Andreas Park PRO
Professor of Finance at UofT
Blockchain Technology explained in 30 minutes
by Andreas Park
Why Blockchain?
Why should we care?
Why should we care?
Source: "Unlocking the human opportunity: Future-proof skills to move financial services forward"; PwC report for the Toronto Financial Services Alliance, April 2018
Two types of Blockchains
public
private
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either: better database
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or: related to public blockchain
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this is what makes the news these days
historically:Commerce requires TRUST
Money transfer now
Sue's bank transfers from Sue's account to its own account
Bob's bank transfers from its account to Bob's account
Central Bank
Central bank transfers from Sue's bank's account to Bob's bank's account
Cryptography: only Sue can spend her money
Cryptography is nice but not enough!
Blockchain solves the double-spend problem!
What do we get?
decentralized internet of value
Premise of Public Blockchains
trust nothing except what you can verify
controlled by no one entity, person, or organization
anyone can participate
- blockchain 1.0
- first solution to double spending
- clunky, slow, expensive
- huge following and computing power
vs
- blockchain 2.0
- smart contract platform
- highly flexible
- foundation for many private initiatives
Strongest feature
digital contracts
With Blockchain: single ledger for money and securities
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One more: a stock trade
Sue wants to sell ABX
Bob wants to buy ABX
sell order
buy order
Clearing House
Stock Exchange
Broker
Broker
3rd party tech
custodian
custodian
record beneficial ownership
central bank for payment
transformations
Quick detour: how do you get cryptocurrencies
Step 1:
send dollars to (say) coinbase using a bank transfer
Step 2:
convert dollars to cryptocurrency
Step 3:
send crypto to blockchain address
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Common concerns regarding blockchain technology
Remedy
Problem
Not enterprise grade
mining concentration
Privacy & secrecy
Energy consumption
Scalability
time will tell ...
proof of stake
zero knowledge proofs & side channels
tinkering, side channels, sharding, proof of stake
ongoing
- 150 companies are members of EEA
- US$400M invested in VC funding (CBInsight)
- US$900M from tokens since Nov 2016 (Smith and Crown).
private blockchain initiatives
private blockchain initiatives
Do you need a blockchain?
Blockchain based coins and tokens as financial instruments
What is a token/coin?
- total token supply,
- account balance,
- transfer rights
- usage of token as a monetary asset.
What is an ERC-20 token?
a smart contract on top of Ethereum
Token Categories
- debt & equity
- Tokens for blockchain-based trading of physical assets
Payment
Asset
Utility
- digital access to an application or service on blockchain-based infrastructure.
- cryptocurrencies
- no claims on issuer
Are tokens/coins securities?
“I believe every ICO I’ve seen is a security. … ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story.”
Jay Clayton, Chairman, U.S. Securities and Exchange Commission, testimony before the United States Senate, February 6, 2018
“I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws”
"Distributed ledger technology has incredible promise for the financial industry.”
“Just because it's a security today doesn't mean it'll be a security tomorrow, and vice-versa.” Jay Clayton, April 05, 2018 (Princeton University)
So what if they are securities?
- Regulation of public securities is burdensome
- Early-stage firms unlikely to tick all boxes that IPO firms would need to tick
- Is this the end? => No.
- U.S. and Canada have provisions for private sales
- Reg D (USA => SAFT-compliant)
- Exempt offering memorandum (Canada)
Key trick:
- token contract can restrict who can own and transfer the token!
- => maintain list of accredited investor IDs
- => restrict issuance and transfers to "suitable" investors
What is it that an ICO can do that you cannot get elsewhere?
Token Sales since Jan 2016
Data: coinschedule
SAFT
Now for the ugly truth
Source: Satis Group LLC
Now for the ugly truth
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New.bitcoin.com using Tokendata:
- 902 crowdsales in 2017
- 142 failed at the funding stage
- 276 have since failed
- => 46% of 2017 ICOs have already failed.
- Some comparative stats:
- U.S. Bureau of Labor Statistics reports: 1st year failure rate of businesses with employees is about 20%.
- Gosh (2012, HBS study):
- of 2,000 VC-backed startups $1 million from 2004 to 2010,
- 75% never return cash to investors
- 30% of the 75% implode.
Crypto vs. Equity Trading
Crypto
Exchange
Traditional
Internalizer
Wholeseller
Darkpool
Investor
Venue
Broker
Settlement
Investor
Venue
Settlement
On chain
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Blockchain is a transformative technology that holds great promise.
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It's still early! New concepts still require development.
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ICOs/ITOs are here to stay, but
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currently they are early stage investments,
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you need to understand the tech for each offering
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Summary
Blockchain Module Part 0b: a 30 minute intro
By Andreas Park
