Bloq on Blockchain

I had a chance to sit down with Jeff Garzik, co-founder of Chicago-based enterprise blockchain firm Bloq, during a lunch break on May 28, the last day of the Consensus 2017 blockchain conference in New York. Note that this was just about at the start of the Summer of Bitcoin. Jeff’s answers amount to a tutorial on blockchain.

Q: Blockchain partnerships in banking are dominated by large banks, how will small banks be able to participate? Will the blockchain system be open enough for a full range of organizations?

A: One of the things we say is that the tech is easy. What we mean by that, is that watching the networks and the entire business problem or the difficulty is selecting network claims. Getting to the heart of your question, and one of Wall Street’s largest banks, they don’t want to see another closed network where it’s just the big banks as gatekeeper. They are a big bank saying this, and they get the value proposition of open networks. That’s where the internet really transformed our society, the internet is an open network.

Blockchains are networks, and specifically, they are networks where all participants must agree on a common set of rules, and those rules are baked into the software. I like to call blockchain adjudication-as-a-service, because the blockchain rules are the final arbiter of whether someone executes a smart contract, if someone transfers a coin or not, etc. All this starts to happen according to consensus rules that are essentially the law of the blockchain.

And so, the business problem is how do you get parties to all agree to a certain set of rules, number one. And then sort of repeating your question right back to you:  are those guys going to let smaller guys onto their network or are they just going to be lords of the network and keep the smaller fish out? So, that’s a valid question, and as a technologist that’s out of our realm.

That’s why you see all the consortiums like R3 and others. That’s why people are creating things in blockchain, because is a network. The value and the key uses in blockchain are in breaking through boundaries. What I mean by that is either going across business units internally where there is a lot of friction, going across an organization, or across borders. That’s where we see blockchain employed most often. I like to say a network of one is not very interesting, and so a network of one has very little value, but on the flipside of that, the business problem is: how do you get competitors in the same room on the same blockchain?

Q: How do blockchains function as trusted networks?

A: Because everyone on that network is essentially using the blockchain as sort of a level playing ground, a referee for the rules, that allows what we call “trust shifting.” That’s where some of the key blockchain values come in as you potentially disintermediate counterparties, because you can trust the blockchain to clear trades rather than say the DTCC. That’s why, for example, the DTCC is so involved in blockchain. So you trust a blockchain more and potentially trust other parties less. That adds confidence to the transaction.

Q: How do you answer the skeptics on trust? They are out there. . .

A: Yeah, well it’s not so much of a negotiation as it is buying into the theory. You either trust it or you don’t. And to illustrate with bitcoin, the way the blockchain software works is you have thousands of computers all over the world that are checking and balancing all the other computers all over the world. They don’t trust any other computer; they only trust these cryptographic truths that this bitcoin has not been sent to more than one place. They double spin it. Essentially, it’s leaderless such that any one actor can be malfunctioning, malfeasant, malicious, any other “m” word that you want to insert, and that’s OK. The network just ignores any invalid data. It’s a binary question, you either follow the blockchain rules or you’re ignored by the entire network.

Q: What is the consensus mechanism used to keep everyone aligned?

A: There are consensus rules. Every computer has a complete copy of the rules and a complete copy of the data. So when you receive some data—a transcription of the distributed ledger—you evaluate it against the rules that you know to be true. Now multiply that times a million, each computer is evaluating the same rules in the same way. The computer science word is “determinism” or “deterministic”. If you have a lot of computers evaluating the same rules, in the same way, against the same data, you come up with the same answer, which is a distributed ledger of these updates. That is the consensus mechanism. For example, if you and I are in New York, and someone else is in Atlanta and someone walks up to you and says, “What’s 1+1?” And a different person walks up to me and says, “What’s 1+1?” You and I arrive at the same answer without having to communicate with each other. That’s the distributive communication problem.

Q: What about the differences between public and private blockchains? Financial institutions and even governments are not going to find the open public bitcoin blockchain adequate.

A: It’s more about two things. Number one I call private blockchain, blockchain on training wheels. From a pragmatic perspective, it’s for an organization looking to gain knowledge, experience, test blockchain etc.  A key value proposition of Bloq is that we use the same software on public and private blockchains. So, when that organization is ready to open, they just flip a switch. They are still using the same software.

Number two, it’s more pragmatic. That’s how we satisfy legal requirements because there are specific antimoney laundering, know-your-customer requirements. There are specific insurance, risk, and liability requirements. All of those are very easy to satisfy if you can prove that the network is not open, whether permissioned or private. That gives banks the confidence that there’s not a bad actor on the network.

Q: What industry trends are worth paying attention to?

A: ICOs, initial coin offerings, were the talk of the conference. What they do is basically enable investors to monetize the network effects a company can produce directly. Otherwise, it’s bitcoin and blockchain 2017, because blockchain is going to production and the biggest banks are finding new levels of comfort with what used to be this scary, anarchist blockchain thing. The biggest investors are seeing the numbers rise a lot. Bitcoin has risen seven out of eight years, and it was too small at the time in terms of liquidity. If a big hedge fund wanted to get in it, if they wanted to write a $50 million check to get into this asset class, the liquidity wasn’t there years ago, but it is now. It went like this: 2015, bitcoin is a dirty word. 2016, blockchain proofs of concept. 2017, cryptocurrencies are a noncorrelated asset class now accessible through organizations like the CME Group.

Q: How are government entities getting into blockchain?

A: I spoke in June 2016 at the annual meeting of all the bankers in the world. I got to meet with Janet Yellen at the Federal Reserve. I met the Chancellor of the Exchequer for the United Kingdom, and all the other smaller countries’ bankers, over 100 central bankers. We also contacted the monetary authorities in Singapore and in Hong Kong, and they are all really interested in it.

Blockchain is really adjudication as a service, and who is the only other illegal adjudicator in the room. That’s the firestorm, and so a lot of finance chairmen are interested in it

We have some states that are not just writing digital currency, they are also looking at things. The State of Delaware created a new class of stock specifically for blockchain shares, so a class of cryptoshares is written into Delaware’s laws.

Governments are also looking at digital identity. Digital identity is going to touch blockchains and smart banking. There’s a lot of work being done over secure digital identities, securing our own personal data, most notably health data, financial data, things of that nature. That’s going to enable them in particular.

One of the reasons I think banks are so interested in digital identity plus blockchain is that they could potentially on-board and see the bottom line growth from a lot of new retail customers. They are easy to on-board now that they have already had that LMYCK stamp of approval. So if someone walks in the door to your bank, already having passed all those you know background checks, it’s easy to click a button and sign up for a mortgage, sign up for a new account, etc. Governments are going out have a hand in this because they oversee regulating this stuff.

Real estate is going to have a title using blockchain software, as in the Cook County demo you mentioned. Bloq has talked to some of the largest insurers; they are interested in getting at those aspects. That again is going to loop in touchpoints with governments. They are starting to engage.