#18 - Building on Blockchain

The technology behind cryptocurrencies, blockchain, is proving to be a revolutionary technology for many industries. From cryptokitties, to the stock market, and even digital music rights, there are decentralised applications being built that have the potential to change the world. Join us as we explore just some of the experiments happening in the world of blockchain.

CREDITS

Moonshot is hosted by Kristofor Lawson (@kristoforlawson) and Andrew Moon (@moonytweets).

Our theme music is by Breakmaster Cylinder.

And our cover artwork is by Andrew Millist.

TRANSCRIPT

ANDREW: From the weird and the wonderful….like that, to more traditional applications...

ANDREW: Blockchain technology is opening up entirely new industries and disrupting old ones.

ANDREW: That’s singer Imogen Heap speaking at Slush Music in 2016. She’s developed a decentralised system called Mycelia that allows musicians to distribute their music using the blockchain….and stay in control of their digital rights.

KRIS: There are companies building distributed stock markets…. and others using blockchain to rethink our power grids.

KRIS: And that’s just the start of what’s possible.

KRIS: Welcome to Moonshot - the show exploring the world’s biggest ideas and the people making them happen.

KRIS: I’m Kristofor Lawson

ANDREW: And I’m Andrew Moon.

KRIS: And In the past few episodes of Moonshot we’ve been looking at cryptocurrencies. But no matter what you think about digital coinage - it turns out the technology behind these currencies - blockchain - is really revolutionary.

ANDREW: Yes - blockchain, is already unlocking huge possibilities for decentralised applications. And in this episode we’re going to unpack a few of these ideas to see what can be done beyond currencies.

Jason Potts: So when blockchain technology was first invented it was developed as a money. So the first use case was to be payments or a store of value and that was Bitcoin. And lots of other tokens still have that property of being different types of money, including tokens like Dash and Monero and ones that provide anonymity in transactions. Money and payments is the obvious first use case.

Jason Potts: So I'm Jason Potts. I'm director of the Blockchain Innovation Hub at RMIT University and I'm an economist that specialises in new technology and studying blockchain in particular.

KRIS: Now before we get started it’s important to just rehash what blockchain actually is.

KRIS: Transactions in a cryptocurrency network are processed in blocks. Each block holds a batch of transactions and then a distributed network of miners cryptographically sign and process each block - linking it to the previous block and creating a chain… a blockchain. It’s incredibly difficult to hack because every computer using the network has a record of the verified transactions.

Jason Potts: the thing about what a blockchain is, is it's basically a way of verifying information, just any information a group of people, a community, an economy, when you look at this information go, "Yep, that's the true information about this thing." Now if this thing is who owns this coin, we've got ourselves a cryptocurrency. But if the thing is pointing somewhere else, we're got other use cases.

Jason Potts: So if the thing is, if the entry in that ledger is pointing to who owns this bit of land, we've got ourselves a property titling system. If it's pointing to who owns this car, we've got an asset titling system. If it's pointing to who owns this share, we've got ourselves a share registry. If it's pointing to who is this person, we've got ourselves an identity system. If it's pointing to who has this, does this person have a degree, yes, no, we've got ourselves a credentialing system. Does this person have the licence to operate this vehicle, and so on.

Jason Potts: So there's a whole lot of things where information about ownership, identity, registries, licencing, relationships and so on are fundamentally ledgers. We don't normally think of them as ledgers because they're operated by government agencies or they're operated by banks or they're operated ... They're just sort of parts of the institutions of society. But what these things are also is just the underpinnings of an economy. Every time value moves in an economy, an entry in a ledger changes.

ANDREW: This ability to transfer ownership of items other than currency has led a lot of people to call blockchain the next big thing - saying it will be like a new internet… but focused on value. And there are a lot of people embracing this idea and experimenting with the technology to see what’s actually possible.

[Grab of Visa CFO Vasant Prabhu on Bloomberg]

KRIS: That was Visa Chief Financial Officer, Vasant Prabhu, speaking with Bloomberg television earlier this year. Visa is a company that has been experimenting with blockchain technology and one of the other companies experimenting is Australia’s Commonwealth Bank…. But given blockchain is the technology behind cryptocurrencies and is decentralised by nature, you might wonder why a credit card company or a bank, which are structure centralised, are at all interested in the technology.

Sophie Gilder: There's many banks looking at blockchain and I think the reason is that we recognise that it's not just a potential threat to banks, it's also a huge opportunity. We recognised this relatively early on. We've now spent several years looking at the technology to develop a really deep understanding of it, and to develop some deep technical capabilities with blockchain technology, because we think that there are some really interesting opportunities in terms of what the technology can do.

KRIS: This is Sophie Gilder - Sophie is the head of blockchain for the Commonwealth Bank’s Innovation Lab and has been involved in a number of real-world experiments testing the technology’s capabilities..

Sophie Gilder: We think that that decentralisation actually can offer increased flexibility in terms of how we share secure information. I guess there's quite a lot of opportunities we're pursuing along parallel streams. We think that there's really significant efficiencies to be gained using blockchain technology. It effectively reduces the friction in reaching agreement with people because you've got a shared set of facts, which are in a blockchain ledger or shared database.

Sophie Gilder: We think there's the ability to build completely new digital markets that would either enhance ones today or create entirely new ones. What blockchain is doing there is it's really coordinating the actions of many different parties, and it's doing that by providing an agreed set of facts on which they can interact with and contract on. Then, there's a lot of other opportunities for banks, which they're probably quite bank specific, but in the audit and compliance area. Blockchain actually allows you to embed rules into the code, so that you can ensure that you're following the highest possible levels of compliance. It's actually a really useful business tool, just in terms of compliance and audit trails.

KRIS: Blockchain started as the backbone of cryptocurrencies - and there are many different variants that have different implementations of a blockchain. Obviously there's the Bitcoin blockchain, but the one everyone is talking about at the moment is Ethereum. Unlike the Bitcoin blockchain - Ethereum allows developers to actually build new applications on top of its architecture and use its blockchain for many different uses outside of just the exchange of money.

ANDREW: One of the things that Ethereum allows is the idea of smart contracts, which, as we mentioned when we discussed cryptocurrencies, is a contract that is tied to the exchange of a currency. These contracts self-execute when predetermined conditions are met. But Sophie Gilder says the concept of ‘smart contracts’ being ‘smart’ is not entirely accurate:

Sophie Gilder:  Smart contract, it's a bit of a misnomer. So it's arguably neither smart nor a legally binding contract, but that's the terminology we're stuck with. So a smart contract is really, simply a piece of self-executing code. So if you're familiar with Excel spreadsheets, for example, it's like an if function. If this, then that.

Sophie Gilder: So it's a way of automating certain actions based on the occurrence of pre-agreed events. And we think that this holds significant promise because, for a start, blockchains, whilst they're not the only way of doing smart contracts, they lend themselves to efficient execution of smart contracts. We think that there's huge application here for automating certain actions. A really simple example would be if I want to pay someone on a particular date, I could set up a smart contract that says when it is date X, pay person Y.

Sophie Gilder: And this means that it will go ahead and execute as soon as those predetermined events occur, e.g. when that date occurs. It means there's no manual intervention that's required then. And so it can be a very efficient way of performing these tasks where there's a black and white precondition that needs to occur. So it's not applicable to everything, you can't automate everything through smart contracts, but there's many actions that you can make much, much faster and more efficient through smart contracts.

Jackson Palmer: Because you're doing it in a blockchain, it becomes cryptographically verifiable.

KRIS: This is Jackson Palmer - the creator of Dogecoin and someone who posts a lot of videos about cryptocurrencies and blockchain on his YouTube channel. We spoke with him in the last episode.

Jackson Palmer: If a service is saying, "Hey, we're going to take your data and do X with it," the user can be sure that that did happen, because it occurred on the blockchain. So, Ethereum is really the first kind of popular implementation of smart contracts, and what it does is it takes arbitrary code that anybody writes, they were a few lines of code and they say, "I want to run this on a distributed network."

Jackson Palmer: Now, this does have implications in that, you know, people can write simple little contracts for payments, for example, like [an] example might be that if you send $100 to this particular address, then the smart contract runs some code and says, "Okay, because that has happened, we will trigger another transaction that will then, you know, send $1000 to somebody else," right?

Jackson Palmer: So, you can do a lot of this if, then kind of logic, in a decentralised way, that isn't reliant on a single party or a single server. The one challenge with this is because, similarly to the scaling issues we were talking about with Bitcoin, because it's not being done on a centralised service somewhere, it is more costly, because you have to pay the whole network to do that, and to verify it on every node. And as such, executing an instruction on a smart contract may cost a dollar or two dollars when you want to interact with that, which if we're talking centralised, would cost probably a fraction of a cent. So, it is more expensive. I kind of question whether it all needs to be done in a decentralised way, philosophically,

ANDREW: And as Sophie mentioned before, smart contracts aren’t exactly legally binding… which raises a number of questions. Smart contracts require hard and fast rules… and as everyone knows, often the law is'nt so black and white.

KRIS: Yes, When you have a traditional contract often the contracts can be updated or changed, or even extended by agreement between the parties. And if the parties disagree then a court can make a ruling as to how the contract should be executed. But smart contracts raise a bunch of questions because they self execute, like how will they actually work within our existing legal frameworks that have been around for generations?

Sophie Gilder: The legal system is built on what has happened in the past. It's built on precedent and much of it is archaic. However, what I think we'll see in the blockchain space is actually a hybrid model where you have the existing legal framework, which continues on, and blockchain and specifically smart contracts is merely a tool which can execute certain terms and conditions within a legal document. It doesn't encapsulate the entire document. It merely automates certain terms and conditions, for example, that automation of a payment example that I gave. So it's not the full contract between two parties, it's often just a subset of that overarching legal agreement.

ANDREW: More than a few people are saying that blockchain has the potential to transform archaic systems… and Sophie Gilder actually agrees - which is why the Commonwealth Bank has run a number of blockchain experiments. And one of the more interesting uses was in the area of trade.

Sophie Gilder: So Global trade's a particular example where the way that people interact and get goods across the globe hasn't really changed much since Mediaeval times. There's a lot of manual processes. There's a lot of paper documents. There's a lot of document handling, getting it from A to B. There's wet signatures, e.g. old fashioned pen signatures. And there's a lot of coordination that needs to happen between a vast number of parties, for example, from the grower of a commodity through to the logistics providers that get it to port to then the shipping entity, which gets it across the globe, and then to the end buyers. And in addition to that, there's a whole lot of Government entities that also need to monitor what is happening. So, vast number of players, vast number of contracts between all of those different individual entities. And it's phenomenally inefficient.

Sophie Gilder: So we believe that blockchain is the perfect solution as a coordination mechanism between all those parties where, firstly, you digitise all of the agreements, and then you securely share them between those parties. So effectively, you're building this digital thread from start to finish along the journey that a good takes as it gets from origin through to destination.

KRIS: The Commonwealth Bank, along with Wells Fargo and Brighann Cotton actually used blockchain to facilitate the transaction of 88 bales of cotton. The bales were being sent from a port in the US across to China.

KRIS: Sophie says the transaction involved three different layers. An operational layer, a documentary layer, and a financial layer.

KRIS: The operational layer was tracking the movement of the shipment and also used an IOT device to measure the location and append that information to the blockchain.

Sophie Gilder: it's getting this time lapse picture of exactly where the underlying is from a geolocation perspective, but also other factors it could be measuring, for example, temperature, moisture, movement, depending on what is important for that particular export. Then, in addition to that operational layer, there's a documentary layer. So that's capturing all of the agreements between different parties, putting a hash of them on the blockchain, a unique digital identifier so that you can be sure that you've got the authentic document, the agreement between those parties.

Sophie Gilder: And then, in addition to that, we are now exploring financing overlays where we believe we can develop some really interesting solutions for the financing of participants along the supply chain by using the real-time trusted information that the blockchain has captured, in terms of where is the good? Whose hands is it in at this moment in time? And what is the condition of the good as well?

KRIS: Did the way that you approach this change after you'd run this experiment?

Sophie Gilder: That's an interesting question, because we're now moving onto a phase two building on this earlier experiment. What we're doing is we're extending it further along the supply chain...

Sophie Gilder: ...so that we can capture the full picture right from origin to destination, so we can provide provenance of where the goods come from because there's a chronological history of start to finish. In addition to that, as we've added more players along the supply chain, we've had to think about things like how to balance the different interests of the different participants along the supply chain.

Sophie Gilder: They have different needs. That's an important area that we have to look into for all of the projects that we have underway, how to make sure that this collaborative technology suits all users, not just a few.

KRIS: And we’ll have more on blockchain right after this break.

ANDREW: This is Moonshot… I’m Andrew Moon… and in this episode we’re looking at blockchain and potential applications of the technology outside of cryptocurrencies…. And at the top of the show we mentioned a couple of the more out there ideas that have been built on top of blockchain tech.

KRIS: Cryptokitties is an interesting implementation that has enabled people to own virtual cats, and instead of money being transferred in the network, you trade cryptokitties… and if you have multiple cryptokitties they can breed and create new cryptokitties, and then you have lots of cryptokitties.

KRIS: But while cryptokitties is just one use - many implementations of blockchain centre in some way around finance… and one of the other ideas that Sophie Gilder’s team at the Commonwealth Bank has experimented with is cryptobonds.

Sophie Gilder: We partnered with Queensland Treasury Corporation to create, what we termed, a cryptobond. What we're really saying there is it's a digital representation of their bond obligation, which is stored in a blockchain.

Sophie Gilder: The blockchain acts as the asset register. It just says who owns the bond. And each time the bond is sold in the secondary market between different investors, the blockchain updates the new owner. So that's basically what we mean by a cryptobond. It's a digital security, which can be transferred peer-to-peer on a blockchain enabled platform.

KRIS: Have you developed your own version of the blockchain for all these experiments that you're doing? Or are you building off Ethereum or one of these existing blockchain networks?

Sophie Gilder: We're building on a lot of different blockchain networks, not our own proprietary version, but instead modified versions of open-source blockchain. We've built on many blockchains to date. We've done the majority of our development on the Ethereum blockchain, but on private permissioned versions of Ethereum where we have changed the fundamental features to get, for example, faster transaction speeds or greater reliability or we've modified consensus algorithms. We use blockchain protocols which are open-source and available for anyone to use, but then we modify them fairly heavily in order to suit our needs. As I said, we've used Ethereum, but we've also used Hyperledger, Corda and looked into various others. So we don't have a preferred blockchain if that makes sense.

Sophie Gilder: In fact, they're developing so fast that I believe that we haven't seen the perfect blockchain yet. They're improving all of the time, and I see it as our role to understand what the pros and cons of each are and to continue to follow the market very closely. At this stage, I believe we can remain blockchain agnostic rather than commit to a particular protocol.

KRIS: There’s already research which shows that a large amount of cryptocurrency transactions are fraudulent...  and while many of the issues around how you deal with illegal activity are yet to be resolved, in this episode we’re actually looking at other applications of blockchain, and considering the rise of smart contracts I asked Sophie Gilder how you actually deal with fraud in a blockchain based network.

Sophie Gilder: So blockchain itself and smart contracts, in many ways, we see as a solution to fraud. An example of that would be in the global trade space, where you're dealing with paper documents, they can be altered. And there's many instances in recent times where documents which are relied upon, which are just in paper and therefore are not fraud proof, have been used for, and banks have funded against them believing that they were the genuine article when, in actual fact, they were fraudulent copies or reproductions. So one of the things that we think blockchain's an excellent solution for is knowing that you've got the genuine, unique document or credential provided. And you know this on a blockchain because you can have, for example, ownership can be proven by the ownership of a particular public and private key. So you can actually avoid fraud using blockchain in many ways that you can't with existing systems where you're reliant on paper. So we actually see it as a solution to fraud.

Jackson Palmer: With cryptocurrency, people seem to forget that a lot of the stuff that makes cryptocurrency cryptocurrency is derived from cryptography, which has been around for decades. And cryptography and some of these cryptographic fundamentals can be used for all sorts of things, and they are. They're used every time you go and you visit a website, and you see that green padlock that says HTTPS, that's using cryptography, that's using encryption, right?

KRIS: This is Jackson Palmer again.

JACKSON PALMER: So, a lot of this technology's already being used behind the scenes and you might not even know it. People act as like Bitcoin and cryptocurrency is some sort of new invention, like people try to say it's like the invention of the internet. But really, it's just a packaging up of technologies that we've been using day-to-day. Even when you're having a phone call on Skype, it's being encrypted over the line, using cryptography. So, I think there's many applications that already exist out there in the world of the same sort of technology that people just don't even know about, and I think this stuff can be used not only for end-to-end encryption in messaging apps, like Signal I think is a really good implementation cryptographically, but I think will continue to be used in things that rely on data storage I think is important for encrypted data storage.

JACKSON PALMER: Lastly, I'd say, you know, one of the things that I think will come out of this is the ability to provide auditable ledgers. Like, I think the blockchain is cool in the way that it... The people that are writing to it, if they lie, you can tell that they're lying, and you can stop using that ledger, or you can have an audit trail.

JACKSON PALMER: If something like, you know, Wall Street was operating on a cryptographic ledger, even if it was centralised, even if it didn't do all that proof of work stuff, but say that people had to sign every transaction and then write it in, you would at least have that audit trail, because people wouldn't be able to invent money out of thin air. They wouldn't be able to do anything outside of the purview of an auditor.

JACKSON PALMER: And so I think some of these concepts I think will start working their way into every day systems. I don't think it's going to be a revolutionary thing that changes everything tomorrow. I think it's going to be a very slow burn where we just see some of the good stuff make its way into everyday technology we use.

Jason Potts: First of all, this is an experimental space.

ANDREW: That’s Jason Potts again from RMIT.

Jason Potts: Just everything you look at is new and exciting and experimental. The ones that I get long term excited about is what's happening in the smart contract space. So smart contracts were essentially the idea between the Ethereum blockchain, and the Ethereum blockchain was essentially was based on the insights that the information that you have on a blockchain could include software or it could be that the... it could be code. If we can do code, we can do contracts on a blockchain.

Jason Potts: The fascinating thing I'm seeing at the moment is Materium. Materium is essentially an attempt to take this to the next level and go, "Okay, so we can build contracts on blockchains. That means we need courts, and we need dispute resolution mechanisms, and we basically need to start rebuilding these institutions that we've had in the real world for millennia, but we need to rebuild these things in this crypto space."

Jason Potts: Materium is led by Vinay Gupta who's absolutely one of the gurus in this space. But I think that notion of this kind of ... If we landed on Mars and had to rebuild society there, we'd go through similar processes. First, we'd need to build infrastructure and then we'd need to build institutions. We're doing that right here. We're building. First, we've put money on the blockchain. Then we've put contracts on the blockchain. Now we're building courts and other institutions on that.

Jason Potts: And that process of actually rebuilding a civilization on in this space is just fascinating to observe, one, that it's happening, two, how fast this is happening. From money to contracts was five years. From contracts to courts being built was what three years now. Historically from money to contracts was 10,000 years... The previous time we tried to do this it took a lot longer than what we're doing now.

Jason Potts: So, I find this fascinating, this idea that not only that we are somehow doing this, but this is being done by volunteer collectives of citizens just coming together on the internet in many cases, not even necessarily in the same space, and rebuilding the societies in a way this is complementary with the existing ... This isn't the secessionist movement in the sense that we're against, being against the nation states, but actually rebuilding entire economic and social infrastructure, and it's an incredible thing to see.

KRIS: You mentioned that idea of self-assembling. What is motivating people to really sort of join together to create these interesting ideas based around blockchain?

Jason Potts: Yeah. If we look at who is doing this, isn't, these are sort of entrepreneurial types. But they're hackers. They're people just who really enjoy playing with new ideas. I've been fortunate enough to meet some of these people and what's sort of striking about them is just how passionate they are about the idea. They're not seeing this as a way to get rich or a way to create power. They're just purely isn't this an amazing thing we're doing? Who wants to join me building this thing? So you've got this real powerful communitarian spirit that's animating and powering a lot of this now, which is infectious. It makes you want to be involved, it makes you want to cooperate and share information around this.

Jason Potts: And it's that pooling and sharing and cooperation aspect to this that I think is the secret sauce in all of this. What's striking and interesting about this particular, about blockchain technology is where it didn't come from. It don't come out of a corporate R&D lab. It wasn't created in a basement with a $6 billion research budget, then patented and then released to the world through a marketing process... It didn't come from the place where technologies normally come from. It just came out of a few people who were working in the background on their obsessive little projects. They kept it secret for a long time and then gradually released it to their own private networks and then it just broke free into the wild.

Jason Potts: With the Satoshi thing we still don't know who.. they, she, we don't know who they was, which is an incredible thing. But what we do know is that the minute it broke free from that... it was built by communities. And things like Materium for instance is one, Ethereum is another one. These are groups of people who have come together, want to work on a thing. Then they've built some organisation structure around them in order to do that. But what's striking about them is how open they are, how transparent this whole process is.

Jason Potts: This is a bottom up technological revolution where what is being built are tools for creating new societies. So the fact that some of these things are just weird and curious and the CryptoKitties thing, and just, and playful, I think is actually a really interesting aspect of this, that this is a technology that's being built that has an enormous amount of potential, disruptive potential in the world.

Jason Potts: But as I see it, and contrary to the sort of sceptics who look at this and go, "Ah that's just for buying drugs on the internet," I sort of see it almost exactly the opposite of this. This is a technology for groups of people to come together and just see what sort of fun things they can actually do with that. And when these things turn out to have unexpected value, that is then released into the world. So I see that sort of open source hacker spirit in this as the most powerful aspect of this technology.