of them got locked up”.
He added: “My friend Bill Gates said ‘Banking is necessary, but bankers are not’ and he was absolutely right.”
Noting that the arrival of double entry book-keeping in the 15th century “led to the Renaissance”, he told the forum that a similar “rebirth” is happening to the financial sector with the application of cryptography and other components to the sector. We are now experiencing what he calls “a digital Renaissance”.
“It’s nothing less than the total restructuring of the financial system,” he said. His conclusion was “don’t trust the bankers, trust the blockchain” and he pointed to four life-changing applications of the distributed ledger which blockchain has created: AI (eg driverless cars), smart contracts in finance, synthetic biology for pharma and quantum computing “that will reshape society”. And if the incoming model challenges the existing players – whether they be bankers, or internal combustion car makers or anything else – Dr Hauser told his audience not to be surprised because disruption is natural in such circumstances.
“When personal computer users changed to smartphones the smartest and best personal computer companies missed the next wave. This happens every time – the incumbents miss the next wave.”
So enough fanfare – what was discussed? Tom Trowbridge, president of Hedera Hashgraph, addressed the crucial area of the security of the new network.
“You cannot have tolerance for this network to go down,” he said. “It won’t be tolerated. No network can be built on if it has vulnerabilities, so this is by far the most secure, and that’s a big differentiator.”
It’s not just security though, it has to be “fast, fair and secure – that’s what is needed from the new financial logic”. In fact the blockchain needs four strengths, Tom said.
■ Technology. The technology has to have the capacity – not just the bandwidth but the storage facilities, and it has to deliver in a way that doesn’t cause a permanent outage on the electricity system because it’s sucking so much power to run it.
■ Security. “We expect to see attacks on every layer.”
■ Governance. The governance of a base-ledger consensus algorithm is about decision-making. With the current, failing, model of capitalism, governance is accrued by a handful of trusted individuals. But all humans are error-prone. The Hadera Hashgraph platform provides a new form of consensus for distributed ledger technology (DLT) via 39 blue chip companies.
■ Stability. “Open source software and cryptocurrency has created both innovation and chaos.” (See Bitcoin, for which the blockchain was originally built.)
The discussion was opened to the floor by the hugely competent co-organiser and host presenter, Hazem Al Nakib, who co-founded Cambridge Blockchain Club with Jon Bradford. One of the questions was about governance. These 39 firms… how does that work?
“The equity is designed so that it has no value,” is the answer. “It’s owned by a company of 39. There are no dividends: any overspill goes to a [charitable] foundation. So there’s no IPO and it [shares] can’t be bought.”
This is pretty revelatory: the council of 39 decentralised trusted companies – who rotate so each is only there for three years – can’t take dividends so they have nothing to sell. They are not driven by profit. They are guardians. Hadera is “the bottom layer [of the internet] on which applications are built.” The firm has raised $124million and has 1,000 investors. Its platform is “incredibly resilient and very hard to take down – that’s the first level of security and what people are rightly concerned about”. Quite right. No one needs a new crypto-iteration of a Ponzi scheme such as that devised by Bernie Madoff. Or a Russian cyber-attack...
So, just to give you an idea of the speed of progress in this sector, the very well-known but very busted crypto-currency Bitcoin operates on a platform which can handle 20 transactions per second (TPS). Etherium (Bitcoin V2) operates at 25TPS. The next generation of digital currency platforms is expected to function at 10,000TPS. Hedera Hashgraph operates at 100,000TPS.
Later – in the graveyard shift just before the close of this astonishing conference – Mattereum’s CEO Vinay Gupta considered blockchain’s key problem: is it a consumer-facing application or is it a data portal for sectors including health, finance and pharma?
Vinay suggested that blockchain is not yet mature enough to act in lieu of cash. “If you try to buy a house in, say, France, using blockchain, there is an enforceability crisis. How do you resolve that?” His answer? “You just hand over all your assets to us.” There are lots of promises and smart contracts to guarantee you can take back your asset once Vinay has acquired it, but still, most people’s response will be: “Okayyyy.”
The idea that everyone is happy to take their assets out of Santander or Barclays and deposit them into Mattereum or any similar company is just not a reality right now. Remember what Dr Hauser said about double entry book-keeping happening in the 16th century? It takes centuries to build up that level of trust and, even if the trust is broken – “reputation arrives on foot but leaves by horse”, as the Chinese proverb says – that still doesn’t mean everyone is ready to hand their finances over to a new and largely untested entity.
Clearly, however, blockchain is making progress. Those developing it take their responsibilities seriously and the issues can be overcome in time.
In fact they have already been overcome in Estonia, explained Ott Matter, deputy director of Estonia’s e-residency programme. The key factor in Estonia’s e-success story, explained the hugely articulate and dryly witty Ott, is that when the Soviet Union was dissolved 1991 Estonia effectively had to start over. The nation’s skill sets were based on “forests and IT”. They decided IT might have more scope and the result is:
■ “Everyone in Estonia has an electronic ID”
■ “99 per cent of services in Estonia are online”
■ “The only two things you can’t do online in Estonia yet are get married and sell a property”.
They’ve also introduced the “once-only principle – once you hand over data to the government you shouldn’t need to do it again”, because “the data belongs to you”. Makes you wish they’d hired an Estonian when the Universal Credit system was designed.
Estonia has been looking after data since 2001, when the X-road – “the underlying platform on which our digital society was built” – was introduced. It now handles 500 million transactions a year and is something of a gold standard for the intelligent application of blockchain.
This Cambridge Blockchain Forum was a brilliantly designed and brilliantly executed conference. Contributions including those from Toby Simpson of Fetch.AI, Michel Rauchs of the Cambridge Centre
for Alternative Finance, Junde Yu of Pundi X and Dr Edward George of Ecobank UK, plus two superb panels on regulation and investing in blockchain and DLT, made it a stand-out event.
Do check in for the next one. Hopefully by then – if the Cambridge Blockchain Hub and its members have any say in it – the sector will be more digital Renaissance and less Wild West.