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> I'm not very well versed in the world of banking and finance. What would banks use a blockchain for? Nothing, in my opinion. The value of a blockchain stems

by runeks 9y ago

> I'm not very well versed in the world of banking and finance. What would banks use a blockchain for? Nothing, in my opinion. The value of a blockchain stems from the fact that, combined with proof-of-work, a single history of transactions can be agreed upon without a central party. This is the same feature that prevents alteration of history, because it would require recalculating the proof-of-work. This comes at a very high cost, however, since energy is literally burnt off just to reach this distributed consensus. Therefore, it only makes sense for the utmost valuable applications, like digital money. I mean, right now Bitcoin miners are paid over a million USD per day in order for the network to reach distributed consensus. Please, anyone, let me know which kinds of applications can bear even a tiny fraction of this cost, except digital money. Even at 1% of this cost, a blockchain-based clearing protocol would be both more expensive and orders of magnitudes slower than using a central party -- and the purpose of clearing is to increase efficiency/reduce costs in the first place. Banks are in the business of taking in deposits and lending them out, while taking a cut. Trustless lending makes no sense; you need to trust whoever you lend money to, or you'll be lending a lot of money to gambling addicts, with little chance of repayment.

highd 9y ago
Proof-of-Stake will be released on Ethereum soon and will greatly reduce the mining overhead, FYI.
- iamphilrae 9y ago
  Actually, if you read one of their blog posts from the last few weeks, they've pretty much abandoned it because it's too hard a problem to solve. Sorry I can't cite, on a mobile and in a rush.
  - djrtwo 9y ago
    I spend a lot of time in the ethereum proof of stake gitter and I can confirm that this is false. It's actively being researched and still in the roadmap. A hybrid PoS/PoW model will likely come out first.
  - terhechte 9y ago
    This is wrong. Ethereum's proof of stake algorithm is named Casper, and is already open source, you can see the repository here: https://github.com/ethereum/casper https://github.com/ethereum/casper There's even a Github project where you can see that the current state is work on the "Fork choice/chain logic". This was started 6 days ago: https://github.com/ethereum/casper/projects/1 https://github.com/ethereum/casper/projects/1 The next release (Metropolis) will afaik contain a first implementation of proof of stake which will run in parallel with their proof of work algorithm (last I heard was that every 1000th transaction will be run via proof of stake, but I may be wrong here).
    - cslarson 9y ago
      I don't think the metropolis release will include any POS based consensus.
  - joosters 9y ago
    https://download.wpsoftware.net/bitcoin/pos.pdf https://download.wpsoftware.net/bitcoin/pos.pdf is one source.
- robinson-wall 9y ago
  How is Proof of Stake useful in an interbank network though? My understanding of PoS is that everyone wants to follow the same chain because the interest payments on your stake make it beneficial to you to accept a new block. Presumably there wouldn't be anything to stake in a private blockchain.
- runeks 9y ago
  Proof-of-stake is not a consensus algorithm on the same level as proof-of-work. When faced with two blockchains, one in which I control 100% of coins -- and thus 100% of the stake -- and some other chain, which chain do you choose, and why? You can't use stake to make the choice, because that's a property of a chain, so you need to decide which chain to use before stake has meaning. Also, what happens if an attacker exploits a bug in the Ethereum implementation, and uses it to replace all nodes' chains with his own copy? How can we ever return to the correct chain unless we just use trust/majority vote?
avar 9y ago
You're making a couple of assumptions which make your entire argument invalid in the context of a "private" blockchain between e.g. several banks. The first is that you're assuming a race to the bottom where the banks will simply try to outspend each other on CPU. You can get a lot of the benefits of a blockchain where e.g. the 10 banks could all agree to each have 1 x86 box contributing to their part of the blockchain. Any violation of such an agreement could be easily solved in meatspace, i.e. 9/10 remaining banks would just agree to ignore the chain maintained by the violator. Since they'd all recognize that they're getting /other/ benefits out of the blockchain without succumbing to some game-theory-esque race to the bottom. Even if there's no such agreement the claim that any sort of alternate blockchain will use up the same resources as Bitcoin itself does is trivially refuted by various altcoins which use up less total CPU, since they're smaller networks. The second faulty assumption is thinking that the only thing standing in the way of rewriting blockchain history is prohibitively expensive CPU resources. In the context of a "private" bank blockchain the banks could simply manually ignore a branch of the chain recognized as being produced by some malicious actor. That leaves a bunch of valuable uses of the blockchain for banks. It's been mentioned as a replacement for the largely manual cross-bank money settling protocols they use now, replacing those with a blockchain would likely be much more secure and transparent, and any issues that arose by voluntarily running a "limited" blockchain would likely be smaller and more easily mitigated than whatever security issues their ad-hoc protocols have now.
- TheDong 9y ago
  There's no value of the work if there's meatspace negotiation, limitations like that on mining, etc, etc. Tell me how this theoretical private blockchain would be better, in any way, than a git repository where each bank signs commits, commits them, and pushes those commits to all participating banks.
  - nugget 9y ago
    ETH vs ETC was essentially behind the scenes meatspace negotiation. The physical world is not as obsolete as some people think.
  - 9y ago
atgreen 9y ago
My view is that the 'blockchain' hype has forced a conversation in the FI community around disintermediation and allowed them to invest in process optimization under the guise of blockchain innovation. I agree that the real innovation in this space is distributed security through proof-of-work, but AFAICT that's not interesting to the banking community.
- kpil 9y ago
  I can't decide if the investors in R3 have no clue or if they are actually smart and are using this as an opportunity to modernise, unsettle the large networks, and also take the opportunity to pose as relevant. I'm leaning towards giving them the benefit of a doubt as there are plenty of 'trusted 3rd parties' that are charging the banks significant amounts of money. There are clearly some incentives here. As a technical decision, it makes zero sense though. I have tried to figure out if a shared distributed ledger could reduce the huge deposited reserves for fast money transfer, but I doubt it unless the central banks are in this somehow.
  - kpil 9y ago
    Ok. After reading all the comments, I am now instead leaning more towards the conclusion that private blockchains are tools to separate fools from their money.
pjmorris 9y ago
> I mean, right now Bitcoin miners are paid over a million USD per day in order for the network to reach distributed consensus. Please, anyone, let me know which kinds of applications can bear even a tiny fraction of this cost, except digital money. Real estate sales. US residential market, ~188K average house price, 5M house sales annually, 6% commission + 1-2% fees per sale. A blockchain record tracking the transfer of title, perhaps in parallel to the existing county appraiser records, and to the MERS system [0], would be worth something. At a flat fee of $100 (less than the property appraiser fee), that's 500M annually, clearing your bar of 365M. At a percentage of the sale, anything over 0.005% would do. You're looking at tracking currency, but tracking assets and their ownership is another important function of banks, one that blockchains can help implement. [0] https://www.mersinc.org/ https://www.mersinc.org/
- mter 9y ago
  Wouldn't a 51% attack means I could lose my house? I seem to be missing how this would work or why this would be desirable.
  - literallycancer 9y ago
    Anyone could fake your signature on a few papers, bribe the guy at the land registry or whatever bureau handles property transactions and you could lose your house. It doesn't have to be a house, it can be a company or anything else. All at a fraction of the cost of 51% attack.
    - DennisP 9y ago
      And all those attacks are common in some third-world countries. Registering ownership on a public blockchain would be a big step up for them.
      - chx 9y ago
        I only want to know one thing: do you guys live in this world? I have been following Bitcoin since the beginning and there seems to be an utter disconnect between the blockchain hypers and the real world. Seriously, who in their right mind would accept this? That you pull some data in a ... what, app? Provided by whom? And it proves house ownership? Have you ever bought real estate or are you 14 to believe this shit? In the real world, there is a chain of trust made out of lawyers, notaries, various government agencies and so on. It's only in the fever dreams of juvenile hackers and Ayn Rand believers who thinks the world work without it.
ChemicalWarfare 9y ago
>> The value of a blockchain stems from the fact that, combined with proof-of-work, a single history of transactions can be agreed upon without a central party. PoW is not the only consensus algorithm out there. Sure, in a completely trustless scenario which is what bitcoin and some ethereum apps are doing - something like PoW or PoS needs to be in place (although Ripple has a different approach for example). For internal private blockchains, this is not really necessary however and would just reduce the tx approval rate.
- joosters 9y ago
  Proof of Stake has some difficult problems to overcome, and it's not clear if they are solvable or not, see the paper https://download.wpsoftware.net/bitcoin/pos.pdf https://download.wpsoftware.net/bitcoin/pos.pdf for some background. It's likely that PoS really just degrades into PoW, with stake holders needing to perform calculations as fast as possible to prevent attackers from out-competing them and generating alternate versions of the blockchain. Adding complicated fines and 'punishments' to deter PoS cheaters just increases the amount of work that they need to do, but cannot stop the problem.
  - drdeca 9y ago
    Does it seem reasonably likely to you that PoS could increase the proportion of computational resources that attackers would need, provided that the attackers control a low enough proportion of the tokens?
    - joosters 9y ago
      Intuitively, I'd say no. I can't see how you can ever prevent a '51%' attack (that is, 51% of compute power). No matter how many coins you own, the attackers can validate their own holdings and disavow the honest stakeholders. At first glance, it seems to be a solvable problem because you can try to put obstacles in place that punish attackers (e.g. fining PoS attackers who generate 'false' results). But you cannot make these inducements to honesty bite, the attackers can happily keep churning out false results until they take over. The problem is worsened because PoS is meant to save wasteful power usage. Honest participants are not likely to dedicate vast computational resources to it, while the attackers will be strongly motivated to do so. The end result seems likely to be an arms race, leading to an effective slide back to PoW, just with added complexity.

by runeks 9y ago

highd 9y ago

Proof-of-Stake will be released on Ethereum soon and will greatly reduce the mining overhead, FYI.

iamphilrae 9y ago
Actually, if you read one of their blog posts from the last few weeks, they've pretty much abandoned it because it's too hard a problem to solve. Sorry I can't cite, on a mobile and in a rush.
- djrtwo 9y ago
  I spend a lot of time in the ethereum proof of stake gitter and I can confirm that this is false. It's actively being researched and still in the roadmap. A hybrid PoS/PoW model will likely come out first.
- terhechte 9y ago
  This is wrong. Ethereum's proof of stake algorithm is named Casper, and is already open source, you can see the repository here: https://github.com/ethereum/casper https://github.com/ethereum/casper There's even a Github project where you can see that the current state is work on the "Fork choice/chain logic". This was started 6 days ago: https://github.com/ethereum/casper/projects/1 https://github.com/ethereum/casper/projects/1 The next release (Metropolis) will afaik contain a first implementation of proof of stake which will run in parallel with their proof of work algorithm (last I heard was that every 1000th transaction will be run via proof of stake, but I may be wrong here).
  - cslarson 9y ago
    I don't think the metropolis release will include any POS based consensus.
- joosters 9y ago
  https://download.wpsoftware.net/bitcoin/pos.pdf https://download.wpsoftware.net/bitcoin/pos.pdf is one source.
robinson-wall 9y ago
How is Proof of Stake useful in an interbank network though? My understanding of PoS is that everyone wants to follow the same chain because the interest payments on your stake make it beneficial to you to accept a new block. Presumably there wouldn't be anything to stake in a private blockchain.
runeks 9y ago
Proof-of-stake is not a consensus algorithm on the same level as proof-of-work. When faced with two blockchains, one in which I control 100% of coins -- and thus 100% of the stake -- and some other chain, which chain do you choose, and why? You can't use stake to make the choice, because that's a property of a chain, so you need to decide which chain to use before stake has meaning. Also, what happens if an attacker exploits a bug in the Ethereum implementation, and uses it to replace all nodes' chains with his own copy? How can we ever return to the correct chain unless we just use trust/majority vote?

avar 9y ago

You're making a couple of assumptions which make your entire argument invalid in the context of a "private" blockchain between e.g. several banks. The first is that you're assuming a race to the bottom where the banks will simply try to outspend each other on CPU. You can get a lot of the benefits of a blockchain where e.g. the 10 banks could all agree to each have 1 x86 box contributing to their part of the blockchain. Any violation of such an agreement could be easily solved in meatspace, i.e. 9/10 remaining banks would just agree to ignore the chain maintained by the violator. Since they'd all recognize that they're getting /other/ benefits out of the blockchain without succumbing to some game-theory-esque race to the bottom. Even if there's no such agreement the claim that any sort of alternate blockchain will use up the same resources as Bitcoin itself does is trivially refuted by various altcoins which use up less total CPU, since they're smaller networks. The second faulty assumption is thinking that the only thing standing in the way of rewriting blockchain history is prohibitively expensive CPU resources. In the context of a "private" bank blockchain the banks could simply manually ignore a branch of the chain recognized as being produced by some malicious actor. That leaves a bunch of valuable uses of the blockchain for banks. It's been mentioned as a replacement for the largely manual cross-bank money settling protocols they use now, replacing those with a blockchain would likely be much more secure and transparent, and any issues that arose by voluntarily running a "limited" blockchain would likely be smaller and more easily mitigated than whatever security issues their ad-hoc protocols have now.

TheDong 9y ago
There's no value of the work if there's meatspace negotiation, limitations like that on mining, etc, etc. Tell me how this theoretical private blockchain would be better, in any way, than a git repository where each bank signs commits, commits them, and pushes those commits to all participating banks.
- nugget 9y ago
  ETH vs ETC was essentially behind the scenes meatspace negotiation. The physical world is not as obsolete as some people think.
- 9y ago

atgreen 9y ago

My view is that the 'blockchain' hype has forced a conversation in the FI community around disintermediation and allowed them to invest in process optimization under the guise of blockchain innovation. I agree that the real innovation in this space is distributed security through proof-of-work, but AFAICT that's not interesting to the banking community.

kpil 9y ago
I can't decide if the investors in R3 have no clue or if they are actually smart and are using this as an opportunity to modernise, unsettle the large networks, and also take the opportunity to pose as relevant. I'm leaning towards giving them the benefit of a doubt as there are plenty of 'trusted 3rd parties' that are charging the banks significant amounts of money. There are clearly some incentives here. As a technical decision, it makes zero sense though. I have tried to figure out if a shared distributed ledger could reduce the huge deposited reserves for fast money transfer, but I doubt it unless the central banks are in this somehow.
- kpil 9y ago
  Ok. After reading all the comments, I am now instead leaning more towards the conclusion that private blockchains are tools to separate fools from their money.

pjmorris 9y ago

> I mean, right now Bitcoin miners are paid over a million USD per day in order for the network to reach distributed consensus. Please, anyone, let me know which kinds of applications can bear even a tiny fraction of this cost, except digital money. Real estate sales. US residential market, ~188K average house price, 5M house sales annually, 6% commission + 1-2% fees per sale. A blockchain record tracking the transfer of title, perhaps in parallel to the existing county appraiser records, and to the MERS system [0], would be worth something. At a flat fee of $100 (less than the property appraiser fee), that's 500M annually, clearing your bar of 365M. At a percentage of the sale, anything over 0.005% would do. You're looking at tracking currency, but tracking assets and their ownership is another important function of banks, one that blockchains can help implement. [0] https://www.mersinc.org/ https://www.mersinc.org/

mter 9y ago
Wouldn't a 51% attack means I could lose my house? I seem to be missing how this would work or why this would be desirable.
- literallycancer 9y ago
  Anyone could fake your signature on a few papers, bribe the guy at the land registry or whatever bureau handles property transactions and you could lose your house. It doesn't have to be a house, it can be a company or anything else. All at a fraction of the cost of 51% attack.
  - DennisP 9y ago
    And all those attacks are common in some third-world countries. Registering ownership on a public blockchain would be a big step up for them.
    - chx 9y ago
      I only want to know one thing: do you guys live in this world? I have been following Bitcoin since the beginning and there seems to be an utter disconnect between the blockchain hypers and the real world. Seriously, who in their right mind would accept this? That you pull some data in a ... what, app? Provided by whom? And it proves house ownership? Have you ever bought real estate or are you 14 to believe this shit? In the real world, there is a chain of trust made out of lawyers, notaries, various government agencies and so on. It's only in the fever dreams of juvenile hackers and Ayn Rand believers who thinks the world work without it.

ChemicalWarfare 9y ago

>> The value of a blockchain stems from the fact that, combined with proof-of-work, a single history of transactions can be agreed upon without a central party. PoW is not the only consensus algorithm out there. Sure, in a completely trustless scenario which is what bitcoin and some ethereum apps are doing - something like PoW or PoS needs to be in place (although Ripple has a different approach for example). For internal private blockchains, this is not really necessary however and would just reduce the tx approval rate.

joosters 9y ago
Proof of Stake has some difficult problems to overcome, and it's not clear if they are solvable or not, see the paper https://download.wpsoftware.net/bitcoin/pos.pdf https://download.wpsoftware.net/bitcoin/pos.pdf for some background. It's likely that PoS really just degrades into PoW, with stake holders needing to perform calculations as fast as possible to prevent attackers from out-competing them and generating alternate versions of the blockchain. Adding complicated fines and 'punishments' to deter PoS cheaters just increases the amount of work that they need to do, but cannot stop the problem.
- drdeca 9y ago
  Does it seem reasonably likely to you that PoS could increase the proportion of computational resources that attackers would need, provided that the attackers control a low enough proportion of the tokens?
  - joosters 9y ago
    Intuitively, I'd say no. I can't see how you can ever prevent a '51%' attack (that is, 51% of compute power). No matter how many coins you own, the attackers can validate their own holdings and disavow the honest stakeholders. At first glance, it seems to be a solvable problem because you can try to put obstacles in place that punish attackers (e.g. fining PoS attackers who generate 'false' results). But you cannot make these inducements to honesty bite, the attackers can happily keep churning out false results until they take over. The problem is worsened because PoS is meant to save wasteful power usage. Honest participants are not likely to dedicate vast computational resources to it, while the attackers will be strongly motivated to do so. The end result seems likely to be an arms race, leading to an effective slide back to PoW, just with added complexity.