A gentle introduction to Ethereum

A gentle introduction to Ethereum


Ethereum builds on blockchain and cryptocurrency concepts, so if you are not familiar with these, it’s worth reading a gentle introduction to bitcoin and a gentle introduction to blockchain technology first. This article assumes the reader has a basic familiarity with how Bitcoin works.

What is Ethereum?

Ethereum is software running on a network of computers that ensures that data and small computer programs called smart contracts are replicated and processed on all the computers on the network, without a central coordinator. The vision is to create an unstoppable censorship-resistant self-sustaining decentralised world computer. The official website is https://www.ethereum.org

It extends the blockchain concepts from Bitcoin which validates, stores, and replicates transaction data on many computers around the world (hence the term ‘distributed ledger’). Ethereum takes this one step further, and also runs computer code equivalently on many computers around the world.

What Bitcoin does for distributed data storage, Ethereum does for distributed data storage plus computations. The small computer programs being run are called smart contracts, and the contracts are run by participants on their machines using a sort of operating system called a “Ethereum Virtual Machine”.

How do you run Ethereum?

To run Ethereum, you can download (or write yourself if you have the patience) some software called an Ethereum client. Just like BitTorrent or Bitcoin, the Ethereum client will connect over the internet to other people’s computers running similar client software and start downloading the Ethereum blockchain from them to catch up. It will also independently validate that each block conforms to the Ethereum rules.

What does the Ethereum client software do? You can use it to:

  • Connect to the Ethereum network
  • Explore Ethereum’s blockchain
  • Create new transactions and smart contracts
  • Run smart contracts
  • Mine for new blocks

Your computer becomes a ‘node’ on the network, running an Ethereum Virtual Machine, and behaves equivalently to all the other nodes. Remember in a peer-to-peer network there is no ‘master’ server and any computer has equivalent powers or status to any other.


How is Ethereum similar to Bitcoin?

I think it’s easiest to understand Ethereum by exploring the similarities and differences between Ethereum and a simpler system, Bitcoin. So what are the similarities?

Ethereum has a blockchain

Like Bitcoin, Ethereum has a blockchain, which contains blocks of data (transactions and smart contracts). The blocks are created or mined by some participants and distributed to other participants who validate them.

You can explore this blockchain here: https://etherscan.io

Blocks form a chain by referring to the hash or fingerprint of the previous block. See a gentle introduction to blockchain technology for a primer.

Ethereum is public and permissionless

Like Bitcoin, the main Ethereum network is a public, permissionless network – ie anyone can download or write some software to connect to the network and start creating transactions and smart contracts, validating them, and mining blocks without needing to log in or sign up with any other organisation.

In general, when people talk about Ethereum they mean the main public permissionless instance (version) of the network. However, like Bitcoin, you can take Ethereum software, modify it slightly and create private networks that aren’t connected to the main public network. The private tokens and smart contracts won’t be compatible with the public tokens though, for now. For more on the difference between public permissionless and private permissioned networks, see confused by blockchains? Revolution vs Evolution

Ethereum has Proof-of-Work (PoW) mining

Like Bitcoin, mining participants create valid blocks by spending electricity to find solutions to a mathematical puzzle. Ethereum’s PoW maths challenge called Ethash works slightly differently to Bitcoin’s, and this allows common hardware to be used for mining. This reduces the efficiency edge of task-specific hardware known as ASICs, which are common in Bitcoin mining.

For more on mining see a gentle introduction to bitcoin mining.

On Ethereum’s roadmap there is a plan to move from electricity-expensive Proof-of-Work mining to a more energy-efficient Proof-of-Stake protocol called Casper, in a future release of the Ethereum software called Serenity.

Ethereum has an inbuilt cryptocurrency

Ethereum’s token is called Ether, shortened to ETH. This is a cryptocurrency that can be traded for other cryptocurrencies or other sovereign currencies, just like BTC. Its current value is around US$13 per ETH token (Oct 2016). Token ownership is tracked on the Ethereum blockchain, just like BTC ownership is tracked on Bitcoin’s blockchain, though at a technical level they track them in slightly different ways.

For more on cryptocurrencies and tokens see a gentle introduction to digital tokens.


How is Ethereum different to Bitcoin?

This is where it gets more technical and in many ways more complex.

Ethereum’s block time is shorter

In Ethereum the time between blocks is around 14 seconds, compared with Bitcoin’s ~10 minutes. This means that on average if you made a Bitcoin transaction and an Ethereum transaction, the Ethereum transaction would be recorded into Ethereum’s blockchain faster than the Bitcoin transaction getting into Bitcoin’s blockchain. You could say Bitcoin writes to its database roughly every 10 minutes, whereas Ethereum writes to its database roughly every 14 seconds.

Ethereum has smaller blocks

In Bitcoin, the maximum block size is specified in bytes (currently 1 MB) whereas Ethereum’s block size is based on complexity of contracts being run – it’s known as a Gas limit per block, and the maximum can vary slightly from block to block.

Currently the maximum block size in Ethereum is around 1,500,000 Gas. Basic transactions or payments of ETH from one account to another (ie not a smart contract) have a complexity of 21,000 Gas so you can fit around 70 transactions into a block (1,500,000 / 21,000). In Bitcoin you currently get around 1,500-2,000 transactions in a block.

Data-wise currently most Ethereum blocks are under 2 KB in size.

The Ethereum Virtual Machine can run smart contracts

Compared with Bitcoin’s primitive scripting language, the code that can be deployed in Ethereum and run as smart contracts is more advanced and familiar to developers. Smart contract code is run by something called the Ethereum Virtual Machine, which runs on the computers of all participants on the network. If you are familiar with Microsoft Excel macros (pieces of code run by Excel), then similarly smart contracts are pieces of code run by Ethereum’s Virtual Machine.

In many descriptions, Ethereum smart contracts are called “Turing complete”. This means that they are fully functional and can perform any computation that you can do in any other programming language.

ETH token issuance

How are ETH tokens printed or created? The biggest difference between ETH and BTC token generation is that BTC generation halves approximately every 4 years whereas ETH generation continues to be generated at a constant number every year (perhaps only until the Serenity version).


This is a lot more complicated than Bitcoin. In summary, the number of ETH in existence are:

Pre-mine + Block rewards + Uncle rewards + Uncle referencing rewards


Around 72 million ETH were created for the crowdsale in July/Aug 2014. This is sometimes called a ‘pre-mine’. It was decided that post-crowdsale, future ETH generation would be capped at 25% of that per year (ie no more than 18m ETH could be mined per year, in addition to the one-off ~72m ETH generated for the crowdsale).

Block reward

Currently each block mined creates 5 fresh ETH. Doing the maths, if a block is mined every 14 seconds, and there are 31.5m seconds in a year (365x24x60x60), this means 2.25m blocks are mined per year. 2.25m blocks at 5 ETH per block = 11.3m ETH generated per year. This meets the commitment of less than 18m ETH generated per year.

Uncle reward

Actually it’s a little more than that. Some blocks are mined a little late and don’t form part of the main blockchain. In Bitcoin these are called ‘orphans’ and are entirely discarded, but in Ethereum they are called ‘uncles’ and can be referenced by later blocks. If uncles are referenced as uncles by a later block, they create about 4.375 ETH for the miner of the uncle (7/8th of the full 5 ETH reward). This is called the uncle reward. Currently around 500 uncles are created per day, adding an additional 2,000 ETH into circulation per day (~0.7m ETH per year at this rate).

Uncle referencing reward

And there’s a bit more too: A miner who references an uncle also gets about 0.15 ETH per uncle (maximum 2 uncles).

This model described above, where valid blocks are determined and miners are rewarded, is called the Ghost protocol (Greedy Heaviest-Observed Sub-Tree).

Future changes to ETH generation

It hasn’t really been decided yet what happens to issuance when Ethereum moves from Proof-of-Work (including the Ghost issuance rules) to Proof-of-Stake as the block-addition mechanism. The Proof-of-Stake mechanism will use a protocol called Casper (yes, as in the friendly ghost. Who says cryptonerds don’t have a sense of humour?). The rate of ETH issuance under Casper may very well be lower than it is now under Ghost.

Mining rewards

So, what do miners get for mining?

In Bitcoin, the miner of a block receives:

In Ethereum, the miner of a block receives:

  • 5 new ETH block reward (0r 4.375 new ETH for an uncle), plus
  • a small new reward for referencing up to 2 recent uncles (1/32 of a block reward ie 1/32 x 5 ETH = 0.15625 new ETH per uncle), plus
  • gas from contracts that were run during the block

Currently the average block has a gas limit of 1,500,000 Gas, and the network has an average Gas Price of 0.000 000 022 ETH, meaning that a miner might make 0.033 ETH in a ‘full’ block as the Gas reward. Note that the Gas from contracts are payments of existing ETH, not new ETH being created.

Other parts to Ethereum: Swarm and Whisper

Computers need to be able to calculate, store data, and communicate. For Ethereum to realise its vision as an unstoppable censorship-resistant self-sustaining decentralised ‘world’ computer, it needs to be able to do those three things fairly efficiently and in a robust way. The Ethereum Virtual Machine is just one component of the whole:

  • The Ethereum Virtual Machine is the ‘calculate’ element that can run contract logic
    • This is computation without relying on a central server.
  • Swarm is Peer-to-Peer file sharing, similar to BitTorrent, but incentivised with micropayments of ETH. Files are split into chunks, distributed and stored with participating volunteers. These nodes that store and serve the chunks are compensated with ETH from those storing and retrieving the data.
    • This is file storage without relying on a central server.
  • Whisper is an encrypted messaging protocol that allows nodes to send messages directly to each other in a secure way and that also hides the sender and receiver from third party snoopers.
    • This is communications without relying on a central server.


Ethereum concepts

Smart contracts

Smart contracts are little computer programs that are stored on Ethereum’s blockchain. They can be activated, or run, by funding them with some ETH. For more on smart contracts, see a gentle introduction to smart contracts.

Here’s an example smart contract, taken from Wikipedia:


Source: https://en.wikipedia.org/wiki/Solidity

In Ethereum you set up a smart contract by creating a new account with some code in it, and uploading it to the Ethereum blockchain in a transaction.

Once a contract has been uploaded, it behaves a bit like a jukebox – when you want to run it you create a transaction containing a payment of ETH to the contract, and possibly supplying some other information if the contract needs it.

Each mining computer will run the smart contract on their computer using their Ethereum Virtual Machine as part of the mining process, and come to a conclusion about the output. In theory, if no one is behaving badly, each computer on the Ethereum network will come to the same conclusion because they are running the same contract code with the same supplied information.

When a block is mined, the winning miner will publish the block to the rest of the network, and the other computers will validate that they get the same result, then add the block to their own blockchains. This is how the state of Ethereum’s blockchain gets updated.


In Bitcoin, there is a concept called address where bitcoins are stored – like a bank account number, but for bitcoins. In Ethereum these are commonly called accounts and there are two types:

Uncles and Orphans: blocks that don’t quite make it

Ethereum’s rate of block generation is much higher than Bitcoin’s (250 blocks per hour on Ethereum vs 6 blocks per hour on Bitcoin). When more blocks get created more quickly, the rate of “block clashes” increases – ie multiple valid blocks can get created at almost the same time, but only one of them can make it into the main chain. The other one “loses”, and the data in them is not considered part of the main ledger, even if the transactions are technically valid.

In Bitcoin these non-mainchain blocks are called orphans or orphaned blocks and they do not form part of the main chain in any way and are never referenced again by any subsequent blocks.

In Ethereum they are called uncles. Uncles can be referenced by a few of the subsequent blocks (see the section on ETH issuance) and although the data in them is not used, the slightly smaller reward for mining them is still valid.

This achieves two important things:

  1. It incentivises miners to mine even though there is a high chance of creating a non-mainchain block (the high speed of block creation results in more orphans or uncles)
  2. It increases the security of the blockchain by acknowledging the energy spent creating the uncle blocks

Gas and Gas Price

When you activate a smart contract, you ask all the miners in the whole network to each individually perform the calculations within it. This costs them time and energy, and Gas is the mechanism by which you pay them for that service.

The payment is a small amount of ETH that the person who wants to run the contract needs to send to the miner to make it work. This is similar to putting a coin in a jukebox.

Payment (in ETH) = Gas amount (in Gas) x Gas price (in ETH/Gas)

Gas amount

The more complex the smart contract (the number and type of computational steps, memory used for storage, etc), then the more Gas the contract requires to run and complete. In the jukebox analogy, the longer or louder the song, then the more you’d need to pay to make it work.

Gas Price

Whereas the amount of Gas to run a contract is fixed for any specific contract, as determined by the complexity of the contract, the Gas Price is specified by the person who wants the contract to run, at the time they request it (a bit like Bitcoin transaction fees). Each miner will look at how generous the gas price is, and will determine whether they want to run the contract as part of the block. If you want miners to run your contract, you offer a high Gas Price. In this way it’s a competitive auction driven by how much someone is willing to pay to have a contract run.

Why Gas?

Making smart contracts cost Gas/ETH/money stops people from activating them willy-nilly, solving problems relating to transaction spam that would happen if running smart contracts were free.

ETH Units

Just like 1 dollar can be split into 100 cents, and 1 BTC can be split into 100,000,000 satoshi, Ethereum too has its own unit naming convention.

The smallest unit is a wei and there are 1,000,000,000,000,000,000 of them per ETH. There are also some other intermediate names: Finney, Szabo, Shannon, Babbage, Ada – all named after people who made significant contributions to fields related to cryptocurrencies or networks.

Wei and Ether are the two most common denominations.



Smart Contract languages: Solidity / Serpent, LLL

There are three common languages smart contracts are written in, which can be compiled into smart contracts and run on Ethereum Virtual Machines. They are:

  • Solidity – similar to the language Javascript. This is currently the most popular and functional smart contract scripting language.
  • Serpent – similar to the language Python, and was popular in the early history of Ethereum.
  • LLL (Lisp Like Language) – similar to Lisp and was only really used in the very early days. It is probably the hardest to write in.


Ethereum software: geth, eth, pyethapp

The official Ethereum clients are all open source – that is you can see the code behind them, and tweak them to make your own versions. The most popular clients are:

These are all command-line based programs (think green text on black backgrounds) and so additional software can be used for a nicer graphical interface. Currently the official and most popular graphical one is Mist (https://github.com/ethereum/mist), which runs on top of geth or eth.

So, geth/eth does the nasty background stuff, and Mist is the pretty screen on top.


History: Ethereum Timeline

Vitalik Buterin described Ethereum as a concept in a White Paper in late 2013. This concept was developed by Dr. Gavin Wood who eventually published a technical Yellow Paper in April 2014. Since then, the development of Ethereum has been managed by a community of developers.

A crowdsale to fund development took place in July and August 2014, and Ethereum’s live blockchain was launched on 30 July 2015.

Ethereum crowdsale

The development team was funded by an online sale of ETH tokens during July to August 2014 where people could buy ETH tokens by paying in Bitcoin, at an initial fixed rate of 2000 ETH for 1 BTC (currently in Oct 2016 1 BTC will buy you 50 ETH on the open market).

Crowdsale participants sent bitcoins to a bitcoin address and received an Ethereum wallet containing the number of ETH bought. Technical details are on Ethereum’s blog https://blog.ethereum.org/2014/07/22/launching-the-ether-sale/

A little over 60m ETH was sold this way for a little over 31,500 BTC, worth about US$18m at the time. An additional 20% (12m ETH) were created to fund development and the Ethereum Foundation.

Software Release codenames: Frontier / Homestead / Metropolis / Serenity

These are friendly names for versions of the core Ethereum software, a little like Apple’s OS X version names such as Mavericks, El Capitan, Sierra.

  • Olympic (testnet): Launched May 2015 – a testing release where coins are not compatible with ‘real’ ETH. A testnet still runs in parallel to the main live network so that developers can test their code.
  • Frontier: Launched 30 July 2015 – an initial live release with a way for people to mine ETH and build and run contracts.
  • Homestead: Launched 14 March 2016 – some protocol changes, more stability.
  • Metropolis: Future launch – moving from command-line to graphical interfaces.
  • Serenity: Future launch – moving from Proof of Work to Proof of Stake (Casper).



The vision of the Ethereum’s development team is to build an unstoppable censorship-resistant self-sustaining decentralised world computer that can perform calculations, store data, and allow communications.

There is a public permissionless open source version, and forks or copies of this have been taken and adapted for private network use. The public and private versions are attempting to solve different problems.

The technology is currently immature, but as more people use it, test it, develop it and build on it, it will improve and become more robust.

Ethereum is one of the most exciting technologies in the Blockchain space, so keep following its progress!

3 Oct update: A few people have commented that I have not written about The DAO (“Decentralised Autonomous Organisation” – a specific smart contract that acted liked a crowd-based Venture Capital fund, whose funds were drained by a hacker who took advantage of sloppy smart contract coding) or Ethereum Classic (an alternative public Ethereum blockchain which split off from the main Ethereum-core-developer-supported chain on 20 Jul 2016 as a response to the hacking of The DAO, with separate tokens called ETC sharing a common ancestory with ETH prior to block 1,920,000). This article is intended to be an introduction to Ethereum, and those two topics are more advanced and probably deserve separate posts.

The emergence of blockchains as Activity Registers

This post tries to describe two very different uses for blockchain technology: Digital Token Ledgers that record ownership changes of digital tokens, and Activity Registers that record timestamped proofs of existence of data or agreements about data.  Bitcoin is used for both.

On Tuesday 2 August, I had the privilege of attending an event hosted by the Monetary Authority of Singapore (Singapore’s financial services regulator and central bank). For 90 minutes we heard from an all-star panel:

This was charismatically chaired by Tim Grant, head of Lab and Research Centre at R3.

Two types of ledger

One of the panelists said something that got me thinking – using blockchains for what she called proof of satisfaction, ie evidence of agreement or assertion that something happened to the satisfaction of the parties involved.

It seems that two types of blockchain* or distributed ledger are emerging: blockchains as digital token ledgers, and blockchains as registers where proofs of activities (transactions, bets, etc) are recorded.


1. Digital token ledgers

These ledgers record ownership and changes to ownership of digital tokens. There are two distinct types of token:

  • Digital Assets: The token is the asset. The classic example of this is Bitcoin. You own a bitcoin, that’s it – you can’t take that to anyone and claim the ‘underlying’ thing. Satoshi doesn’t own a bunch of gold which he promises to give you if you wave a bitcoin at him. (Neither do central banks for fiat currencies, but that’s for a different post).  A bitcoin is your asset, and there is no corresponding liability owed by someone else.
  • Digital Claims: The digital token is a claim for something against someone else who promises to give you the actual asset upon presentation of the token. It’s a debt token, or an IOU. It’s your asset, but their liability.  The classic example is user-issued tokens on Ripple, where “Gateways” (eg banks) issue tokens representing underlying assets (eg gold) or issue them in place of existing liabilities (eg currency deposits). These tokens can be passed around to different owners, where changes to ownership are recorded on the shared ledger, and where owners ultimately need to come back to the issuer to claim the underlying thing, rather like claiming your coat by presenting your cloakroom ticket at the theatre.  (NB user-issued tokens on Ripple are not to be confused with Ripple’s underlying token XRP which actually is an asset)

2. Activity Registers

This second class of blockchain contains entries that contain data, usually fingerprints of data called hashes, possibly stored with some other non-sensitive metadata.  The data can represent anything, but in the financial services context, they might be trade facts about transactions negotiated and agreed “off-chain” via another channel.  This keeps the commercially sensitive secrets off the industry-shared ledger, while leaving an indelible mark on it that can be referred to later if needed.

For example:

  1. Two banks agree on a trade, with various trade facts (dates, price, amounts, etc). They can agree via any mechanism such as telephone, email, click and trade, or carrier pigeon.
  2. They both record the trade details in some very standardised way (standards are important here as pedantry is key when creating and agreeing hashes).
  3. They calculate and agree the hash of the trade facts.
  4. The hash gets submitted onto some sort of timestamped industry blockchain, cryptographically signed or agreed by one or more parties.

Note that the hashes themselves can’t be backwards-engineered into the trade fact data, if they are well constructed. But in the future either party can take their copy of the trade facts and show it to anyone interested and point to the hash on the blockchain which proves:

  • These are the original trade facts – or at least these trade facts existed at the timestamp time.
  • Whoever signed the hashes, must have also agreed to the trade facts (if there was some some sort of requirement for both parties to put a signature against the hash in the first place).

This concept can also be used to store data such as images, newspaper headlines, identity information, etc.

Which blockchain should activities be registered on?

Private blockchain supporters prefer to store proofs of activity in databases visible to only known participants, with the comfort that all writers are known entities, and censorship may be possible, if required, and it is also cheap to write on a private blockchain.

Public blockchain supporters would argue, well if all you’re doing is putting hashes somewhere without giving away any trade facts, then why not use Bitcoin’s blockchain as it is the most tamper-resistant and battle-tested chain, and the cost of transactions can be kept low by bundling data and committing the bundle at once – using techniques like Merkle trees.


As an industry I think we need more differentiated terminology, or at least be clear on what we are talking about. I would suggest Distributed Ledgers with Asset Tokens, Distributed Ledgers with Claim Tokens, and Distributed Activity Registers. Hmm, not as sexy as ‘blockchain’, but probably more clear.


Blockchains seem to be being used for very different uses: recording ownership changes of digital tokens, and recording activity with timestamped proofs of existence of data or agreements about data.


Bitcoin has a blockchain which contains:

  • Asset Tokens (BTC) – this was the intended use
  • Claim Tokens in the form of Colored coins etc – not really the intended use
  • Hashes of data – not really the intended use


Ethereum has a blockchain which contains:

  • Asset Tokens (ETH or ETC depending on which Ethereum!)
  • A multitude of ‘user generated’ tokens that are created and managed through smart contracts
  • Hashes stored in smart contracts


Ripple is a distributed ledger which contains

  • Asset Tokens (XRP) used mainly as an anti-spam mechanism to make each transaction cost a tiny amount
  • Claim Tokens (gateway-issued tokens) whose transmission from user to user is the main purpose of Ripple
  • Hashes of data – not really the intended use

Private Industry Activity Registers

These may be distributed or not, but they are databases that contain:

  • Immutable(ish) records of hashes of private activities between participants
  • Usually cryptographically signed by known participants for non-repudiation

The distributed ledgers may not include records of real final settlement of actual digital assets eg stock ownership:

  • unless the token is the asset a la Bitcoin or a real central bank-issued digital currency
  • and because of privacy issues around letting your competitors know what you own


* In this post I will (ab)use the word blockchain to mean replicated databases controlled by multiple equivalent owners with equivalent write-privileges, using digital signatures as part of authentication and data validation. What a mouthful.

So you want to use a blockchain for that?

There are good reasons and bad reasons to use blockchains. In conversations with people thinking about blockchain use cases, I have noticed common confusions and conflations arising from words initially used in a narrow context (usually to describe bitcoin’s blockchain) being understood more generically for blockchains. In this post I hope to untangle some of these common misconceptions.

Theme: Blockchains are secure

Writing data

Bitcoin has some specific security for writing data due to the burden of proof-of-work. That is, in order to add blocks of transactions, you have to validate all the transactions within the block (easy) and then perform repeated calculations (called hashing) to find a magic number that makes your block valid and acceptable to the other participants according to the rules of the network (easy, but computationally expensive, therefore energy intensive, therefore expensive). This proof-of-work burden combined with the longest chain rule makes it expensive to mine your own subversive chain.

Private chains on the other hand, with known block-adders, may have other mechanisms replacing proof-of-work that limit the ability to subvert the chain. These rules can specify that blocks need to be signed by a limited, known list of signatories, in some round-robin fashion. The knowledge of which entity signed which block, with rules in place to make entities take it in turns to write blocks is enough to discourage or limit unilateral bad behaviour.

Reading data

Bitcoin, and blockchains, do not have inherent security against read access. Indeed, blockchains are mechanisms for copying data to all relevant participants – this is what consensus is all about.

If you think you have cybersecurity headaches controlling read-access to one central database, then multiply that by the number of nodes in your blockchain to get the new attack surface area of your blockchain.

You can control read-access to some degree by encrypting certain elements on your blockchain and handing out the keys to the relevant participant. But consider the threat of industrial espionage where keys are sold to a rival organisation who also runs a node – now the rival can read your data without even penetrating your system, because the blockchain is copying the data right into his data centre!  There may be solutions here involving key-rotation, but historical data also needs considering.  The value of the third party is that they can control access to the data more finely.  They also provide a single entity to litigate against if they expose private data or they breach their contractual obligations.

Denial of service

Blockchains are more resilient than centralised systems against denial-of-service attacks, due to their peer to peer, multi-redundant nature. If one node is taken offline, the others keep working. Users connected to the disabled node will be unable to connect, unless there is a mechanism in place for them to try some other nodes to fall back to.

Theme: Blockchains are encrypted

There can be confusion between the cryptographic methods used in bitcoin (hashing, digital signatures) and data on blockchains being encrypted (data stored as cyphertext). This can lead to people thinking that data on a blockchain is by default encrypted.

In fact, data on blockchains is by default not encrypted, especially data that needs to be validated by the nodes. In bitcoin, transaction data is not encrypted, as you can see by looking at any transaction in bitcoin’s blockchain. For a deeper look explanation of the specific elements in a bitcoin transaction see here.

The most apparent problem with encrypting data on a blockchain is primarily that the encrypted data can’t be validated, because nodes need to know what they are validating. For example, if I am validating the legitimacy of your payment of 2 BTC from your wallet, I need to know the contents of your wallet (ie your previous inbound transactions) and the fact that you are trying to spend 2 BTC (and which ones).

In a private chain, if all validating nodes can decrypt your data by having decryption keys, then you need to consider why you are encrypting it in the first place.

There are solutions emerging from primary cryptographic research for the ability to prove facts about data without knowing the underlying data itself, known as zero-knowledge proofs, but this technology is not currently mature.

If privacy is important, then consider what needs to be encrypted: All data at rest? Data in motion? The whole database? Data within specific database fields? And who will be able to decrypt it and when? How will permissions be granted? Can permissions be revoked? What happens if a third party gets a decryption key through a rogue staff member? What happens if a legitimate user loses a decryption key?

Key management is a crucial part of data security – even more so when the data is freely shared between (usually) competitors in an industry, and needs to be carefully considered in a blockchain solution.

Theme: Using a blockchain allows better access to data

Many existing centralised solutions already do an excellent job of allowing access to data, with carefully controlled read and write access, and also a layer of accountability on the central owner of the data who can react to either moral imperatives or legal directives. For example Facebook is quite accessible globally, can take down hate speech or copyrighted material.

Blockchains can make access control to data more complex, and immutability is not without its downsides. In many potential use cases being examined, nodes are run by a separate entities or groups (if they’re not, then consider why you’re using a blockchain in the first place), and each entity controls and manages its own access control to the data. There may be challenges around managing access control across all entities that have a copy of the blockchain data.

Theme: This blockchain allows end users to do [x] peer-to-peer without a middle man

This narrative seems to have come from bitcoin’s whitepaper which describes the purpose of bitcoin  to allow people to send digital cash from person to person without a specific financial intermediary. If you count the miner adding the block as an intermediary who collects fees and rewards for his work, then there are intermediaries in bitcoin, but the point is that they are not specific (one miner can substitute for another), and you are not beholden to a specific miner for your transactions to work or not.

For many private blockchains currently being described in industry, there are middle men – these are the participants running the nodes, or the technology vendors clipping tickets to monetise their blockchain solutions.

Theme: Users will run their own blockchains on their phones

I have occasionally heard ideas where users need to store blockchain data on their phones (especially for use cases where users should own their own data). Beware the mobile phone blockchain, as it implies that the phone will be constantly chatting to the rest of the network, downloading and uploading other people’s data non-stop to remain in consensus.

Theme: The blockchain will be an immutable record of all events

In bitcoin, where old transactions need to be tracked in order to figure out the validity of new transactions, this is the case. It is also the case that a bitcoin transaction only “happens” or settles if it is broadcast to the bitcoin network and is accepted into a block. Each event in bitcoin is a necessary event to build up the picture of the state of the ledger.

This does not mean that if you throw a blockchain at a random problem, you will immediately accurately capture every single event. Events need to be input by someone or something and then broadcast and accepted for them to be recorded. Data on a blockchain doesn’t imply accuracy – events need to be recorded accurately in the first place. This is even more important when the record may be immutable.

Theme: Because it’s on a blockchain, it’s true

This is a confusion around use of the word “true”. In bitcoin “true” means that the network has agreed that a transaction has taken place, and nodes are in agreement or consensus that this has happened.

The concept of “truth” as applied to blockchains doesn’t extend to other meanings of “true”. If a heart-monitoring piece of hardware becomes faulty and records incorrect heart-rate readings onto a blockchain, do the readings become truth? Clearly not.

On a registry of car ownership, a blockchain may immutably record that a car has changed owner. If this transaction was made in error or fraudulently due to a hacking of the owner’s phone, what is the state of the truth? If the transaction was found to be fraudulent by the police and needs to be ‘unwound’, then how will that be done, given the cryptographic security of digital signatures? (there are solutions, but they just need to be thought through)

In the case of blockchains, truth just means “what was originally recorded and agreed as valid by the majority of the nodes”.  Valid doesn’t necessarily mean true. Don’t confuse blockchain truth with The Truth.  For a trivial but concrete example of an immutable lie on multiple levels, see here.

Theme: Data stored on a blockchain

This is prevalent in the blockchains-for-KYC and blockchains-for-document-storage space.

Comments such as “This is stored on the blockchain” can cause confusion when a hash of a document (pdf, jpeg etc) is published to a blockchain. A hash is not an encrypted version of an original; and when a hash is stored, you can’t retrieve the original by decrypting the hash. The hash of a fingerprint of the data, and if it is stored on a blockchain, someone who has kept an exact copy of that data (off chain) can prove that that specific data existed at the timestamp when the hash was stored on the blockchain.

While you can store whole documents on blockchains (after all a blockchain is just a database coupled with software that validates and shares new entries to the other participants), passing large chunks of data around, at speed can create its own set of problems.

Theme: Participants to a blockchain

There can be confusion when the word “participants” is used.  Generally speaking there are three main types of participants to blockchains:

  1. Participants who write blocks (in bitcoin these are called miners and they crunch numbers)
  2. Participants who maintain the entire blockchain and validate and propagate new entries (in bitcoin these are generally called full nodes)
  3. Participants who are the end users of the functionality of the blockchain, usually accessing the blockchain by connecting to a full node (in bitcoin these are generally called users)

It may be best to always spell out exactly which participants are being referred to.

Theme: Well what should I use a blockchain for?

Blockchains are great when multiple parties need to read the same information but for whatever reason there can’t be or shouldn’t be any specific individual party in control of that data. Gideon Greenspan has written a great article about avoiding the pointless blockchain project here, and then describes some genuine use cases here.

Theme: If I use the word ‘blockchain’ I can get budget

Go for it! The only way the technology will improve is by people trying it and adapting it to fit problems better. Try to understand and be aware of the limitations and complexities early and be careful about over-fitting a trendy technical solution to a problem.







KPMG Report on Consensus: Interview with co-author George Samman

KPMG Report on Consensus: Interview with co-author George Samman

Q&A with George Samman, co-author of KPMG’s report: “Consensus: Immutable agreement for the Internet of value”

This interview is posted on both www.sammantics.com and www.bitsonblocks.net. Interviewer is Antony Lewis (AL) and interviewee is George Samman (GS).





George, it’s a pleasure to chat with you.  The KPMG report “Consensus: Immutable agreement for the Internet of value” you co-authored was an interesting read and shone a light on some of the challenges facing private blockchains and distributed ledgers.  How would you summarise the findings?



One of the key findings is that getting consensus right is really hard and some of the brightest minds in the space are coming to terms with this and re-examining a lot of the work they have done or researched.  Trying to re-model existing blockchain technology turns out not to be the answer.



When you say “getting consensus right”, what do you mean?  Do you mean multiple databases all reaching the same state quickly, or do you mean something else?



Consensus has been around for as long as human beings have formed societies and needed to come to a state of agreement without necessarily trusting each other.  For purposes of this interview, we can refer to consensus computing for distributed systems.   In this context, it’s a way for nodes to agree on the validity of a transaction and updating the ledger with a coherent set of confirmed facts.



How would you describe the problems around achieving consensus?



Keeping data in sync and ordering transactions are what consensus mechanisms are supposed to do.  The main problem that is being researched is around network stability and latency.



Why is getting consensus right hard?  Why is the consensus methodology important?



Most of the material on the subject of consensus comes from academic papers and applications in other industries like air traffic control or stabilizing airplanes.  The challenges are very different to the consensus challenges in capital markets – this hasn’t been done before and the issues are different.

For example, ordering becomes really important when you are dealing with stock market order books.  If multiple people are bidding for a stock at the same price who is the first one to get that price?  An issue of fairness also comes into play which some blockchain systems suffer from because of how they are attempting to achieve consensus. Leader based consensus systems have this problem because the leader selects the ordering of data, so you end up with a centralisation of control, which is what we are trying to avoid. So depending on the use case, the consensus mechanisms themselves become extremely important.

Further, with certain consensus systems, it turns out that there are a maximum number of nodes you can have before the system breaks. This is certainly an additional complexity if you need a lot of nodes in a network where parties do not trust each other but want to have equivalent write-access to the same ledger.

Getting consensus right is critical particularly when nodes can be located all over the world, and network latency adds another layer of complexity to system stabilization.



Point taken on pre-trade orderbooks – I suspect that’s why this isn’t an area of focus any more for private blockchain vendors to financial service companies.

In terms of node distribution or decentralisation, I don’t see any reason why nodes in a high throughput distributed ledger will end up being scattered across the world.  Although with Bitcoin, we currently see geographical distribution for nodes, I think that any successful distributed ledger for the traditional financial industry will have nodes clustered in the same data centres, in the same building, where a number of banks rent hardware sitting physically next to each other, connected with short cables.  This should help to reduce some of the latency issues.  Of course this will be replicated to other data centres as redundant backups in case the main one fails.

To summarise, the ‘distributed’ in ‘distributed ledger technology’  will be ownership distribution rather than geographic distribution.



That makes sense.  Although, if you want true distribution of the information, geographically distributing the nodes and using different cloud providers for the nodes add an extra layer of distribution and security.





Moving on from consensus, to the concept of scalability and transaction throughput.  In financial markets a lot of tickets are printed, from the start of the process with orders being submitted and cancelled within milliseconds, through to matched trades and eventually settlement.  Clearly you need throughput.



The problem of consensus becomes harder by orders of magnitudes when dealing with how many transactions financial institutions make. Its essential for the network to be up and running all the time. Scaling to 10s of thousands of transactions per second and beyond, keeping the network up and running is extremely difficult. This is why there aren’t many projects that are in production and able to do this as of today.  It’s a big challenge.   A general principle that could be thought about is to run two sets of consensus mechanisms one which runs locally and one which runs globally and make them intersect, this could be done at intervals of time in a Baby Step Giant Step (BSGS) manner.


Regarding  scalability the notion that you start a blockchain with an endless lifetime is still preliminary. The reasoning for that is 3 fold:

    1. Public blockchains are supposed to be everlastingly immutable, but are immature and have not yet figured out how to deal with unknown issues, as we have seen with the recent issues with The DAO.

<li”>Technological innovation has yet to come up with a suitable solution for the transaction volume common in the financial sector, and this also then becomes a consensus problem as well.

<li”>Configurations – you can’t deploy a single service solution until you’ve tested and retested the correct configurations for such a vital network railroad.



I have seen internal “Proof of Concepts” where a single or double node blockchain is spun up, with a user-friendly front end.  They seem to work, at a rudimentary level.  Surely it’s now a case of institutionalising the technology?



Yes you are right the Proof of Concepts are validating that the technology “might be able to live up to its promise.”.  They also have great marketing value.  However, this is a long way off from institutionalized technology and the inherent stability necessary for this.  Institutional technology needs to be battle tested and hardened, and has to be as antifragile as possible.  Hence, I believe the cycle to get the technology up to an acceptable level for satisfying a switchover will be longer than people think.  There can be no room for mistakes even if there are inherent benefits in the technology.



Ok, aside from consensus and scalability, what are the other challenges facing the private “DLT” space?



I think one of the challenges continues to be a lack of industry standards. The longer that common standards and protocols aren’t agreed and written up by industry participants, the more harmful it can be when trying to integrate different solutions, and the further away from interoperability we become.  Is distributed ledger technology creating the next legacy system problem?

Another problem is a technical problem around interoperability with existing systems and potentially between different blockchain networks.  I think this directly correlates to the above point about standards and protocols.  How will these ledgers interact if they are built separately for different types of assets and then work with existing market infrastructure technology?

What we are seeing is sort of the exact opposite of a common framework being adopted where people are trying all sorts of different things.



Sure, but that’s what you would expect with a new set of technologies – and then some sort of Darwinian selection process will occur, and the best will win.  At the heart of it, this seems to be an interoperability and standards discussion. APIs and inter-system communication comes to mind here.  It seems that a lot of the interoperability issues could be fixed by creating standards for common APIs.  You then remove the privacy concerns of shared ledgers.  But APIs don’t solve for immutability and decentralised control – if that’s really what’s wanted.





An interesting takeaway is that R3 is not building a blockchain.  That’s surprising to some people – one of the world’s most well known “blockchain companies” is not building a blockchain!



I think it’s surprising because some people thought that private “distributed ledger technology” would be the panacea to cure us of all the “ills” of public blockchains (total transparency of network, mining and potential centralization, anonymous actors and the slow speed of transaction times) – however we have seen that is not the case.  In my opinion, R3 realized that the financial problems they aim to solve are not blockchain compatible at the present time.

We are seeing the amount of nodes in these distributed ledger networks shrink all the way down to two – ie back to bilateral communication, with “consensus” being the two nodes agreeing. This is centralization and the exact opposite of what blockchains try to solve for.  A blockchain is supposed to offer immutable consensus. The benefits of transparency, no middleman, p2p transacting without needing trust and speed are what appealed to me about blockchains to begin with.

This also applies to replication of the data: while this can certainly be permissioned to allow certain nodes to have certain actions, those in the network benefit by knowing that whatever business logic that was supposed to happen did the way it was supposed to.

Well, in every system and with every tool there are tradeoffs. When you are performing certain capital market operations, and privacy and confidentiality are most important, a distributed ledger may not be your best tool. Particularly when we are still trying to get consensus right for scaling to hundreds of thousands of transactions per second.

Corda solves the consensus and ordering problems by not being a blockchain requiring network consensus: instead, computers communicate and agree bilaterally.  This gets rid of a lot of the complexity involved with the privacy issues of forming a network with your competitors.  This also brings in a great debate about whether or not a blockchain will be the end solution and if that solution will need consensus. Let the debate begin!  In my opinion Corda can be considered more of an oracle that can connect to blockchains if necessary.



What do you mean, an oracle that can connect to blockchains?



What I mean by oracle is a bridge between a blockchain and the outside world, so in the case of Corda it’s a platform that can speak to blockchains but is not a blockchain itself.



On 2 June this year, Morgan Stanley Research published a report stating “For ASX, blockchain deployment seeks to reduce market costs, defend the clearing monopoly and grow new revenue streams”.  It’s amazing that we have moved from blockchains being “disruptive” to blockchains being used to “defend the clearing monopoly” so quickly!  No wonder there is confusion!  I tried to clarify this here: https://bitsonblocks.net/2016/05/09/confused-by-blockchains-revolution-vs-evolution/



You are getting from the banks a lot of Orwellian doublethink. This is the ability to hold two contradictory thoughts in your head and believe that they both are true.  In this case that blockchains will change the world but we can’t use them properly for certain things we need to do, in a way we are comfortable doing them.

There have also been cautious, or even negative sentiments in recent days about the utility of blockchain technology. The CEO of ICE is not convinced about blockchains.



Sure, some will hate, some will love.  What are you getting at?



I would just say be cautious of false narratives and that there is a deep need for understanding what this technology is really good at, and what it might not be good at.

For me, consensus is a feature not a bug.  A blockchain is a transparency machine like nothing that has come before it. Therefore, if you want a blockchain, look for use cases where total transparency is suitable. There are three questions that need to be answered in order to help you guide your decision making:

  1. Who are you?
  2. What do you want to achieve?
  3. Who will be the nodes?

If you can answer these questions than you are on your way to figuring out consensus and the types of permissions you want to configure in your blockchain experiment.

Knowing the types of entities that are going to be involved in the transaction as well as the type of assets being created are also big steps.  Once you have a handle on this figuring out the consensus layer is much easier and you can start to build applications on top of the stack.



What about the Proof of Concepts that we are seeing in the media?



A lot of the use cases that companies are going after right now don’t need a blockchain – or at the very least, the end clients – often banks, aren’t needing a blockchain solution for them yet.  A lot of the blockchain companies are also Proof of Concepts themselves and have still not been taken “out of the box.”.  This is where separating hype from reality starts. I also think a lot of use cases people are looking at for a blockchain to solve are things that aren’t meant to be solved by a blockchain.

From the company side it is important to define your identity: Are you a blockchain company or a company using a blockchain? There is a big difference. For example, if you are working on solving issues in trade finance and you are using a blockchain as a solution, unless you are designing your own platform from scratch, you are just improving efficiencies using technology, but you are still a trade finance company.





Clearly we’re at the start of the innovation cycle and the problem is just that the hype and promise has accelerated and deviated from how quickly we can deliver.  This is an unfortunate reality, but sometimes necessary to attract the investment needed to light up a technology.  Can we reach the promised land of $20bn reduced annual cost by using distributed ledgers?



I think eventually we do reach the $20 billion mark, and that’s nice, but it’s not revolutionary.  It’s also a drop in the bucket compared to what banks spend today.  In order to get there and switch systems, the costs saved will need to outweigh the money invested to do that. That hurdle may be too large to jump.  Maybe the way to think about it is, are there other accrued costs which will also be saved aside from just reducing settlement costs and backoffice reduction savings.  The answer is to this is yes.

While the cost savings are appealing to banks for many reasons talked about, I think the more relevant story will be how can we generate revenue from the apps built on DLT technology.  While ideas are floating around now, the reality will probably look very different from their original conception.



You’re talking about how blockchain / DLT technology providers will monetise?



Yes, the VC funding cycle has become long in the tooth and the IPO market is no longer attractive. Some of the private company tech darlings, including Airbnb are getting valuation writedowns.  The FinTech narrative is starting to question monetisation paths, and where the revenues will come from when VC money dries up.



Scary picture – when and how will VC money dry up?



This can come from rate hikes in the future or recession or some shock to the system.  It’s hard to predict, however the funding cycle has become long in the tooth.  Global growth has slowed and even Mary Meeker pointed this out in exquisite detail in her latest state of the union.

Particularly in the blockchain space, The DAO should be looked at as the top. This is really madness in a lot of ways but based on the sheer amount of money that was raised is astounding. I think we are post peak-hype and reality will start to set in sooner rather than later.



The DAO raised the USD equivalent of $150 million from pseudonymous investors, to fund unknown projects, to be voted on by unknown participants.  That really does seem pretty nuts.  It was also hacked recently – or at least it behaved exactly as it was coded to, to the detriment of many of the investors who had not scrutinised the code.

So the billion dollar question – as celebrated startups move towards becoming technology providers, unable to monetise on a “per ticket” basis, how are the company valuations justified?  Who should we invest in?



Valuations seem to be based on what the last round someone else raised at as a starting point. Particularly for the bigger startups who raising later stage rounds.

The financial service companies investing in these large rounds will not be taken for fools.  They understand valuation like no other.  What is interesting is the lack of high profile VC’s investing in these bigger rounds. The funding seems to be coming from the titans of finance and those that are at risk of being “disintermediated” by cryptocurrencies.  It’s a good narrative-control play.

The funding source from finance titans can also come back and bite DLT startups. If they are beholden to only the established incumbents, they might not be able to design the disruptive ecosystems promised by blockchain technology.

I think it’s way too early to predict any clear cut winners. I would be investing in the cloud companies that will be hosting all these companies, their data and their applications, and also the companies that are using blockchain technology properly.  This is not an easy thing to do when people are trying to fit square pegs into round holes. Simplicity always wins.



What’s next for the DLT / Blockchain industry?



Companies need to deliver, and companies need to make money to stay in business, therefore if you are under certain time constraints to make something people want and there are still inherent problems in the technology you want to use, you pivot to making things that can improve existing workflows.

This is what you have called “industry workflow tools” in your blog and although some costs may be saved, this doesn’t transform finance any more than the next efficiency technology.  In fact in many ways it exposes us to the same risks as have been seen in the past because privacy and confidentiality are more important than anything else for banks performing capital market operations.

The problem with this thinking is that this does nothing to benefit the consumer except maybe faster transaction times. The customer experience should be a major focus for banks as they already are one of the most hated brands for young couple consumers.



Perhaps some of the cost savings will be passed to consumers, settlement will speed up, and collateral released so that businesses can make better use of working capital.



We all hope so!



Thanks for your time George!


George Samman is a blockchain advisor and consultant to global companies and startups as well as Entrepreneur in Residence at Startupbootcamp for bitcoin and blockchain in New York City. George also writes a blog on blockchain technology and use cases at www.sammantics.com and he can be found on twitter @sammantic

Antony Lewis is a cryptocurrency and blockchain consultant to financial institutions, policymakers, and professional services firms.  Antony lives in Singapore, tweets as @antony_btc and writes a blog about bitcoins and blockchains, found at www.bitsonblocks.net

No, “Blockchain” is not a solution looking for a problem

I have heard this comment many times:

“Blockchain” is a solution looking for a problem.


That is incorrect – here’s the problem statement, originally articulated in 2008:
Bitcoin whitepaper

The problem statement, to paraphrase, is

“How do people pay each other electronically without being at the behest of Financial Institutions?”

The proposed solution is:


Bitcoin uses blockchain technology, right?  Yes it does.  Of course you remember the 2015 rhetoric “I’m not sure about Bitcoin, but I’m interested in Blockchain, the underlying technology” – enthused by people who had read something on some website (or perhaps on a Dilbert) then stood on a stage and waved their hands?

That was 2015.  This year, R3, arguably one of the world’s premier companies pitching “blockchain”/”distributed ledger”/”fabric of finance” (no one actually knows the difference) said on April 5 that they are not using blockchains to solve Financial Industry Problems:


That’s great!  That’s a step forward! Banks have problems where blockchains aren’t really the solution.  R3 & DA are attempting to solve those existing financial industry problems and, according to Morgan Stanley in a 2 June 2016 report, various intermediaries are seeking to use the technology to defend the clearing monopoly (oh, how far we are away from “blockchain to disrupt finance”):

MS June 2 2016

The way I understand this is ASX, who according to Global Investor Magazine, has paid close to $15m for a 5% equity stake in Digital Asset (valuing Digital Asset as an enterprise worth USD $300m prima facie), is exploring ways to use “blockchain deployment” to stop other people from doing clearing-related activities.


So what next?  Here are some things to think about:

  • Public blockchains (ie Bitcoin) promise to solve the problem of having your assets held by Financial Institutions.
    • You may not think this is a problem
      • Yes, this is a problem: you wouldn’t voluntarily give your money to gambling addicts in order to participate in normal life, if you didn’t have to.
    • Why are we paying money to people/companies to keep ledgers of who owns what?  This seems silly.
  • Public blockchains in their current form (ie Bitcoin) may not work
    • Bitcoin has kind of worked, more or less, give or take, with a few hacks, etc, for 7 years.  Right now it kinda works.  It may yet fail. No one knows.
    • Sure, Bitcoin transaction fees are going up.  But they are linked to the cost of data (reasonable) not the number of zeroes on the cheque (lol)
      • The other day I paid the BTC equivalent of USD $5 to move the BTC equivalent of USD $15 million from one owner to another, and it settled (as far as anyone concerned agreed) within an hour.  There was no bank or custodian in sight.  Call me if you can do better.
      • The biggest scam* in finance is editing rows in databases and charging a percentage of value moved – banks and custodians are laughing all the way to the, er, bank.
        • *One of the biggest scams
        • Yes, financial drag on payments is a drag on GDP/economy/economic growth by any measure
    • Sure, proof of work is probably not the most efficient way of keeping baddies out – there may be better ways.
      • This is nerdy but important (in bitcoin) point.
      • The people thinking about this are working hard, they’re not sitting around waiting to retire.
    • Coloured coins (graffitiing on Bitcoin’s blockchain) may not be “incentive-compatible” ie they may make blockchains top-heavy and screw with the mining incentives, and they might not be the best way to solve the problem of paying people to tell you what you own.
      • Why are we paying people to tell us what we own in the first place?
  • Bitcoin may fail; other commodity-like currencies/things may fail.  It’s just an experiment, guys (yes that’s my hedge🙂 ).


But for goodness sake, it’s not a “solution looking for a problem”.

You may not like the problem.  You may not agree that “the problem” is a problem. That’s fine, but “Blockchain is a solution looking for a problem” isn’t true.

Happy to take comments.




Interview on Brett King’s Breaking Banks

I was honoured to be invited to Brett King’s Breaking Banks podcast to talk about Bitcoins and blockchains with an Asia angle in the “BITCOIN & BLOCKCHAIN IN ASEAN” episode.

Rob Findlay, CEO and founder of Next Money (formerly Next Bank) hosted the conversation, and Marcus Swanepoel, CEO of BitX also shared his insights.

The full audio episode is here and I recommend subscribing to the podcast if you are in to FinTech.  A transcript of the relevant section is below, edited for clarity:

Breaking Banks, Voice of America Business Channel, 21 April 2016
Bitcoin and Blockchain in ASEAN

Host: Rob Findlay (RF)
Guests: Marcus Swanepoel, BitX (MS), Antony Lewis, blogger at bitsonblocks.net (AL)

07:38 RF
Hi everyone and welcome to Breaking Banks. This is Rob Findlay here with another edition of our Breaking Banks series live from Singapore. We always love to have a global view here at Breaking Banks and we are having another look this week from the FinTech world at the Asian markets. We have a great line up today with Marcus Swanepoel and Antony Lewis, two experts on blockchain and Bitcoin who are going to join us …

We are here today to talk a bit today about blockchain and Bitcoin. Now we heard from Brett [King] and his guests around early March, who were talking about blockchain and Bitcoins, and that was certainly from, a US and European perspective. What we want to do today was to talk to our two guests about the application of blockchain and Bitcoin here in Asia and Southeast Asia in particular.

We are lucky to have two guys who are really pioneering the way here in blockchain and Bitcoin and have been in the space for a while. I’ll let them introduce themselves. First I want to welcome Antony Lewis from bitsonblocks.net. Antony, can you introduce yourself to the Breaking Banks audience?

08:15 AL
Hi Rob. My name is Antony Lewis. I’ve been in the Bitcoin blockchain space for about two and a half years now. I left IT in a bank to join itBit, where I was the Director of Business Development in Asia. itBit is a Bitcoin exchange, and my role was to build the business here and get more people trading Bitcoins. That was about two and a half years ago.

Just under a year ago I got really interested in blockchain, the technology, so I left to really study the white papers and I thought the best way of understanding the technology was to write about it. So I wrote a blog called bitsonblocks.net where I was explaining blockchain, which is kind of a geeky concept, and I was explaining it in business English to business people. And off the back of that I started consulting to banks and financial institutions, and so I am now an independent blockchain consultant.

09:09 RF
Fantastic, so a really big welcome to you, Antony, and it’s great to have you here and bitsonblocks.net is an excellent resource of Antony’s thoughts and a simple way to approach it, so I encourage you to check it out and have a look.

Marcus Swanepoel, are you there, and can you introduce yourself to the Breaking Banks audience, please?

09:27 MS
Yes, thanks Rob, really good to be on this show. My name is Marcus Swanepoel. I the CEO and one of the co-founders of a company called BitX. I think for the sake of the conversation we are having today it might be worth just giving a bit of history about our company.

We actually started off in 2013 as a company called Switchless, building Bitcoin and blockchain systems for banks. And we were the first company in the world to build a fully integrated Bitcoin system for a major bank, which happened to be Africa’s largest bank at the time. That was in 2013.

Early 2014 we spent a lot of time with all the major banks in Europe, Australia, southeast Asia, even in the US, looking at their Bitcoin, blockchain and so on strategies, and it was during this process that we quickly realised that, you know, the banks are probably going to be followers and not leaders in this space. So we changed our business and formed BitX, which essentially is an independent platform that makes it easy for people to buy and sell Bitcoin, to store their Bitcoin, we integrate with e-commerce companies and other payment platforms, and we predominantly focus on emerging markets, in particular southeast Asia and Africa, although we are expanding into other markets and some developed markets now as well.

Maybe also just a last point, given the audience might not be familiar with some of the emerging market companies, we are backed by the Naspers group. For those of you who don’t know Naspers, it’s about a $60bn US billion dollar market care public company, probably the most prolific emerging market tech investor in the world. Some of the stakes, major stakes they have, is, you mentioned Alibaba earlier, so they have a large stake in Tencent, which I think is the second biggest internet company in China, also large stakes in the biggest internet companies in India, Russia and many other really, really large emerging market e-commerce, video and payment companies.

11:26 RF
Great, thanks Marcus, Appreciate that. It’s exciting to hear the involvement of those businesses. We are going to start on the blockchain side, given that this is a relatively hot topic for the banks out there, and specifically and obviously the startup industry and the VC guys who are seeing the development of blockchain.

Antony, we’ll start with you. We obviously heard about a month or so ago, some of the views of what’s happening in the US and Europe and potentially this topic is becoming quite overheated in terms of hype and attention, but in the Asian market if you would summarise what you have seen and heard now, say in the last few months. Where are we at with blockchain in this region? Is it mature, are we having the right conversations and how has the interest from banks changed over the past, say, six to twelve months?

12:10 AL
Around a year ago we had just come off the Bitcoin cycle, so people at banks had heard about Bitcoin and they had dismissed it as a fad or as something that they weren’t interested in, and they are still not interested in that. And blockchain was still a very new word. Fast forward a year, it has been one of the most, accelerated educations I have seen in finance.

Now not only do bankers have the word ‘blockchain’ on their lips but they actually have opinions on it, not just wanting to know what it is.

12:46 RF
God forbid they have an opinion! It has been pretty amazing to see the level of interest, the level of appetite for understanding. What are they doing about that, are they reaching out, are they trying things, are they actually building something, or is it really a conversation and a dialogue?

13:05 AL
I think it’s a bit of both. It varies from institution to institution and also from department to department and, even within: it’s easy to say ‘banks are doing this, banks are doing that’ but I think we are still at a department level and then an individual level. So certain people are completely up to speed in banks, and that’s not just the IT crowd, it’s senior management as well, whereas others are still behind the curve.

For example, I’ve educated everyone from senior management level all the way through to IT project audit departments, and they are at various different ends of the education scale.

From the conversations I’ve had I think banks are either coming off, or have just finished, the proof of concept stage, so they are spending money educations themselves on blockchain technology and I think they’ve got a rough, a good idea of what it is now. So the education is done and the state of the technology is understood and now I feel that they are waiting for the business case, and with blockchain technology it’s really about how to bring entities together, so something needs to happen to force a number of industry-wide business cases.

14:11 RF
I think then the work that I’m very curious about and the reason I thought this would be a good conversation this week is because I’m really curious about the Asian perspective and the Asian application of this. It’s not that it’s a vastly different region to many parts of the world, obviously, it’s complex, but I’m really curious to know if you have seen the attitude or the outlook or the application of blockchain being different here in Asia and even within the region itself. Have you seen some complexity and some variety on the way blockchain is used?

14:41 AL
People think of Asia as, as one blob and we think of Europe, we think of America as, as separate blobs. The context in Asia is very different. We have different languages, different cultures, different regulators, different regulations … it’s much, much more complex than US and Europe.

But I feel that there’s much more opportunity here because the promise of blockchain technology is to bring together and bridge companies and entities to do better business and the purpose of ASEAN, which is southeast Asian nations, is to bring companies together to promote international trade within Asia.

So I feel that blockchain should have more impact in this region that it may do in the US and Europe, which is already pretty joined up.

15:25 RF
Marcus, are there particular markets in Asia that excite you, that the audience should really know about, that you think are the ones that blockchain specifically are going to really embrace?

15:34 MS
I think Antony summarised it really well in saying that it is all very, very different. If we just look at a macro level in terms of opportunities in southeast Asia we are very excited about Indonesia. There’s just a really fragmented payment system, the banking system isn’t the most modern, so in terms of the opportunities to bring all of the different moving parts together and just given the pure size of the country and the rate at which are seeing e-commerce and really on-line activity in general grow I would say Indonesia is probably the most exciting market, but of course, it also presents probably most of the challenges in southeast Asia, so it’s a bit of a double-edged sword.

16:17 RF
Absolutely, and I think what we are going to do and touch on a bit after the break is a bit more about the regulators specifically because that’s a big conversation about how we deal with this. But also we think about these consortiums, Antony, the R3 Consortium is one that we know well in America and is there an equivalent here, is there involvement from the Asian banks in the R3 Consortium or have they had shared discussions and joint programmes that are launching here?

16:41 AL
There are certainly Asian banks feeding into R3 and participating in R3’s consortium. I think there is a role for an independent third party to join up the banks and shepherd the banks and financial institutions to work together. Whether it’s R3 or not, who knows, but there is certainly a lot of interest in R3 in Asia.

17:01 RF
Are there enough banks in this region to create their own consortium? Is it unique enough a market to create their own version of a banking system or is it just too important to be part of that global network?

17:14 AL
Well, although banks here and the context here is culturally different from the US, where R3 is from, the business problems – the fundamental underlying business problems of inter-operability of trading are the same, so at one level, yes, the context is different but at another level, at a problem statement and solutioning level, I think it’s the same here, as there.

17:39 RF
OK, great, we’re going to take a break here on Breaking Banks. We want to thank Tim and of course our partners and we’re going to come back and talk about regulators, we’re going to talk about the global blockchain forum, we’ll talk a bit about Ethereum hopefully and a bit more on China specifically, so stay with us …

21:07 RF
Welcome back to Breaking Banks. You’re with Rob Findlay here in Singapore and we are talking blockchain and Bitcoin in particular in the Asian markets, and we’ve got Marcus and Antony with us to discuss some specific questions about the application of blockchain and Bitcoin in the ASEAN and southeast Asian region.

But, Antony, I want to just jump onto the way that we think about blockchain in particular around policy, around regulation. Recently there was a global blockchain forum formed with a group of associations to help inform governments globally but also in the orient regions about what the developments in blockchain may mean.

How important is it to have all different stakeholders in Asia, in Asian market or in Asia in particular economies to inform governments and banks about policy around blockchain? What’s been your observations so far?

21:53 AL
I think it’s critical to level-set and I feel that at the moment the level hasn’t been set. Different regulators are different people, and different departments within those regulatory bodies are at different levels with blockchain, so as the non-profit organisations come together and form alliances and educate the regulators as one, I think that will increase the chances of success and adoption dramatically because they’ll be reading from the same page.

22:24 RF
Marcus, is it the same with you, because you obviously spent some time with organisations and governments in the region. Are you finding that there’s a good dialogue across all the different participants in each of those fintech ecosystems or it it still all a bit top-down?

22:36 MS
I think generally there’s a good dialogue. I’ve been quite impressed over the past twelve months in terms of how proactive and open minded many regulators are. I must say though that the level of understanding of Bitcoin and blockchain varies quite significantly across some of the countries in the markets. Some people will know their technology back to front and they’ve already started thinking about how to regulate it; others are really still at the Bitcoin 101 stage.

I think, like Antony mentions, it’s really important for us to get everyone on the same level because you don’t want a knee-jerk reaction or someone that doesn’t understand it properly to do something against the grain, and then confusing everyone else.

So I think that levelling up is important. Of course there’s a lot of economies of scale that comes from the industry for doing that. And I think one thing that we are still seeing a little bit in the emerging markets versus the developed markets is that there are still many misconceptions, so just a general lack of understanding – so part of our role is to educate.

But also misconceptions around, some of the more notorious things around things like Bitcoin and blockchain, and when we spend time with regulators and really de-bunk some of these myths and show them some data then a lot of them have an ‘Aha’ moment in terms of their understanding about it.

So it’s very important and its going to be a long process, and I think it’s going to take many years to get everyone on the same page, but there’s a lot of people working, doing some really good work on it. So … very optimistic.
24:00 RF
Yes, it’s a very interesting time. There’s a deep education period here we’re going through. The problem is, Antony, that the technology, is established and we understand the core of it, but the application and the developments around it and on top of it are changing so quickly.

Is it still seen as a foreign thing, is it a competitor to the status quo, or it is really an opportunity or a great partner? What can this technology do for Asian banks? How are they seeing it, and are they taking the opportunity?

24:29 AL
Haha, I think it’s a bit of both. I think initially Bitcoins were seen as a tiny, tiny potential threat to banks and to currency; I think that was massively overblown by the media. Bitcoins are available of course for payments but at the moment it’s still training, right? In terms of blockchains as a technology, different people have different opinions.

Firstly, blockchains are useful to organisations as an efficiency measure, so you adopt the technology and you realise cost savings because at the moment banks are spending a lot of money because they’re not interoperable with other banks. So think of the amount of headcount and the amount of money you spend in your ops department because things aren’t flowing straight through using technology. Now the blockchain technology promises to make data flow more easily between organisations. So in that respect it’s definitely a positive thing, it reduces your costs.

Now, there’s the other larger question that’s lurking in people’s minds. Can blockchain technology disintermediate third parties? And if you think about financial institutions and the whole industry, banking is an industry of third parties – can they be disintermediated by this technology? That’s still a question that’s being discussed and thought about.

My personal opinion at the moment is that third parties will continue to have a role. Whether that role is control, which it is now, control over money, control over assets, control over ownership, or whether third parties will move to more of a standards-type of organisation where they herd companies and they shepherd how companies can operate together, that remains to be seen.

26:13 RF
Yes – Marcus, we’re finding that governments attempted to see this as a way to solve some problems that maybe the industry won’t solve for themselves. When we think about what China is doing with their own crypto-currency, including the digital currencies potentially, and the whole remittance base here in southeast Asia is obviously incredibly huge, the volumes of money moving back and forth are pretty substantial, are you finding that maybe that governments are trying to use this as an opportunity to really open up the liquidity of money across borders? Does this mean that you think that this is a motivation for them?

26:40 MS
It depends on the country. As you are probably well aware, most emerging market countries have capital controls, and this something that a lot of people in the developed markets don’t realise. Many of those counties don’t want to open up capital flows. They might want to do something to make remittances little bit cheaper but they still want people to declare funds moving in and out of the country, there are limits placed on it.

So if you’re looking at something that’s completely decentralised and out of their control, like Bitcoin, that is potentially problematic. When they look at employing blockchain technology for the same purpose, then of course, yes, I can see them being interested in that.

But, as Antony alluded to, when it comes to blockchain you’re really looking at industry-wide benefits, not firm-level benefits, so if, a couple of banks or governments want to do stuff, they have to coordinate, and this coordination is potentially one of the biggest problems.

I had a chat to someone the other day, a senior leader in a financial institution, and he said, at the end of the day blockchain is basically just a standards discussion. And he had a point. Because in many ways it’s everyone agreeing to use the same technology, and we’ve seen standards discussions many, many times in the financial industry over the past few decades, and most of the time it has not turned out well.

So, yes, I think at a theoretical level if they can still be in control of it they would beinterested, but in practice whether they can actually coordinate to reap the benefits of the technology is a different story altogether.

28:10 RF
What sort of research or academic work has been done? Are we going here with a recommendation of experts and banks so that regulators and even the banks themselves, (where are they getting their education from) and what real developments being done in universities or in research houses around this? Antony, are you finding that there’s some decent analysis being done here by a sort of more critical community or is it really still too early to do?

28:33 AL
Yes,  I guess that from two years ago to one year ago the education was really being done by industry pioneers to the universities. So I remember lecturing at Singapore Management University, at NUS (National University of Singapore) and NTU (Nanyang Technical University) and that was an eye-opener – this was the first time they had heard of Bitcoins and blockchains.

Now it’s the other way round. Now we’re seeing research come out of the universities. Universities have set up departments to look into Bitcoins, to look into fintech, to look into blockchains. So, for example I was catching up with someone from Singapore Management University a couple of days ago, they are going to be rolling out trainings this year, so, for example, a two-day course on introduction to blockchains and getting your hands dirty at programming.

So this is universities working with industry to re-train people from the financial services industries to understand this technology. So that’s really positive.

The research I’m seeing is shifting from pure crypto to the role of blockchains in financial inclusion. We’ve seen some white papers coming out of National University of Singapore from the Computer Science Department talking about Bitcoin mining attacks, and these esoteric ideas, and more recently they have been putting out different types of blockchain technology. So, for example, more scaleable consensus protocols, so better ways of implementing this technology so that more participants can take advantage of it. That’s at the National University of Singapore.

Singapore Management University (SMU) will be putting together a conference in August, I believe with the IMF (the International Monetary Fund), where the agenda is very much on fintech, blockchain and financial inclusion.

30:20 RF
Marcus, what about the people who need to use this technology? Has there been some research and some studies or some development made on the application for people, for humans, to interact with this technology? It seems fairly foreign still to a lot of people, certainly even within our industry. Has there been any advancement on the interaction with this technology?

30:38 MS
I think there is, but people are blindsiding themselves to it. So I would argue that there’s actually too much effort going into the technical issues: university research papers, and a lot of technical arguments about what could these things do and what could this mean for the world.

And when people really just take a step back and look at what the practical obstacles are, I think those a lot bigger to overcome than the technical obstacles. And even from a learning point of view, we recently published something called Beyond the Blockchain where we actually detailed this, as a company, out in quite a lot detail. This was based on our experience of working with big financial institutions where you would see examples of a couple of financial institutions that decide to work together to build, let’s say, in a particular region. This was a while ago before blockchain interbank clearing settlement system, and, you know, not willing to be dependent on the US dollar, and so on, so on.

They had the technology, they had the budgets allocated, they started building the thing, but in the end the reason why the project never happened was because the service provider, and I won’t say who the service provider was,  was taking senior management on golfing holidays and senior management just had no incentive to change the systems they were using. So I think it’s important before people get lost in all the technical stuff and looking at all the papers, just taking a step back and coming back a little bit to what I said earlier about the standards discussion, just looking at, if these solutions are really technical issues or are they human issues, working together, being motivated to change the bank system, coordinating with your competitors, all of those things. I think it’s there for everyone to see but people are just turning a blind eye to it because they are very excited about the technology.

32:19 AL
I think you need both. I think the technology right now isn’t ripe enough. So if you take today’s technology and you try and apply the human side to it, it’s just not going to be good enough for purpose. So you need to educate on the human side. But you also need to drive the technology along and create better technology and I still think we’re early days in the technology now, but let them both happen in parallel.

32:42 MS
Fair enough. I agree with that. I guess what I’m saying is that there’s an overinvestment on the technology side and an underinvestment on the practical side. But I agree with you that both are equally important.

32:53 RF
Let’s move then on to another potential obstacle, Antony, around data privacy and security. To the layman the definition of a blockchain is that it’s an open distributed ledger upon which everyone who’s on that ledger verifies data back and forth.

How does that reconcile with having a single source of data that’s secure and private that no-one else can see? The nature of a blockchain or a Bitcoin transaction is that it’s essentially open code, right? So how do we deal with this openness but yet this need for privacy?

33:24 AL
I think this is one of the things that people in the space have known about for a while but weren’t really comfortable talking about because they didn’t have the solution. This came from Bitcoin, where every single Bitcoin transaction from Bitcoin account to Bitcoin account is detailed on the Bitcoin blockchain, everyone can see the money moving.

Now, clearly for privacy reasons that’s not good enough for the rest of us. But the technology can and is evolving to create bubbles of privacy where needed, and such that only data that should be shared, is shared. A number of companies in Asia and in the US and in London are working on how to solve for a number of entities being able to validate things with the right level of privacy in the data.

34:12 RF
Marcus, do you agree? I mean, with the Bitcoin transaction or a Bitcoin world is it the same, are we going to have this issue around security or data quality and privacy?

34:22 MS
It’s one of those things, it’s a bit like the Bitcoin volatility. If it gets too volatile people say you can’t use it and if it’s not volatile enough people complain that you can’t trade it. And I think the privacy thing is the same. If you says it’s anonymous then regulators get upset, and if you say everyone can see it, then people worry about privacy.

I think Bitcoin does present a golden mid-way, in my view, and that is that even though you can see those transactions, your identity is not necessarily attached to it. So it is anonymised, but if law enforcement needed to track that person the chances are very high, and we’ve seen this with actual cases that they can actually find the people.

So, in Bitcoin of course there will always be camps who think it’s too much and other camps that think it’s too little but I think that if you cut that across the general population I think the characteristics of something like Bitcoin and the blockchain has enough to appeal to the masses.

35:17 RF
Great guys, we’ve going to end this section. I’m going to give you one sentence literally each to describe for the audience out there who may not be in southeast Asia the opportunity for blockchain, Bitcoin and their bank in this region. Antony, can you start?

35:27 AL
I think Singapore is the right place to be to be in blockchains; It’s right in the middle of ASEAN, which is the region of the world which has the most to gain from joined up banking and joined up institutions.

35:42 RF
Thank you. Marcus, one sentence from you.

35:44 MS
Emerging markets really have inefficient banking systems and very fast technology adoption, and for that reason we believe that a lot of these technologies are going to be better applied and used in these markets and other markets, so it’s very exciting.

35:59 RF
Thank you guys very much for the conversation.

Just because it’s on a blockchain it doesn’t mean it’s true

Just because it’s on a blockchain it doesn’t mean it’s true

This short article attempts to explain what people mean when they are talking about blockchains being a “single source of truth”. In classic Chinese Whispers style, the narrative has become confused about what is meant by “truth”.

This is currently relevant to discussions in the insurance industry where blockchain enthusiasts may be eager to promote blockchains as a solution to the problem of verifying if something has happened or not.

Here, I permanently recorded on Bitcoin’s blockchain a non-truth about the world.

Graffiti box

When you make a bitcoin transaction, you have the opportunity to type in a short amount of text in a field called OP_RETURN.  This gets submitted with the transaction and is stored on bitcoin’s blockchain when the transaction is included in a block.

This is similar to the free-text field in a banking payment where you can type a short note like an invoice number or some initials.

If it’s on a blockchain…

Here’s an example of a transaction where OP_RETURN has been used (hat tip to Eternity Wall):




Notice that at the bottom there is a permanent record on bitcoin’s blockchain with the comment:

a_lewis says 1+1=3 true story

This is “on the blockchain” which some will have you believe makes it “true”.

However it’s not true on two counts:

  1. One plus one does not equal three
  2. I (a_lewis) didn’t actually say this


So what is true?  What was validated?

Well, inclusion into a valid block means that the transaction was valid – ie it passed some technical requirements (the size of the data was below a maximum threshold, the signature was valid, etc) and some business requirements (bitcoins weren’t created out of thin air, etc). That so much is true.

The block creator (self-reported as CKPool Kano) validated the transaction and included it in block number 412,248.  Later, 5,500 or so nodes (according to Bitnodes at time of writing) all agreed that this transaction, and the text within it, was valid and occurred. Each full node has recorded this on their copies of the blockchain.

However the validation done on the content was limited to some technical checks (like message length) and clearly not the logic of the comment (1+1=3) or if the the event actually happened in real life (it didn’t).

When people talk about a single source of truth, they should really be talking about a single, mutually agreed, version of record, but being careful that this is not over-sold as “truth” or “fact”.