TechTalk ep9: Blockchain melody

Paramita: Hello and welcome to PwC Luxembourg TechTalk. This is part one of our blockchain and crypto series. Today I talk with Ravi Jhawar, Manager and Michael Delano, Partner and blockchain and crypto leader about what blockchain really is.

Paramita: Hello. We have in our studio today Ravi, Ravi Jhawar and Michael (Mike) Delano. And we will talk about the fascinating topic that is blockchain and what it is and why do we say blockchain and bitcoin always in the same sentence, can these terms be used interchangeably... So Ravi shall we go with you first to clarify what it is a little bit? What is blockchain, Ravi, tell us.

Ravi: So if I start with what is blockchain then it's obviously a complication.

Paramita: Let's get complicated.

Mike: We will go complicated.

Ravi: All right. So blockchain is essentially an open or shut distributed, shared and distributed ledger that records all the transactions in a business network.

Paramita: OK I understood it perfectly.

You know what, before starting yeah probably it was a good idea. Why did we start thinking about something like blockchain in the first place?

Ravi: All right. Yes so this is perhaps better.

Mike: The history, where did this start...

Ravi: So trying to understand the history... Let me put it this way: in year 1998, the Nobel Prize winning economist Milton Friedman once said that the internet at that point in time lacked only one feature or one essential feature which is for two people A and B to be able to exchange value without A knowing B and B knowing A. Fast forward 10 years in 2008 was the advent of bitcoin which essentially does that.

And today we have basically bitcoin everywhere or block chain everywhere starting from JP Morgan issuing their own coins to more or less every country considering what kind of regulations that they need to bring in. Dubai aspiring to become the first blockchain powered government...

Paramita: But bitcoin is not really blockchain, is it?

Mike: Yeah I guess it's important to distinguish the two. So bitcoin runs on the blockchain right. The blockchain is a type of Distributed Ledger Technology. So you hear a lot about DLT essentially that's what it is. Bitcoin is one of I think just over 2000 different types of crypto assets now and they all run on one form or another of a blockchain. So they are not interchangeable. One is a function of another. Blockchain is the infrastructure on which bitcoin is run.

Ravi: Yeah. From how I understand like why are we even talking about bitcoin right. This is what we're getting into.

So like consider the traditional financial infrastructure that we have. Yeah. So if a person from Luxembourg wants to send say a thousand euros to somebody in Australia. So this simple transaction would involve parties which is the sender and the receiver, the sender's bank, the receiver's bank, correspondent banks and maybe some foreign exchange agencies and so on. Right. For this transaction, to be able to send these thousand euros from A to B, it might take about three or four days time and the overall transaction might cost about 20-25 euros right. What bitcoin tries to do is simple. It's threefold. One, it still wants to be able to do this transaction but without any intermediaries no need of A's bank, B's bank, correspondent bank and so on. A should be able to send value to B directly, without the intermediaries. And it wants to be able to do this instead of taking three or four days time almost instantaneously. In a matter of seconds this transaction can be performed. And finally this is to be done at significantly lower cost. So instead of costing 20 euros it would cost maybe 20 cents to perform this transaction. So this is what bitcoin achieves. And this is the first true digital decentralised cryptocurrency without any intermediaries. And that's why it's so popular today.

Paramita: And how can the blockchain technology help businesses why are we getting all excited about blockchain, Mike?

Mike: I mean I think it's good to take a step back because I think a lot of businesses currently are looking at... They have blockchain as a solution and then they go looking for a problem rather than thinking about from a business process perspective. I think Ravi it's unfortunate we don't have pictures but Ravi has a good graph in terms of thinking about three or four different key aspects of a process that needs to be in place for blockchain to be useful. So I think if you have multiple parties involved you have multiple parties changing data or needing access to a data and you have some sort of decentralised trust then you may be looking at blockchain as an application.

If you have and I think we'll get into it in a few minutes but you have different types of blockchain. You have a public blockchain which is what bitcoin is run on and private blockchain which means that you can choose who has access to the blockchain through the various nodes right. So I think the potential for blockchain to streamline things particularly in transactions similar to what Ravi was talking about is enormous. I think once you know from a banking perspective, from a you know... I'm an asset management partner so from a fund's perspective the transactions you can process through either security transactions or through fund share transactions, having that done on a blockchain the potential is quite big to disrupt the current business as we have today.

Paramita: And are business aware of all these potentials?

Mike: Yeah I mean all the different intermediaries in you know and businesses both financial focused and non-financial focused are looking at blockchain technology and how it can help them either improve efficiency you know be a repository for your data because of the immutable properties of the blockchain. So businesses are definitely looking at this. I'd say if businesses aren't looking at this they are behind.

Paramita: And since you came up with the different types of blockchain public and private could you Ravi could you tell us a little bit more?

Ravi: Yeah maybe we should first clarify what is blockchain before discussing about different kinds of blockchain.

So like we started off by saying blockchain is one type of distributed ledger technology right. So again going back to a simple scenario like we were discussing. So if we have a few parties doing business with each other, say four parties in some kind of business context. Currently what happens is each of these parties maintain their own ledgers, their own business ledgers. So they record all the transactions. But this system results in a lot of inefficiencies. You have to rely on trusted third parties. There is potential for fraud sometimes. There also are discrepancies in what people record in their own ledgers. And this obviously means that there are a lot of conflicts that arise. And obviously these are very expensive again to settle. So what blockchain does is I'd explain this in three parts. One, instead of every party maintaining their own copy of the ledger, there is one copy, one shared copy, which serves as a source of truth. So when there is any transaction that is happening in the network this gets recorded in this shared ledger. Because it's open, because it's shared, anybody can see the process, see the transaction and verify whether it's actually a correct transaction or not. So if I possess only a hundred euros or if I promise to send to you 300 euros but if I only send 250 you can raise an objection. Because the ledger is open. So then which is fine like having one copy of the ledger but the whole point of having blockchain is to have decentralisation, not to trust one party as such. So while a shared ledger or an open ledger would solve several problems it wouldn't really solve the problem of not having intermediaries or trusted third parties. So what blockchain would do is find this is a shared ledger. But let's also be like every member every entity in the business network can maintain their own copy of the ledger.

Paramita: So this is where I think the question of traceability comes right? When you delete the intermediaries that... I'm sorry I interrupted you. But I was just thinking when we were talking about traceability in the supply chain and you know about blood diamonds and everything.

Ravi: Yes. So how blockchain actually helps in traceability is this: the way the data is stored in the blockchain is very simple. You have all these sets of transactions which are grouped together which is basically called a block. And each block is linked to the previous block using strong cryptographic techniques. This essentially results in us having a database which is basically append only and each set of transactions are linked to the previous one which cannot be changed anymore. So it becomes an immutable set of records. On top of this there is also a set of metadata which is added with each block like time stamping and so on. This ensures that at any given point in time we can go back to the root of every single transaction and identify where a specific piece of information comes from. This results in having a complete traceability. So like we were discussing about supply chains, so we could simply imagine a supply chain where the raw material comes from a specific farm or you know somewhere which goes to local manufacturing unit which again goes to the logistics company which is distributed to several distributors or supermarkets or whatever. And then finally goes to the end consumer. So if we are able to record all these exchanges on blockchain we basically have a trusted record of information which is immutable. So at any point in time we can identify where this product which is in your hands that you buy from the supermarket actually comes from.

So this clarifies traceability.

And yeah so I was mentioning about these ledgers you know copies of ledger distributed across different members in the business network. It solves the problem of not having a trusted third party entity.

But this also creates another problem as to how can we make sure that at any given point in time all these copies of the ledger are in the same state, they have the same set of records.

Paramita: How?

Ravi: This is where consensus mechanisms are used to make sure that all the copies of the ledger are synchronized. So there are really plenty of different types of consensus mechanisms. Bitcoin for example uses something called proof of work as its consensus mechanism. There are other things based on who will have access to trusted processing unit. Proof of Stake wherein everybody is going to put in some money and you know there are leader election algorithms also based on Byzantine Fault Tolerance. So there are a very large set of algorithms that are used. Bitcoin uses something called proof of work and what essentially it does is it throws mathematical challenges to the network and everybody starts trying to find a solution to this mathematical challenge. So the first party who comes up with the solution basically says hey look I found this solution and it's very easy for anybody to verify whether the solution is correct or not. And this party who has solved this challenge successfully gets the chance to create blocks in the blockchain and validate transactions. And because he has spent his computational power to be able to solve the challenge he is rewarded with some bitcoin as a return.

Paramita: I'm sorry... a very silly question. Say I'm a company and I wish to take advantage of blockchain, what do I do? How do I go about it? Is there a company that I go and say that... What do I do?

Mike: I mean you know it's similar to any other process or process improvement that you want to go through. I'd say you know unless you have people in the organisation with a good understanding of blockchain, how it works you know probably talk to advisors, talk to us to go through... I think it's important that you don't start off again looking at blockchain as a solution and look for a problem. It's looking at your company. So start with the processes, start with what you have. There are different types of organisation. We've seen multiple different types of use cases. Starting there and then figuring out you know is blockchain something that's good for me, that's going to be useful for my organisation.

Paramita: So it's basically a technology that you install in your...?

Ravi: All right. So building on what Mike had said... So if you are a company, there are a few conditions that you need to keep in mind before even considering whether blockchain is a solution for you or not. For example, whether you have like multiple parties and this could be your external partners, your business contractors or different departments within your organisation or so on. If you have multiple parties who need shared access to information who together update certain information there are a lot of intermediaries which basically add complexity and costs. There are transactions which interact with each other and are time sensitive. So if these kinds of conditions satisfy in any of your business processes this is where you can consider using blockchain. So if now depending on what kind of process it is there are different kinds of blockchains that we could use. And now coming to the type of blockchains that are you know that one could think of... so in the case of bitcoin for example anybody who has computational power or in fact just a mobile phone with a public and private cryptographic keys can participate...

Paramita: What is a cryptographic key? You know I have to ask this because you know I can see the tangents going out and I'm trying to grab them...

Ravi: So you basically actually I think already have a public and private key, you just simply don't know that you do. OK?

Paramita: And you're going to tell me what it is...

Ravi: An easy way to think about it is let's say your e-mail address and corresponding password.

Paramita: OK that's my cryptographic key...

Ravi: No that's not really your cryptographic key. So your e-mail address corresponds to your public key. Which is something that you would share with people. And every public key has a corresponding secret key or a private key. This is what you have to keep secret to yourself. Like you keep your password secret. Now to access all the information corresponding to this e-mail address you need both your e-mail address and the password. And whoever has access to this can actually has access to all the information. So it's the same thing. When you want to buy bitcoin for example you essentially transfer bitcoin to this public key. And if you want to access the bitcoin you'll need your corresponding secret key to be able to make transactions. So getting back...

Paramita: Getting back to the types of bitcoin...

Mike: That was cryptographic keys made simple...

Mike: So basically like anybody who has a small mobile phone and who has public and private keys which are very easy to generate can own bitcoins, can participate in the bitcoin network to mine bitcoins and anybody in the network can actually download the ledger, the copy of the ledger and go through all the transactions. Now this essentially means that there is no need of any permissions for anybody to join the bitcoin network. Secondly, it also means because anybody can read the data in the ledger. This is why it's called public or permission less or un-permissioned blockchain. But obviously in enterprise applications this isn’t working. My competitor if he's in the same network and if he can see all the transactions within my organisation my partner will throw me out.

Mike: Yes.

Ravi: So then you also have capabilities to ensure that data can be kept private instead of being open and public. Similarly you also have capabilities of making sure that not anybody can simply join the bitcoin network or block chain network. Only people with permissions can join in. So these kind of blockchains where you need permission to join the network and you have the capabilities of keeping data private or giving access to data only to authenticated people, authorised people, these kinds of blockchains are private and permissioned blockchains. So implicitly I've introduced private, public, permission less, and permissioned. Now there is a lot of combinations that can go around here. I can have a public but permission network and so on.

Paramita: OK my question now is like because I'm thinking we talked about getting rid of intermediaries and everything. Governments can use blockchain right?

Mike: Yeah. Yeah. The governments can use block chain. Again it depends on what it is they want to use blockchain for. You've had many central banks have railed against crypto currency because you know effectively they have no control over it.

But yeah I mean there are various applications that you could use it for you know something like a data repository. So in AML, so in KYC identification you know it can be used effectively for that because again it is immutable... you can't change it. You'd have to only update it in future blocks. You can't go back and change any data in the previous blocks. So from that perspective yeah governments are certainly looking at it from an application.

Paramita: And I'm thinking about corruption that...

Mike: Yeah. So there's you know you hear a lot in the news about bitcoin is all used for drugs and guns and terrorist financing.

But to be honest I think it is probably the worst way of going about that because again as Ravi mentioned it is very transparent.

Paramita: Yes exactly. I was actually thinking the other way around.

Mike: Yeah. You can see everything that's happened from you know the inception of your public key all the transactions that have taken place on the chain. So I think you know I think it's a bit overblown that it's used for that. There are multiple different services now which go through and do an analysis of the chain activity of what's happened in your account. So it is very easy to trace whereas you know if you take a 100 euro bill out of your wallet you have no idea where that's come from or where it's been set. So yeah I think, traceability is definitely there with crypto currency.

Paramita: Yeah I wanted to go into the innovations like we had spoken about that's related to but I'm thinking that probably we won't have enough time for that. So probably let's first talk about the trends that we are seeing right now and the potential future of block chain. And then if we see that we have time then we can probably talk a little about the innovations.

Mike: I mean I guess there's a couple of things I'd mention. So you know again just to address one of the other negative points that people commonly quote about the bitcoin block chain is the energy use for bitcoin. It does use a tremendous amount of energy because it is public because you have multiple thousands of different people around the globe trying to mine bitcoin, because they're still getting rewards. You're still getting the 12 and a half bitcoins for every block you add. And as the more people get added into the network the computing power goes up because they want to you know the protocol is such that it's only one block per every 10 minutes. Right. So it is a very intensive energy use of or intensive use of energy for the blockchain. There are multiple different types of blockchains in blockchain technology some of which are coming out now, which we're seeing are much more efficient from an energy perspective and quite honestly much faster from a transactions perspective. So I think we'll continue to see the evolution of those and I think one of the points that Ravi wanted to mention was around ICOs and STOs in terms of what they are.

Paramita: Yeah ICO... again tangent!

Ravi: All right. Let's rewind a little to understand...

Mike: He doesn't like what I said.

Mike: I like but I was getting into tokens because if I don't talk about tokens we don't talk about ICOs.

So like we mentioned that bitcoin helps in giving all this traceability and serve as you know a source of truth for the business network. Now because you're able to record transactions that are immutable you can also record ownership of certain assets and transfer of assets. And in bitcoin, in blockchain world a token is basically a digital representation of rights. And these rights could be any kind of right. It could be cryptocurrency which means it has value or it could be equity in a real estate property or it could be anything. So a token is basically something which is again a secured way of representing rights. And these are recorded on blockchain. So token ownership when recorded on blockchain has... we have a way to know at any given point in time who owns which part of how many bitcoins or whatever it is that the token represents. Similarly when we perform transactions using this token all the transactions can be recorded. Now starting from 2014 there was this trend where a lot of people came up with a lot of innovative ideas on different kinds of blockchain projects. And then they came up with this process of selling tokens to people. So in return people will be able to use these services that this new platform is going to offer to them. And this process of selling tokens was called ICO - Initial Coin Offering. So anybody could buy these tokens which were sold within this ICO process. And if I hold these tokens I will be able to use some services that this project offers to me.

And this trend, these ICOs ended up becoming a billion dollar industry. Just last year it is estimated that about 20 billion dollars were accumulated by tokens sales.

And so this was a very growing trend, exponentially growing trend, starting let's say about from 2014 until last year, sometime last year. But last year also saw another trend wherein these tokens represented something which was backed by an asset, a real estate property, gold securities or something like that. And currently this notion of Security Token Offering (STO) moving away from Initial Coin Offering is becoming really very popular. And in the next podcast on the second episode of this crypto-blockchain thing my colleague is going to deep dive into tokens and token sales.

Paramita: OK great on crypto assets...

Mike: Yes. Well crypto assets, tokens... tokens in particular because I think that is where you see a big trend in terms of companies using tokens to raise assets and also tokenising different assets as Ravi was mentioning.

Mike: Yes. So we'll go all about tokens.

Paramita: Oh my gosh... I feel like...

Mike: I see it in your face you can't wait.

Paramita: Yeah. Well the thing is because you know it's... I can't say that it's a very heavy topic but it is somehow you know for somebody like me who...

Mike: It's very complex because you know you start talking about the technology and cryptography and you think Oh my God you know what... what is this all about. It's very hard to grasp but you know I think once you get into it just a little bit and play with it becomes much more I guess hard to say it's concrete because you can't touch it or feel it but you understand it a bit better I'd say that.

Paramita: Yeah. Thank you. Thank you both of you for being here for enlightening me. Believe me you have enlightened me you literally because for me blockchain was... the first time that I heard about bitcoin was when somebody became a billionaire or something some years back when he or she sold you know because he had bought at a very peanut value and they sold it and I was like oh wow I should do that. And then I went on the Internet...

Mike: You and everybody else thought the same thing.

Ravi: Who doesn't want to be rich...

Paramita: Yeah I know. So but thank you so much. And like you said we will, I'm sure we'll have other opportunities to you know for another podcast on other blockchain innovations.

Mike: Looking forward to it.

Paramita: So that was Ravi and Mike talking about blockchain, types of blockchain and how businesses can actually use blockchain to their advantage. Hope you enjoyed the show and as always please leave us comments with #PwCTechTalk. Thank you and I’ll see you next time.