[ORGANISER] Andreas, please come up to the stage. [Applause] [ANDREAS] Hello everyone. Can you hear me well? Very good. 1.
Bitcoin is dead. [Laughter] Bitcoin is just a silly idea. It clearly can’t work. It won’t scale. It will fail.
It has failed. It is dead. The true innovation at the heart of this technology, the blockchain, is what matters. This technology will create new opportunities in financial technology (“fintech”) for banking and financial services companies across the world, even while Bitcoin won’t be able to succeed further.
Blockchain is a joke. Blockchain doesn’t actually work. Bitcoin is the only thing that matters. Bitcoin will completely change banking. It will make banking obsolete.
All central banks will be destroyed in the path of Bitcoin. Within just a decade, every currency in the world will be dominated by Bitcoin. Both of these positions are ridiculous, simple-minded, puerile, and fundamentally wrong. For every complex question, there is one very simple solution and it is wrong. This is a very nuanced space.
It is a space that is brand new. It is a space that has existed for only seven years. Yes, it does represent something truly revolutionary: a fundamental change in our understanding of trust, in the way we organise authority from hierarchical systems to network-centric flat systems. It is a re-imagining of what it means to have currency, how currency derives its value. It is a new system for disintermediating intermediaries.
It is a re-balancing of world affairs. All of these things are true, but we don’t really know how this is going to play out — which is the most exciting part of my job.
Bitcoin is one of the few spaces, one of the few experiences I’ve ever had in my life, where I feel that I am sitting on the front rows of history, observing history in the making. History is not the past, history is how we change the present to affect the future. We are doing this right now worldwide.
By “we,” I don’t just mean Bitcoin. I mean the much broader space. Before we go to a very simplistic answer, what is called in some spaces “Bitcoin maximalism,” or the opposite extreme where we discount Bitcoin as an unruly, rag-tag, anarcho-capitalist dream that is silly on its face…
Something that “serious” people, scientists with PhDs, have said will soon die. Before we go to these two extreme positions, we really need to understand the nuance. What is Bitcoin? What is the blockchain? What do these things have at their very core which gives them the characteristics they have?
How do you tell them apart? What are the differences between the systems? What applications do they have? My goal today is to really try to answer these questions. What is Bitcoin?
Bitcoin is the first blockchain. Bitcoin is the largest open, global blockchain that exists today. Bitcoin is the first borderless, transnational, open system of access for financial payments and trust.
It enables innovation without permission, with high resistance to censorship, coercion, and geopolitical manipulation. Bitcoin is a mathematical proof system that is fundamentally neutral to [the identity of] participants.
It exhibits a principle that on the internet we call “net neutrality,” and brings that to finance — which of course terrifies people. Finance without concern for source, destination, or amount? Neutral routing of transactions, equal for everyone? That idea is terrifying. Where [is authority involved]?
Where does trust come from? It’s almost as if, suddenly, we no longer pay attention to the New York Times.
Instead, anyone can publish their opinion without an editor. What will the world come to? What the internet did for communication, bitcoin is doing for finance.
It is introducing a fundamentally different network-centric and flat system which allows us to do transactions without recourse to authority or intermediaries, that derives trust… from the collaboration and computation of thousands of nodes. It uses a blockchain, but the blockchain is one of several components that make Bitcoin work.
If you focus too much on the blockchain, you may miss the point. What is the most important technology of the internet? What is the really important invention that makes the internet work? TCP/IP? Packet-switching?
TLS? But to take the internet and consider it only as a packet-switching network, means that the internet and an intranet or your local area network are equivalent. Are they really? Was the real opportunity to be able to do packet-switched networks? Or is the power of the internet the fact that it is open, global, transnational, borderless, censorship-resistant, open-access, and anyone can innovate without permission?
This is the crucial issue.
Where does the value of bitcoin derive from? Yes, it is a blockchain, but it is a very special blockchain. It is a blockchain that uses, as its fundamental consensus mechanism, proof-of-work. Proof-of-work gives it certain characteristics that are unattainable, so far as we know, with other consensus mechanisms.
Bitcoin is fundamentally open, borderless, transnational, censorship-resistant, etc. All of these characteristics are both what it is and what makes it powerful. Ironically, they are also the things that most critics of Bitcoin point to as its greatest weaknesses. “It cannot be allowed to exist if it is borderless and open to access.” “If it has no ability to be controlled, it cannot be allowed to exist!
” Yet it exists.
Bitcoin forgot to ask for permission. Out of this grand experiment that has lasted seven years, we now have this really disruptive force that is pushing us to re-imagine payment networks. Out of that, we [saw] the most brilliant marketing campaign in the history of disruptive technologies. Imagine if you’ve invented a new disruptive technology and within four or five years, you manage to completely distract the incumbent by persuading them to follow in your footsteps and adopt the central premise of your technology [under the assumption that they] can “disrupt their own business from the inside-out.
” If the Bitcoin community had presented banks with the idea of blockchains (as some of us did) and said, “Put a billion dollars into training people on how to do things our way and work in our space.” Someone should have gotten the Nobel prize of marketing, the Oscar of disruptive distraction. The truth is that the financial services environment seized on “Blockchain” because they saw within it the possibility of using some elements of Bitcoin without being disrupted.
But the blockchain is not the only thing that makes Bitcoin tick. In this effort, we see many similarities to the early internet.
In the early days of the internet, when companies saw how it had no editorial control, no centralised security mechanism, no barriers to access… This represented a terrifying departure from their model of IT. As a result, most companies resisted and built intranets using TCP/IP, with heavy firewalls all around to separate them, keep them controlled, give them editorial access, and “tame” the system.
They ended up with these stagnant islands which gradually became less and less secure. Then we had the second wave of the internet, where many of the most effective and disruptive companies in the space took their internal IT infrastructure, turned it inside-out to face the world, put everything on the internet, and fully harnessed the collaborative potential of keeping an open system.
We no longer live in a world of Oracle and IBM, in a world [dominated by] enterprise computing and software. Apple is driving your IT faster than Oracle. Your systems are inside-out or they are stagnant.
Collaboration is the name of the game. The most robust and secure systems are the ones that are on the internet, subject to attack and competitive disruption every single day. Through that process, they become more robust. It is ironic that 15-20 years later, we’re repeating this conversation with the blockchain. The question is: if TCP/IP isn’t the magic sauce, but the really interesting aspect is the open-access, collaborative, global network, does that mean that intranets are useless?
Does that mean that TCP/IP on your LAN or your datacenter has no value? Of course not. These are still powerful technologies and useful models of adopting. However, the best thing you can do with an intranet is inter-connect it to other intranets. For that, you need the internet.
Bitcoin is the internet of money. Bitcoin is the de facto money of the internet. Does that mean that Bitcoin will always be the internet of money? No.
Does that mean that Bitcoin will always be the de facto money of the internet?
No. What is special about Bitcoin is that it represents the open blockchain; the blockchain that offers anonymity, censorship resistance, open access, and innovation without permission. That engine creates an explosion of innovative potential. It connects the vast number of under-banked and un-banked people around the world. About 4 billion people could become connected, through a simple Android phone or a simpler Nokia text-messaging phone, to the global financial network.
The open blockchain will change this world. Today, there is one open blockchain that matters, and that is Bitcoin. I can’t predict that it will always be the only open blockchain that matters, or the dominant one.
Why? Because it might not be “the best.
” But very often, in technology, “the best” is not what wins. TCP/IP wasn’t “the best.” In fact, we now realise that it had fundamental problems in scaling, in addressing, in routing, and many other things. Yet TCP/IP was good enough at scale, with network effect, so fast that it became irreplaceable. It has now become un-upgradeable.
TCP/IP is so embedded into global networking that it resists its own upgrade to IPv6, and has resisted its own upgrade for almost 20 years. “IPv6 is coming.” IPv6 has been coming since 1995. [Laughter] Any day now..
. But clearly, IPv4 is dead and the internet can’t possibly scale beyond Usenet to email and attachments, to voice, to video, to HD video, to Oculus VR 3D 4K capabilities. Of course it possibly can’t.
It doesn’t for a while, until it does, and then we shift the goal of what “scaling” means again. Bitcoin can’t scale to Visa, until it does.
Bitcoin can’t scale to a global transactional network, until it does. But I can tell you what Bitcoin can scale to: a $7-10 billion secure transnational network that remains up and running for 24 hours per day, 365 days per year, for seven years without a single successful attack against the core protocol. Not because there have been no attempts, but because Bitcoin has been under attack from the first day, for 24 hours per day, [365 days per year], by some of the most sophisticated adversaries the world has seen. [How do I know this]? Because Bitcoin has a $7 billion security bounty for breaking it.
It is a system that is on the internet and lives right in the dirt, in the warzone of internet security, and it survives. As it survives, it gets stronger every day. If that’s what Bitcoin is, maybe this will be the one that becomes the internet of money. I can’t predict that. What I can tell you without any uncertainty, is that the world of finance will forever be dominated within less than two decades by open, global, transnational, censorship-resistant, largely anonymous, privacy-protected payment networks based on the exact model of Bitcoin.
With optimisations. Maybe it will be something unrecognisable from what we still call Bitcoin, but the brand still works. Or maybe we’ll call it something else. I remember, when I was in IT, how people kept telling me that Ethernet would not scale beyond 1Mb, then 10Mb, then 100Mb, then 1Gb. “It could never scale.
” Yet today, we’re running 10Gb Ethernet over fibre. Think about it for a second: what part of that is still Ethernet? The brand, the frame size, and the physical address maybe.
The switching algorithm? Nope.
The distribution mechanism? Nope. The network topology? Nope. None of that is the same.
What survived is the brand. We still call “Ethernet” what we have today. Therefore the question is: did Ethernet scale? Sure did, as long as you keep changing what you call Ethernet. Can Bitcoin scale?
It depends. What are the characteristics that define Bitcoin, unalterably? The 21 million coin limit and predictable issuance rate. That is Bitcoin. You cannot change that.
The proof-of-work algorithm that is decentralised with pseudonymous participants? That is Bitcoin. You cannot change that. Everything else is up for negotiation. We’re going to maintain anonymity and privacy.
We’re going to empower the world.
We’re going to distribute these powerful tools of finance to everyone who has a smartphone. When you think about this, we’re not talking about everyone with a smartphone having a bank account. We’re talking about everyone with a smartphone having a bank, of which they are the CEO. A bank with the potential of international wiring and settlement, market-making, loan origination and termination, liquidity generation, and many other capabilities that today even many banks don’t have.
One day, a decade or so from now, a six-year-old will be able to open a “bank” on their phone and become a “banker,” perhaps even issue their own currency and become a “central banker.” That sounds insane, but that is absolutely the world in which we now live, with the possibility that any individual on this planet can issue an unforgeable, global, secure, instantaneous currency. The recipe exists. Will it be Bitcoin or will it be something else? I don’t know.
But it will be an open, global, private, censorship- resistant, transactional and transnational network. Then the question becomes: what are we going to do with blockchains? What’s going to happen to the banks? Some of the banks will adapt. Blockchains may have some very interesting applications.
Blockchains have certain useful characteristics as a technology. In general, blockchains are not an answer. If you say, “I have a blockchain,” what that prompts me to do is ask you questions. It opens many questions. For example, what is the consensus algorithm?
What is the control / governance structure? What is the model for currency or token generation? Who has the authority for issuance? What are the characteristics for security? If you start asking those questions, you can decide what type of blockchain this is.
Is it open or closed? Does it use proof-of-work or a different consensus algorithm? Are we talking about a “proof-of-authority,” signing instead of mining, centralised as a consensus consortium between five or six banks, for example? A closed, permission-based access model for specific participants? Maybe that’s what we’re looking at.
But when you’re talking about that, you need to understand what the limitations of that technology are. What does it do and what does it not do? Just because it is a blockchain doesn’t mean it will do everything that you think it will do. If I take a Formula One car that is beautifully designed for [driving] on a circuit, I could say..
. this car can go 250 miles per hour. Fantastic, but on what road? If I take it into downtown Milan, my average speed will be 15 miles per hour because of traffic. But even if, for whatever miraculous reason, the road ahead of me opened up and I tried to go 250 miles per hour, the car would disintegrate because of the road surface conditions.
Just because it is a powerful vehicle doesn’t mean that if you put it in a different context, it can still operate. It has to be suited for the purpose. Let’s examine some of the nuances. First of all, immutability. One of the things that people suggest blockchains have as an inherent characteristic is immutability.
[As in], once you can record something on a ledger, it cannot be changed.
But immutability is not a characteristic of blockchains; immutability is an artefact of a proof-of-work consensus system. The open blockchain, Bitcoin, has immutability because even if you control 100% of the mining power, you cannot recreate an alternative version of history by re-writing the blockchain without also presenting valid proof-of-work. That needs to be computed. You can only affect, with the most immense amount of computation (hundreds of hexahashes per second).
.. Let’s say you did have that. You could now affect hundreds of blocks. You could re-write the history of this afternoon, but not yesterday, certainly not last week, and most certainly not last year.
Even if you controlled all the hashing power currently in the world, it is impossible to re-write the proof-of-work on the Bitcoin blockchain even two days in the past. The amount of computation is unfathomable. You’d have to wait for everybody else to stop doing [proof-of-work as well], while you re-calculate the past. They will continue into the future, creating a longer blockchain, while you waste resources re-writing history. Immutability is a characteristic of proof-of-work, not blockchains.
That has some very serious implications.
Censorship resistance and coercion resistance [depend on] the anonymous and decentralised nature of mining. If you combine those two facts, you come up with some weird characteristics. Let’s say you have a consortium consensus mechanism that controls banking. I don’t know why you would apply that, but let’s say you built a blockchain that uses six banks, signing transactions in a round-robin fashion or sophisticated Byzantine consensus model that you bought at great expense from a consultant.
[Laughter] What happens when you are served with a judicial order to re-write the history of the last year and make the balance in the bank account of WikiLeaks go to zero? What happens if you’re not served with a judicial order, but simply blackmailed through market pressure or by a regulator to do that? Not that it would ever happen…
I mean, in a democracy we don’t just cut off the finances of WikiLeaks without any judicial process, do we? [Laughter] The problem is that you can actually coerce the participants in this system to re-write the financial history of transactions. That represents a moral hazard of extreme proportions. The next question is: why would you use such a thing for a settlement system? This is something that mystifies me.
SWIFT is an antiquated pain in the butt, expensive, slow, and mired in geopolitical control. The equity clearing systems are not as bad, but they’re still expensive and slow.
Certainly, you’re directing a lot of profit. Why not just implement a banking consortium that does settlement internally? Well, I have an idea.
One of the things with a centralised clearinghouse is that they have maximum transactional efficiency (billions of transactions per second is no problem). A blockchain can’t replicate that level of efficiency. There’s no way you can do it.
Physically it is impossible. But let’s say you [ignore that].
What you’re saying is that you’re going to replace a party that has no fiduciary interest in the equities and instruments that they’re clearing, that is not a market maker and participant, that is completely independent by design, that gives you some guarantee of neutrality through separation of concerns and duties… with a consortium of five banks that are themselves market makers and participants and have enormous conflict of interest? Until now at least, the brokerage game is gamed with front-running, algorithmic trading, and dark pools.
The futures’ game is rigged, the foreign exchange game is rigged, but at least the settlement game isn’t. You’re going to give that to a consortium of banks to do without any oversight? You’re going to do this with a blockchain that has full encryption, complete anonymity? Well, that’s a double-edged sword.
But if you make it fully transparent, then the first time that Anonymous gets in to that market and leaks that blockchain, forget the Panama Papers!
This is Panama Terabytes! [Laughter] Every transaction ever made. I would love to see the black budgets of some governments come out when their blockchain leaks. How do you protect the keys? How do you protect the keys that are used to sign in this consensus algorithm?
You’re creating an enormous concentration of risk there, from a security perspective. If those keys are stolen, even just as a denial-of-service attack, that would lead to disastrous consequences. But that’s okay, right? Banks know how to keep information secret..
. Oh wait, not even the NSA can do that. There is no system in the world we can design that can keep information secret forever.
Bitcoin’s answer is to decentralise the power so massively, as much as possible, that there is no place to press a button / pull the lever and exert control, to force the system. The whole point is decentralisation.
Blockchains can effectively decentralise big parts of the financial system. They will absolutely generate cost-savings for banks. They will affect the margins, increase efficiency. Like intranets, they will be very useful tools..
. In fact, I think you should implement an overlay blockchain on top of Bitcoin for settlement and replace SWIFT, swiftly! [Laughter] In the end, it doesn’t matter. I’m not critical of blockchains because I am morally or ideologically opposed to banks continuing business. I think banks have bigger problems than Bitcoin.
I have some questions about the practicality and applicability of blockchains without proof-of-work and decentralisation; blockchains that are closed and not open to access, which don’t have permission-less innovation. I don’t think [that kind of blockchain] really delivers on the promise. In the end, I really don’t care. I’m not interested in the 1% marginal decrease in cost of a settlement platform for interbank this and that.
I don’t care.
There are four billion people who are under-banked. With an open blockchain, we can change that. That is the team I’m on. Thank you. [Applause] [ORGANISER] Thank you, Andreas.
[ANDREAS] Thank you. [ORGANISER] Thank you for your compelling view on the relationship between Bitcoin, blockchain, and the future of our central banks. We have a representative right here from the bank of Italy, the payment systems, the currency we have in our wallet, our financial institution clients, and us as consultants.
Before we go on to the next speaker, as you are so knowledgeable about Bitcoin, I have a question on the compelling story of the day. Who do you think is Satoshi Nakamoto?
Do you know? [Laughter] I have to inform you that we have journalists in the room, so… [ANDREAS] I don’t know.
I don’t care. It doesn’t matter. Bitcoin is not a system of proof by authority, or even reference to authority. It is a system of independent, neutral, mathematical proof. What that means is that it stands on its own without appeal to its author or creator.
I have no idea who Euclid was, or even if Euclid existed. Euclidean geometry is part of my daily life whether Euclid existed or not, whether Euclid was a group of people or an individual, whether Euclid was a nasty malicious pervert or a saint.
It doesn’t matter. Some people will say, “Yes but Satoshi Nakamoto has one million bitcoins.” “What happens if Satoshi Nakamoto sells all one million bitcoins in one moment?
” I’m a bit more worried about what happens if China’s central bank sells all of their dollars in one moment. [Laughter] Percentage-wise, that’s a bigger problem! What happens if Saudi Arabia decides to…
change fundamental supply characteristics of oil in one moment? What happens if the Walmart family decides the yuan is a better investment and they exit the dollar? Market fundamentals mean that [Satoshi doesn’t] matter. Bitcoin survives regardless. The only thing the identity of Satoshi Nakamoto is guaranteed to deliver is sensationalist articles.
.. that give us more appeal to authority. In the end, Bitcoin is not governed by Satoshi Nakamoto. Bitcoin is governed by algorithms.
[ORGANISER] Thank you, Andreas. [Applause] [ANDREAS] Do we have any time for questions? [ORGANISER] We have many questions from the audience. As there are so many of you and time is passing quickly, I would like for you to read one of them and maybe [answer the rest] later on.
Otherwise we wouldn’t have time for the next speaker. Is there any question you would like to answer? [ANDREAS] Let me see, just one second. [ORGANISER] Sure. [ANDREAS] I think “will the success of blockchains be defined by a push factor from the market.
.. or a pull factor” is happening now.
I’d like to shift that a tiny bit and talk about the global open blockchain, Bitcoin, as it exists today. I had said that we “forgot to ask for permission,” but we also don’t need support.
This is not a system that is going to work better if banks support it and back it. It is not a system that is going to have an increase in trust if we add intermediaries. It is not a system that will become better if we add identity and reputation systems, thereby replicating the problems of the past. It [does not intend] to replace Visa for a developed nation consumer buying a cup of coffee at Starbucks.
That is not the point.
It is not a system that will replace national currencies. Bitcoin will effect import / export businesses, international remittances, in-sourcing and out-sourcing, and cross-border transactions where the friction is greatest. It will serve those who are not being served by banks. Bitcoin is irrelevant to banks because they cannot use it. They cannot use it because banks are fundamentally imprisoned within a regulatory system that does not permit them to use systems without identity.
Outside of that prison are four billion people who don’t have identity, who can’t be a part of that system. But they can use Bitcoin. They don’t care about banking, and banking doesn’t care about them. Thank you. [Applause].