Adam Back

New Context Conference 2016

We are using a hashtag to organize the information today. The hashtag we're using is nccblockchain. Ncc stands for new conference context. That's where we are. Blockchain is what we're talkin gabout. Can I ask the people in the back to take a seat? We're about to get ready. Meet the neighbor near your seat. Switch your cellphone off. I am going to demonstrate. The toilets squirt you. It's by design. We have translation headphones, if you speak japanese. Thank you to our translator up there to help people understand what's happening. We have 23 seconds. I am going to repeat the hashtag is nccblockchain. We have a livestream going. If you start getting fired up about what you see here, like your colleague your friend your mother would really enjoy the content, search nccblockchain on twitter and send the link to the livestream to people. Maybe you could wave at them on stage too, althoug hthat's not enocuraged. Thank you for so much for joining us. Today is the beginning of the New Context Conference 2016 San Francisco. Yes. We did it. Thank you. We are synchronized. Thank you for joining us. Today's topic is the social impact of blockchain. Tomorrow the topic is collaboration with microbes. Join us today, maybe join us tomorrow. The format for today is a series of short talks and then the people who present will gather with the moderator for a brief discussion and maybe some questions if there is time. We have provided lunch and snacks. Our goal is for the people in this room to create a new context together and make a new .. for blockchain. DG717 is a co-working and incubation and event mpace. The hosting body is Digital Garage, founded 22 years ago in Japan, where two people saw the size of the internet change coming at us. They said they needed to create new context to let people adapt to new technology. Today we are creating new context to understand blockchain. DG stands for Digital Garage. It is continuously reinventing itself. This year they have lunached DG Lab. There are several brave Japanese companies that have joined DG Lab. I encourage you to meet them. They are from Credit Suissane, ... can I get a round of applause for our sponsors please? My name is Justin Hall. I will be your MC all day long unless something goes really wrong. I have been a journalist, video game producer, and a community manager now at DG717. I am here because I am pretty turned on most of the time by the near future. When I found DG I found a company turned on also by the near future. I had a chance to visit the DG offices the first time earlier this year. I was stounded to see a drawn portrait of Timotyh Leary in the CEO's office. I think this will tell you about the character of the company. He was a godfather of counterculture in the society of the 20th century. He constantly said think for oyurself and question authority. A slogan like think for yourself and think for yourslef and question authority is not customary for Japan, but it's customary for Digital Garage. This is Rocky Eda, for many years has been runnng the CEO's offce at Digital Garage. He wll tell you about DG Lab and our situation here today.

Thank you. Good morning. Our annual new onference onference at DG 717. This is our fourth... ... ths year, ... DG lab... so we also ... as our co-sponsor of this conference. As Justin mentioned, this year conference theme is social impact of blockchan. And collaboraton with microbes for day 2 otmorrow. I'm excited to explore the impact of blockchain and microbes on our lives. We picked ... biotech and blockchan as 2 of 5 areas that DG Labs is focusing on, lke AI, VR, AR, and security. Thank you to all of our speakers who took time from your hectic schedules to join us. Thanks Justin. I hope you will enjoy the talks and conversations at the conference. Thank you very much.

Okay. So we're in the moment together right now, but before the moment, other moments happen and there are videos made about them. I think we want to play a video.

Thank you. I am pleased to introduce our next speaker, if Emily could forward a slide for me. There are a lot of people in this room. When we think about creatng new context, it's about bringing together entrepreneurs and hackers and people who are investors and consultants trying to help people make sense of new landscapes. I think we have a pretty diverse group of people who have participated in blockchan. There are people who here are at zero. Our next speaker is extremely new to blockchain space, but only f you count n terms of jurassc time. This guy has been doing cryptocurrency since 1995. Some of you may not have been born when he started working on this. He has a long career in privacy and infrastructure. He built a precursor to tor. Do you guys know about tor? It's about dark web but about human freedom. This guy's name is Adam Back. Today he is the CEO of Blockstream. They are building infrastructure ofr blockchain. That's smple and elengant so that Adam can come up and blow our minds.

Alrght. So. I mean, what I'm gong to talk about and explain about is implication of blockchan. What can they deliver for soiety? Why might they be exciting? To get to that, I am going to explain some aspects and features and what blockchain are going to deliver to existing infrastructure. We're going to talk about what blockchains do in contrast to existing infrastructure. In banks, it's largely about trust and reputation. In blockchain, things are automated and machine verifiable. You get some kind of real-time assurance that the network that the financial network built with blockchain tech has balance and everything has integrity after each transaction set is processed. In the financial world, you get assurances after transaction. Failures and risks can build up for longer periods of time. In particular, one interesting thing that bitcoin introduced to ecash tech was the decentralization of bitcoin. It is this concept of mining. I think there are multiple ways to look at it. One interesting way to look at it is that it's an open market for audit services. So miners can fetch sets of transactions, validate them, and then expend resources to mark that the transactions that are valid. If hteir assertions are incorrect, other people will cross-check them. There is independent assurance that this is correct.

These protocols are open and permissionless. They tend to give faster innovation. They create something like the openness of the internet and the wave of innovation that came with it. Since blockchain is automated, they have low barrier of entry. The other important factors are that we need interoperability. The financial network is loosely connected. One of the interesting things about the assurances of the blockchain is that you want the trust assurances to be independently validatable so that someone can send you an asset, or someone else sends oyu a share, you should be able to combne it into something else, like a structured product that builds on it, and have anyone else validate on that. You should be able to move assets between chains. You could think of a web of interconnected chains where it's something lke the internet. In the internet you have SSL encryption. You want in blockchain for trust to be end-to-end. If we could move the owrld to this kind of technology, we should be able to reduce systemic risks.

I think the blockchain offers opportunity for early adopters. Looking at the nternet as an example, ... Digital Garage is an example of a company that took an early interest in new tech. Some people will adopt more slowly. There are risks with this, lke Netflix vs Blockbuster situations. If you don't adopt, you get left behind. Other than real-time audit and automated trust and sort of automated trust statements that you get ....

What is a smart contract? With bitcoin transactions and other related technologies, when you have a coin, and a private key to sign to authorize a transaction, that's a small program. To spend the coin, you have to make the program return true. The program could say well if t hasn't expired and the market price is above this, then you can exercse it. That small program rather than being in a back office n a bank, becomes a part of this bearer asset. It has rules. We can extend this bearer asset into more complex assets with rules, and this is called smart contracts. If you think about a tradtional financial industry infrastructure for a derivative, if you go through the fine print, you're not directly the owner it. There's someone underwriting it, and if they go bankrupt you might not get the money back. With a smart contract, it wll explain the complex rules, but it's based on underlying commodity. As long as you have those assets directly connected to the smart contract, and you trust the custodian of the gold depository or something, then you don't have to trust the person executing the contract because it's a self-executing contract executed by the blockchain network. It might sound like narrow AI, but really it's simple. Everyone downstream of the contract has to verify the rules and that the current benefactors were resulting.

One part of the challenge wth blockchain is that everyone can audit it and get trust and assurance, but it's too public for some companies. If you talk wth the fnancial industry about blockchain, then they get concerned about revealing information about what prces people are paying. They want confidential. They want public auditability to get public trust, and some integrity assurances, but they also want confidentiality. Some companies have focused on private blockchains where they are nside firewalls or VPNs or maybe even just running it within a single company or a group of companies collaborating. It turns out that you can, this problem is solvable. You could have an encrypted order for 3000 shares and an encrypted order for 5000 shares, and you could see that this amounts to the right encrypted amount. They can all get assurances about the math, but they don't learn how much money changed hands.

The other interestng aspect of blockchain is that because it's cash-settled and bearer, it's unlike a bank. It has security properties that are binary. If you lose the prvate key, someone can take your money. Many ledgers in finance are append-only. You might have experienced this yourself, when a bank makes an error, you see an error and then you see a correcting transaction. By general accounting standards, they never undo transactions. Blockchains are the same. If lose control of your keys, then you lose the funds. It's dependent on good security practices. Ultimately you can replicate the existing custodian relationships and solve these securty problems, I believe.

On what else you can do with smart contracts... they are mostly a system for enforcing rules. In general, as a society, we agree on a framework for rules, and it's more efficient for us to agree on rules, and make it.... than it is to reactively discover this later and try to get the money back or something. Blockchains can preserve privacy and enforce rules at the same time, in a timely manner.

Building smart contracts and building assets from smart contracts... the effect is that we can replace a trusted issuer with a trusted instrument. Rather than trusting credit rating and long-term solvency of issuer, we can just trust the custodians that hold the bearer assets. This brings about the possibility for more a longer-tail of instruments and lower price of entry, more competition. You could buy a multi-year contract from a startup that might have a longer lifetime on the instrument than the startup's life itself. So this should ultimately deliver competition at lower pricing. Financial institutions have to build and maintain their trusted reputation, which has a cost, so they are going to charge accordingly. It's difficult for someone to start a new bank and catch up on reputation like that.

We can reproduce the custodian model. It has to be cash-settled. You literally wouldn't have large amounts in cash; you would still have custodians, but more checks and balances. Your approval would definitely be required to transact. We can also use technology to reduce intermedaries. We can do things more p2p (peer-to-peer). If we could rearchitect and move the financial network on to new technology, we should ultimately be able to reduce systemic risk.

One of the final points is that-- scalability, sometimes people talk about blockchain as having scalability challenges. There's some misunderstandings in the sense that there are different layers of blockchain. The basic layer is robust and has some n squared scaling properties. It is challenging to have extremely high scale. But, there are other layers we could use, lke a caching layer which we often describe as lightning payment channels or the already existing duplex channels. We're working on that now, and it allows much higher scale while preserving blockchain properties. We can get to scale and there are interesting technologies which might make even more flexible scalability possible even in the longer-term future, particularly SNARKs which are a cryptographi signature of execution.

I think what blockchains provide is more transparency and accountability that society agrees, so that would be cheaper and more effective and so I think regulators ultimately will like and appreciate smart contracts and blockchains and reducing bitcoin compliance and sort of reactive after-effects today where things have to go wrong before a regulatory would find out, and by then it's too late, so we should be able to reduce some of that. Smart contracts also provide secure automation. You can make the backoffice operations into a more trustless automated system. We can solve confidentiality and accountability and auditability in parallel, Interoperability is very nteresting and important. We need to convey the trustless nature of the transaction.