An intuitive explanation to blockchain

1. An Introduction to
Blockchain
:for Finance Professionals
Srinath Perera, Ph.D.
VP Research WSO2, Apache Member,
( srinath@wso2.com)
@srinath_perera

2. Double Entry Book Keeping
• Created somewhere 70AD Rome and 13 century BC Italy
• Established current accounting as we know it
• In addition to avoiding mistakes, the main idea is each entry has a
corresponding entry somewhere, making it hard to forge
• Help us establish trust
!2

3. We can think of blockchain as an
indestructible append-only
ledger where entries can’t be
edited, repudiated, or destroyed.

4. Such a ledger let us establish
trust, and can redefine many
complicated processes in the
world.

5. Example: Land Registry
• We need
• Only owner to be able to sell
• The owner can only sell to one person
• Currently, we solve the problem via
regulations and professionals
• Land Registry
• Lawyers + Land registry checks
• Still issues: masquerading or selling the
same day to two people
• System works going back and catching
people who did fraud
!5
Photo. Credit: CC, https://www.flickr.com/photos/tjc/6454659319

6. Ledger based Solution
• Check the ledger for ownership of the buyer
• Add an entry of the sale
• Both should happen without other operations in between
• Entry is added using owner’s key, which only he has ( Others can’t
masquerade, and the owner can’t repudiate)
!6
Image Credit: CC, https://www.flickr.com/photos/moneymetals/31403416393

7. Trust Establishment
• We have many organizations,
processes, and regulations to
establish trust
• Government
• Banks
• Insurance Cooperations
• Brokers
• Blockchain by creating a ledger can
replace some of these systems
!7

8. How it works?
• Many participants
• Ledger records are stored Hash Chain
• Hash Chain can’t be changed, and can only add to the chain
• Participants agree on the next entry( using a special algorithm), and
everyone updates their own copy
• Conflict resolved using majority
• Can’t change the Ledger without
• Getting more than 50% of current participants to agree (e.g., Ethereum
Hack)
• Breaking current cryptography
!8

9. Public vs. Private Blockchains
• Bitcoin, original version is public; everyone can see and participate
in the blockchain
• Alternatively, there are restricted blockchains
• Only people with access can read
• Anyone can read, only people with access can write
• Anyone can read and write
• Public blockchains are decentralized, everyone is equal, and
operations can’t be reversed without more than 50% consent
• Restricted blockchains have admins and support reversals.
!9

10. Are Private Blockchains secure?
• They are not fully decentralised
• Yes, better than a centralized system
• e.g. to change a private blockchain that connect banks, a bank
has to get other banks to agree. It is much harder than having
your own books
!10

11. Indestructible append-only Ledger
• Blockchain gives us the ledger
• We can build our trust protocols on top
!11

12. Typical use cases
• Record audit trails in the ledger, can’t be changed later
• (Certification, Provenance)
• Record execution in detail in a ledger (e.g., If you pay 80$ premium per
month, we will pay $30000 if the car is totaled)
• (Smart Contracts)
• Write ownership of assert to a ledger, and make the assert work by
reading the blockchain (e.g., Only car owner can unlock the car)
• Digitally control an assert (e.g., track car ownership) / Tokenization
• Create an ID and get authorities to explain myself in the ledger
• Digital ID and permission
!12

13. Four Common Motivations for Blockchain
• Foster Trust: Some companies face higher hurdles for engendering
trust due to the nature of their business.
• Avoid Coercion: Some organizations face risks because they can
be coerced into actions that harm them.
• Improve efficiency: In some cases, enterprises may choose to
implement blockchain to do things better
• Collaborate More Effectively: Blockchain allows better
collaborations with partners, suppliers, and other parties.
!13

14. Foster Trust: Auditing
• Record audit records in a
blockchain making it tamper-
proof
• When financial records are
sensitive, instead of sharing
financial records, record hash
of the records in a ledger,
which can be verified later.
!14

15. Foster Trust: Providing Supply Chain Visibility
• e.g., Organic Food,
Provence of artwork
• Get suppliers to record
transactions in a
blockchain to provide
visibility into the claims
made by the company
about how resources are
sourced.
!15

16. Foster Trust: Reputation Systems
• e.g., professional reputations such as doctors and lawyers, social
reputation, credit ratings
• Ratings are signed by actual users together with their verifiable
claims, and therefore, they are hard to fake.
!16

17. Give up control to Avoid
Coercion
• Some organizations face risks
because they can be coerced into
actions that harm them.
• If all transactions recorded in a
blockchain, an accountant can’t be
coerced to cook the books
• A Certification Authority may put
the public certificate in a blockchain
so that they can’t change it without
others’ consent. This reduces the
chance that they will be coerced
into creating certificates for
activities, such as intelligence.
!17

18. To Improve Efficiency: Efficient Verification
• Replace documents by
recording them in the ledger
• Simplify processes
• Reduce paperwork
• Make compliance easy and
transparent
!18

19. To Improve Efficiency: Issuing
Customers Verifiable Claims
• Issuing Verifiable Claims to
customers might enable
integration with other vendors,
and it can become a feature for
attracting customers.
• For example:
• Telco provider or water
provider can confirm your
address.
• Bank can confirm your income
• Bank can confirm withholding
Tax
!19

20. To Improve Efficiency:Trade
Finance
• Trade finance enables parties
who do not know each other to
do business
• Typically provided through
Letters of Credit, Guarantees,
and Insurance
• Record them in the ledger to
• Make processing efficient
• Replace reduce or
intermediaries
!20

21. To Improve Efficiency: Tracking Software
Lifecycle
• An organization can improve its security by tracking aspects of
the software lifecycle—such as what libraries are used, what
version, and who built it for a given distribution—and verifying
them before deploying the software.
!21

22. Collaborate More Effectively: Audit a Business
Process
• Have the ability to track the
activities of each actor in a
business process later.
• Use case: Handle a dispute
after a failure or customer
complaint.
• Implementation: Each
participant in the process
record has hashes for incoming
and outgoing messages, which
they can’t deny and can prove
they indeed sent specific
messages.
!22

23. Collaborate More Effectively:
KYC
• A group of organizations
• Each records their verification
in a ledger ( private to the
group)
• Each can decide to trust other
• Reduce verification overhead
using other’s findings
!23

24. Collaborate More Effectively: Global Decentralized Prediction
Markets
• Conduct research, consulting, analysis, and forecasting.
Blockchains can be used to build prediction markets to place
and monitor bets on anything from sports, to stocks and
elections in a decentralized way (e.g., AUGUR).
!24

25. Risks
• It is not Zero risk
• Liability if hacked
• Insurance, and get an insurance
company to audit
• User (human) is the weakest link
• Blockchain forks and chain splits and
50% attacks
• If the hacked potential impact is huge
• Too big to fail, the hack can lead to
the financial meltdown
!25

26. Utopia
• Everyone has a decentralized ID and all information recorded against them
• Processing and document verification is instantaneous
• All transaction (e.g. government, charity money spent), manufacturing, and value
additions are traced
• All decisions are recorded in the ledger, which is auditable, making fraud very hard
• All contracts are peer to peer without intermediaries.
• All assets are tokenized and managed via ledger
• The world is efficient, traceable, and understandable
!26

27. Reality
• Starting with low-risk use cases such as tracking and
collaboration
• Blockchain will coexist with current systems, adding value -
e.g., triple entry bookkeeping
• Will face natural resistance
• e.g., Listed companies in the US, reports given as images
• The critical use case will take time
!27

28. “People tend to overestimate what can
be done in one year and to underestimate
what can be done in five or ten years.”

29. Questions