The investment market for cryptocurrencies is becoming increasingly institutional. In July 2017 (in the wake of the “ICO dotcom bubble”), the SEC signaled its stance on ICOs. “Stock-like” ICOs are likely to be deemed securities, and as such, would need to be registered offerings, which by implication, would target institutional investors. Also in July 2017, the CFTC granted a derivatives clearing license to New York-based LedgerX for cryptocurrency derivatives, and options listings may appear on the CBOE later in 2017. Since derivatives markets are already part of the institutional ecosystem, this means that cryptocurrency derivatives might be a more accessible, liquid, and large-scale means of obtaining exposure to crypto asset classes than investing in the underlying cryptocurrencies themselves. Finally, there is greater emphasis on institutional liquidity aggregation platforms for large-size cryptocurrency trading (i.e. $20+ million positions), with Genesis Trading, Cumberland Mining, Circle, and Project Omni.
Emixa Mendix Meetup 11 April 2024 about Mendix Native development
Blockchain Investing: Economics Implications of Distributed Ledgers
1. Blockchain Investing
FinTank, Chicago IL, August 24, 2017
Slides: http://slideshare.net/LaBlogga
Blockchain Investing
Economic Implications
Melanie Swan
Philosophy Department, Purdue University
melanie@BlockchainStudies.org
2. 24 August 2017
Blockchain 1
Melanie Swan, Technology Theorist
Philosophy and Economic Theory, Purdue
University, Indiana, USA
Founder, Institute for Blockchain Studies
Singularity University Instructor; Institute for Ethics and
Emerging Technology Affiliate Scholar; EDGE
Essayist; FQXi Advisor
Traditional Markets Background
Economics and Financial
Theory Leadership
New Economies research group
Source: http://www.melanieswan.com, http://blockchainstudies.org/NSNE.pdf, http://blockchainstudies.org/Metaphilosophy_CFP.pdf
https://www.facebook.com/groups/NewEconomies
4. 24 August 2017
Blockchain
Agenda
Blockchain Investing
Blockchain Economics
Blockchain Economic Theory
Smart Network Convergence
Blockchain and Deep Learning
3
5. 24 August 2017
Blockchain 4
Blockchain is the tamper-resistant
distributed ledger software underlying
cryptocurrencies such as Bitcoin, for the
secure transfer of money, assets, and
information via the Internet without a third-
party intermediary
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
What is Blockchain/Distributed Ledger Tech?
6. 24 August 2017
Blockchain
Context of the Blockchain Revolution
Internet all over again
Blockchain supplies crucial functionality for the
secure transfer of money and assets over
networks that allows the only sectors not yet re-
engineered for the digital era to modernize
Financial services; Legal and governance services
Involves money and assets, likely to take longer
Information Internet: 20-40 years (corporate email)
Money Internet could take longer (2050-2075)
More profound impact
Computationally-based society has much smaller need
for brick-and-mortar institutional footprint
5
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
10. 24 August 2017
Blockchain
High-profile ICOs
Filecoin; $186 mn, Aug 2017
Registered (exempt) small offering CoinList (AngelList);
Reg D 506(c)
Tezos $232 mn, Jul 2017
Brave, BATs (basic attention tokens), $35 mn, 30
seconds
Gnosis; $12.5 mn, Apr 2017
Self-regulating mechanisms
Known % of money supply in the ICO offering
Lock-up: No lock-up on ICO founders coins (usually 1
year IPO), could have time-lock-up
9
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
11. 24 August 2017
Blockchain
ICO Regulatory Stance
US: investor protection; must be regulated
ICOs and exchanges; what about smart contracts?
Betting as a related example: limited
ICOs vs token sales (network utility) vs crowdfunding
Howey Test: is it a security?
1. Investment of money
2. Expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party
UK: caveat emptor; safer if regulated, not regulated
Betting as a related example: ubiquitous
EC, Japan, China, India (currently more open)
10
Source: https://www.coindesk.com/ico-tracker
12. 24 August 2017
Blockchain
Investor demand for cryptographic assets
Institutional investors must invest in
cryptographic asset classes
Cryptographic assets: currently valued at
$150 billion, estimated to grow to $2 trillion
over the next 10 years
Global invested capital market by asset
class must include cryptographic
assets
Cash, stock, bonds, gold, real estate, crypto
Cryptographic asset growth could
become tied to general rate of
economic progress (global GDP)
11
Source: https://www.coindesk.com/standpoint-founder-bitcoin-asset-class-will-grow-2-trillion-market/
13. 24 August 2017
Blockchain
Cryptocurrency Options
NY-based LedgerX CFTC approval
Provide clearing services for fully collateralized
digital currency swaps
License to operate as a swap execution facility,
initial plans to clear Bitcoin options
Clearing house for derivatives contracts settling in
digital currencies
LedgerX options to trade on the CBOE
Significance: cryptocurrency derivatives
possibly more accessible and liquid means of
gaining exposure than trading the underlying
cryptocurrencies
12
Source: https://www.bloomberg.com/news/articles/2017-07-24/bitcoin-options-to-become-available-in-fall-after-cftc-approval
14. 24 August 2017
Blockchain
Cryptocurrency Market Capitalizations (8/17)
13
Source: https://coinmarketcap.com, http://us.spindices.com/indices/equity/sp-500; List of countries by GDP (nominal) - Wikipedia
S&P 500: $22.2 tn; US GDP $18.8 tn
Bitcoin market cap: $68 bn (≃ top 70/200 countries)
15. 24 August 2017
Blockchain
Indirect Cryptographic Asset Exposure
Default exposure through equity/mutual funds (same
argument as emerging market)
50% S&P 500 sales from overseas
S&P internal implementation of foundational technology
like blockchain digital ledgers
14
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
Large cap investing is a
proxy for blockchain
investing
Free ride the search
problem, vetting, selection
process
16. 24 August 2017
Blockchain
Direct Cryptographic Asset Exposure
15
Source: https://www.slideshare.net/lablogga/the-black-swan-30871838
Invest “Black Swan” money
Small percent of portfolio
Willing to lose
Convexify (e.g.; manage)
exposure
Diminish downside
Maximize upside exposure to
“black swan” rare outsize
returns (VC, movies)
18. 24 August 2017
Blockchain
Blockchain risks?
ISSUE
17
Regular global technical meetings (Satoshi Roundtable);
vociferous debate/proposals (democratic power struggle)
PoW: not scalable, PoS: validator model too complicated
Cybersecurity Hacks
Mt Gox, Ethereum DAO, Bitfinex
Silk Road, drug dealers,
terrorists, criminals
Scalability
Block size, Consensus method
Mining Centralization
51% Attack
RESPONSE
Temporary; mining is collusive; attack unsustainable, cannot
steal coins, confirm transactions or change protocols
Building resilient system constantly under open
attack 24/7 (remember early Internet DNS attacks)
Blockchains are a universal technology available to
all; non-criminal activity predominates
PoW: Proof of Work (mining), PoS: Proof of Stake (validated voting) – mechanisms for establishing ledger state consensus
Early Internet: “this will never scale, insecure, not resilient;” Yahoo, AltaVista down for days due to DNS attacks
Technology Risk
Perception Risk
Regulatory Risk, Economic Risk
Government regulation,
bans; Exchange rules
Governments modernizing economic infrastructure
with blockchains too; licensing, open dialogue
19. 24 August 2017
Blockchain
Two big investment risks
Too early, cart before the horse
Blockchain network infrastructure is
immature
Same lesson as 90s dotcom boom:
Webvan, Dogster: too early
Network economy models require the
network to be in place to obtain network
benefits
Technical/scalability risk re:
consensus algorithm
Achieve Visa-scale transaction
processing (2000/second) needs
alternative consensus mechanism
18
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
20. 24 August 2017
Blockchain
Infrastructure Risk
Blockchain Network Infrastructure Immature
19
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
TCP/IP Blockchain
AppsAppsApplication Layer
Protocol Layer
Issue: no one wants to fund basic infrastructure build-
out, but “shiny new” network apps will fail without it
21. 24 August 2017
Blockchain
Scalability Risk
Bitcoin vs. other payment networks
20
Source: Statista / Coinmetrics, http://www.altcointoday.com/bitcoin-ethereum-vs-visa-paypal-transactions-per-second
1,667
7
Average daily transaction volume ($US mn)
Average
transaction
volume per
second
Visa: 2,000 transactions/sec; Bitcoin: 7/sec
Visa: $18bn/day; Bitcoin: $300mn/day
22. 24 August 2017
Blockchain
Scalability Risk
Consensus Algorithms (BFT)
Proof of Work
Bitcoin blockchain
Proof of Stake
Ethereum, Tezos, DFINITY, Tendermint/Cosmos, Stellar
Complicated scheme of tiered voting by staked participants
Issue: recreation of human-based power structures, is not a
computational Searle’s Chinese Room
Other solutions
IOTA Tango automata
Proof of Computational Completeness
Complexity-complete computational entropy
Brownian motion and Crutchfield’s statistical complexity measure
Using network entropy-generation to solve BAP
21
Source: BFT; Byzantine fault tolerance; https://www.slideshare.net/lablogga/blockchain-consensus-protocols
23. 24 August 2017
Blockchain
Agenda
Blockchain Investing
Blockchain Economics
Blockchain Economic Theory
Smart Network Convergence
Blockchain and Deep Learning
22
24. 24 August 2017
Blockchain
New Economic World Order
23
Source: https://bitcoinmagazine.com/articles/op-ed-blockchain-economy-ushering-new-world-economic-order
Not just cryptofinance, multiple sectors of the digital
economy: storage, banking, healthcare, financial
services, technology platform companies, fundraising
25. 24 August 2017
Blockchain
Smart Network Thesis
Two fundamental eras of network computing
24
Source: Expanded from Mark Sigal, http://radar.oreilly.com/2011/10/post-pc-revolution.html
I. Transfer Information II. Transfer Value
6 7
2020s 2030s
Simple networks Smart networks
Pushing more and more complexity through the global
Internet pipes
26. 24 August 2017
Blockchain
Scalability and Financial Inclusion
Hierarchy does not scale
Next leap-frog tech: fintech
Like cell phones vs. POTS, it
does not make sense to build
out brick-and-mortar banks in a
world of digital finance
Decentralized networks +
digital finance = the power of
the printing press in banking,
credit, and money
Access to credit and financial
services as a basic human right
(2 billion under-banked)
25
Source: POTS: Plain Old Telephone Service, http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
27. 24 August 2017
Blockchain
Long-tail economics and governance
One size does not fit all
Any two parties can meet and transact on the blockchain
26
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
One size
fits all
Personalized
Long-tail Systems
Long-tail economics
“Amazon or eBay of money”
Personalized banking, credit,
mortgages, securities
Long-tail governance
“Amazon or eBay of government”
Personalized governance
services, pay for consumption
28. 24 August 2017
Blockchain
Personalized
governance
services
Crypto-enlightenment
27
“One ought to think autonomously,
free of the dictates of external
authority” - Immanuel Kant
Kant, I. "Answering the Question: What Is Enlightenment?" (German: Beantwortung der Frage: Was ist Aufklärung?). 1784.
Hayek, F. The De Nationalization of Money. 1976. (paraphrased)
“Multiple private currencies should
compete for customer business”
- Friedreich Hayek
Personalized
economic
services
29. 24 August 2017
Blockchain 28
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
Blockchain: Fintech and beyond
AssetsImmediate
cash transfer
Applications
Payments
Money
Remittance
Financial
instruments
Unified ledger
Mortgages, loans
Titling: house, auto
Inventory
Commercial trade
Payments
Financial
Services
Logistics &
Supply Chain
Energy, IoT
Healthcare
Government
Humanitarian
Non-profit
Industry adoption
Time
Complexity
Stocks, bonds
Goods transfer
Assurance, provenance
Identity
Driver’s License
Passport, Visa
Contracts
Registries
Marriage licenses
Public Documents
Birth/death registries
BoL, Forfeiting
Insurance
Cash Smart Assets Smart Contracts
30. 24 August 2017
Blockchain
Agenda
Blockchain Investing
Blockchain Economics
Blockchain Economic Theory
Smart Network Convergence
Blockchain and Deep Learning
29
32. 24 August 2017
Blockchain 31
Smart networks are computing networks with
intelligence built in such that identification
and transfer is performed by the network
itself through protocols that automatically
identify (deep learning), and validate,
confirm, and route transactions (blockchain)
within the network
Smart Network Convergence Theory
33. 24 August 2017
Blockchain
Smart Network Convergence Theory
Network intelligence “baked in” to smart networks
Deep Learning algorithms for predictive identification
Blockchains to transfer value, confirm authenticity
32
Source: Expanded from Mark Sigal, http://radar.oreilly.com/2011/10/post-pc-revolution.html
Two Fundamental Eras of Network Computing
34. 24 August 2017
Blockchain 33
Conceptual Definition:
Deep learning is a computer program that can
identify what something is
Technical Definition:
Deep learning is a class of machine learning
algorithms in the form of a neural network that
uses a cascade of layers (tiers) of processing
units to extract features from data and make
predictive guesses about new data
Source: https://www.slideshare.net/lablogga/deep-learning-explained
What is Deep Learning?
35. 24 August 2017
Blockchain
Next Phase
Put Deep Learning systems on the Internet
Deep Learning Blockchain Networks
Combine Deep Learning and Blockchain Technology
Blockchain offers secure audit ledger of activity
Advanced computational infrastructure to tackle
larger-scale problems
Genomic disease, protein modeling, energy storage,
global financial risk assessment, voting, astronomical data
34
36. 24 August 2017
Blockchain
Deep Learning Chains
Example: Autonomous Driving
Requires the smart network functionality
of deep learning and blockchain
Deep Learning: identify what things are
Convolutional neural nets core element of
machine vision system
Blockchain: secure automation
technology
Track arbitrarily-many fleet units
Legal accountability
Software upgrades
Remuneration
35
37. 24 August 2017
Blockchain
Agenda
Blockchain Investing
Blockchain Economics
Smart Network Convergence
Blockchain and Deep Learning
36
38. 24 August 2017
Blockchain
Blockchain Strategies
Leadership Edge
Start or join industry consortium
Implement digital ledgers
Automate transfer of money, assets, bids,
quotes, RFPs, ERP, supply chain
Value chain process mapping
Revenue-generating
Offer blockchain-based services to clients
Example: banks targeting larger customer base
through blockchain-based eWallet solutions
Cost-saving
Finance, treasury, accounting, GL/AR/AP
Quality assurance, regulation, compliance,
audit
37
Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491
39. 24 August 2017
Blockchain 38
Source: http://futurememes.blogspot.com/2016/10/blockchain-fintech-programmable-risk.html
Stock Transaction
Real Estate Purchase/Sale
Health Insurance Billing
2. Steps that can be automated with blockchain
1. Steps with human decision-making
Energy Contract
International Trade Shipment
Reengineering economics and governance
Any complex transaction has two kinds of activities
Blockchain automation economy
Economics Governance
40. 24 August 2017
Blockchain
Conclusion
Blockchain is a fundamental IT for
secure value transfer over networks
For any asset registered in a cryptographic
ledger, the whole Internet is a VPN for its
confirmation, assurity, and transfer
Reinvent economics and governance
for the digital age
Long-tail structure of digital networks
allows personalized economic and
governance services
Smartnetworks are a new form of
automated global infrastructure for
large-scale next-generation projects
39
Personalized
Long-tail Systems
One size
fits all
IT: Information Technology
41. 24 August 2017
Blockchain
Conclusion
Next-generation global infrastructure:
Deep Learning Blockchain Networks
merging deep learning systems and
blockchain technology
Smart Network Convergence Theory:
pushing more complexity and
automation through Internet pipes
Blockchain Deep Learning nets: Ability to
identify what something is (machine
learning) and securely verify and transact it
(blockchain)
40
42. Blockchain Investing
FinTank, Chicago IL, August 24, 2017
Slides: http://slideshare.net/LaBlogga
Blockchain Investing
Smartnetworks and the Blockchain Economy
Melanie Swan
Philosophy Department, Purdue University
melanie@BlockchainStudies.org
Thank you! Questions?
44. 24 August 2017
Blockchain
How does blockchain work?
43
eWallet app: holds keys, not money
Using PKI (public key infrastructure): electronic wallet
software issues a public-private key pair (public address is a
32-character alphanumeric code)
Scan public address (QR Code) & submit transaction
Private key confirms access and funds availability,
transaction validated and posted to blockchain
45. 24 August 2017
Blockchain
Why is it called blockchain?
Ledger (chain) of sequential transaction blocks
Each new block starts by calling the last block, so a
cryptographic chain of transactions is created
Every 10 minutes, the latest block of submitted
transactions is validated (by cryptographic mining) and
posted to a single distributed ledger
44
Source: Satoshi Nakamoto whitepaper: https://bitcoin.org/bitcoin.pdf, https://blockexplorer.com
Block 10 Block 11 Block 12
46. 24 August 2017
Blockchain
How robust is the p2p software network?
45
p2p: peer to peer; Source: https://bitnodes.21.co, https://github.com/bitcoin/bitcoin
7340 Global Nodes running full Bitcoind (6/17); 100 gb
Run the software yourself:
47. 24 August 2017
Blockchain
What is Bitcoin mining?
46
Mining is the software-based accounting
function to record transactions, fee-based
Mining hardware/software “finds new blocks”
Network regularly issues random 32-bit nonces
(numbers) per specified cryptographic parameters
Mining software constantly makes nonce guesses
At the rate of 2^32 (4 billion) hashes (guesses)/second
One machine at random guesses the 32-bit nonce
Winning machine confirms and records the
transactions, and collects the rewards
All nodes confirm and append the new block of
transactions to their copy of the distributed ledger
“Wasteful” effort deters malicious players
Sample
code:
Run the software yourself:
52. 24 August 2017
Blockchain
Supply chain and logistics
Asset transfer and customs clearing
Provenance, assurance, release
Inventory management
Custody, insurance, damage
Automated tracking and notification
Pallets, trailers, containers
Trade finance and documentation
Track purchase orders, change orders,
receipts, shipment notifications
Custody and product certification
Link physical goods to serial numbers,
bar codes, RFID tags
51
53. 24 August 2017
Blockchain
Energy
Blockchain energy projects
Enerchain: trading (NE Europe)
BTL Interbit blockchain energy
platform: trading (Vancouver CA)
PONTON: DSO, TSO, aggregator,
generation power-balancing (Austria)
Automatic markets
“Energy Internet” - smart buildings
on regional energy smartgrids
Smart resource self-pricing
Load-balancing
Source fungibility: wind, solar power
Energy price and trade validation
52
Sources: https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york,
https://enerchain.ponton.de/index.php/16-gridchain-blockchain-based-process-integration-for-the-smart-grids-of-the-future
54. 24 August 2017
Blockchain
EMR (electronic medical record)
Personal health records
Users key-permission doctors to records
Digital health wallet
Identity + EMR + health insurance + payment
Health insurance billing chains
Automated claims processing
Price-quoting for medical services
Health Data Research Commons
Biobanks, QS (DNA.bits), genome files
53
Source: http://futurememes.blogspot.fr/2014/09/blockchain-health-remunerative-health.html
Healthcare
Digital health wallet
55. 24 August 2017
Blockchain
Politics: governance services
54
Blockchain weddings (Bitcoin, Ethereum)
Public document registries
Titling Registries
Local government RFPs for home, auto, land
Legal services: register and attest
Contracts, IP, agreements, wills registries
Proof of Existence: hash + timestamp + blockchain record
Voting
Quadratic voting (interest), PageRank (relevance)
Delegative democracy, random sample elections
Opt-in personalized governance services
Composting vs education
Sources: http://merkle.com/papers/DAOdemocracyDraft.pdf, http://www.proofofexistence.com/, https://bitnation.co/ , World’s First
Blockchain Marriage: David Mondrus and Joyce Bayo, 10/5/14, ConsenSys wedding : Kim Jackson and Zach LeBeau, 11/2/15
56. 24 August 2017
Blockchain
Humanitarian
Refugee identity system
Phone access: smartphone eWallet, SMS
Object access: card, paper wallet, pendant,
ring, keychain, tattoo, implantable chip
Biometric access: word phrase, fingerprint,
iris, facial scan
Financial inclusion, access to learning
Smart contracts for literacy
Bitcoin MOOCs “Kiva for literacy”
Open-source FICO scores
Decentralized credit bureaus
Remittance, blockchain-tracked aid
55