Blockchain Fundamentals

[00:00] Podcast title introduction

[0:13] Lory: Hello and welcome to Blockchain Leaders Insights, brought to you by Blockchain Ireland. My name is Lory Kehoe, Chair of Blockchain Ireland. On today’s episode, we are talking about all things education. We’re getting into the nuts and bolts and explaining what blockchain is, what Bitcoin is, what tokenisation is, what Web3 is, and everything in between. No better people to explain all of the above than Professor Donal O’Mahony from Trinity College, Dublin, and also Dr. Trevor Clohessy from Atlantic Technological University. You’re very welcome.

[0:48] Donal: Thank you, Lory.

[0:49] Lory: So, look, jumping straight in, Donal, I think people find it really complex, but what is blockchain and how does it work?

[0:57] Donal: Yeah, well, blockchain, another name for blockchain is distributed ledger technology. And I think that’s really at the core of what blockchain really is. So if you think about if you want to move money between two people, typically they will open up a bank account with, let’s say, any particular bank. And logically, that bank could maintain a ledger and will basically say, well, Lory has 10 euro and Trevor has 15 euro and so on. And then just to move them, it’s really just a matter of updating the ledger. But to do that, you need the bank to be involved. So that’s a third party. Now, what blockchain does or distributed ledger technology is it essentially moves that ledger out to nodes clustered around the Internet. Each one of them maintains its own independent copy. They have a mechanism for making sure they get a consensus on what’s in the ledger. And now the third party is removed. So essentially anything that you needed to do before with a third party that’s really not adding a whole lot of value can now be done on the blockchain, on the Internet, available 24-7. Nobody in between, unstoppable, and has all sorts of other properties like that.

[2:04] Lory: And so what happens to these third parties who play that role today in that world?

[2:09] Donal: Well, one of the things I guess is that it’s the third parties who are looking at this and they’re thinking, well, okay, if someone’s going to eat my lunch, it might as well be me. So you do find that among the companies that are most interested in blockchain, it is people who are essentially in danger, I suppose, of being disinter-mediated. So, you know, I think in a pure blockchain world, those people might be out of the picture, but there are all sorts of hybrid situations where they continue to play a role, or at least an on-ramp, where blockchain would do some of the functions, but the centralised entities will do others.

[2:44] Lory: Understood, understood. And based on, you know, you explaining what blockchain is to many people from around the world. And certainly a question I get asked a lot, you know, there’s almost an obsession as to how it works when there are lots of other things that we use in society, whether it be electricity and other things like that, where people just use it and they don’t know how it works. Have you experienced that?

[3:04] Donal: I mean, blockchain is a complicated technology, really. So it’s the culmination of, I guess, 30, 40 years research in crypto. It involves things like public key systems, which are a little bit difficult to get your head around. And I think that’s one of the main barriers to adoption. And it’s also perhaps one of the dangers of it, because if you’re crypto naive, let’s say, and you start to use blockchain, it’s very easy to go wrong. You know, you can do things like lose your keys or divulge the wrong thing to a third party and everything can go wrong. So, yeah, that’s definitely a significant barrier to adoption, I think.

[3:40] Lory: Got it. OK. Okay. Now, people would argue, Trevor, that one of the, you know, best applications or the only application of blockchain technology is Bitcoin. So what is Bitcoin and how does that work?

[3:53] Trevor: Thanks, Lory. And I suppose Donald mentioned a key word there, disintermediation. So around the end of 2008, you know, we’d seen, you know, a global financial crisis and people had become kind of, you know, disenfranchised with traditional mechanisms of fiat currency. So all of a sudden, tail end of 2008, start of 2009, we saw the introduction of this virtual currency or digital currency called Bitcoin. Funnily enough it’s the creator is it could be they or he or she or a group called Satoshi Nakamoto released a white paper called Bitcoin and in this nine-page white paper described a new form of digital currency which was secured by this really cool technology called blockchain which enabled you in a disintermediate decentralized manner to send transactions currency digital forms the payment from one person to another in a peer-to-peer network. This kind of disintermediation from traditional fiat currency world was seen as a huge innovation. But if you think back to 2009, not many people outside the community knew what this digital currency was. Fast forward nearly nine years, price of a single Bitcoin rose to around $20,000. All of a sudden we had this global phenomena of, you know, to propel to a global audience, this digital currency called Bitcoin. And for some of us, there was mass interest in what the cryptocurrency was, but for researchers and lecturers like myself, I was more interested in what enabled this disintermediation from traditional finance world to work securely, anonymously, and to go onto a platform like Blockchain Explorer and see these real-time transactions in real time. Whereas if you compare it to your traditional bank account, you can’t see the transactions of your peers, let’s say. You can see your own, your transactions. So for me, this was a really cool innovation that was something that was open, transparent, but most importantly, the underpinning structure, which was called blockchain, would allow transactions to go back and forth between parties in a secure, transparent way.

[6:02] Lory: Wow. Okay. Very succinct. Is there a difference Donal between how Ethereum works and how Bitcoin works well?

[6:12] Donal: I mean Bitcoin is the granddaddy of the whole thing so bitcoin I guess has a fairly simple structure and it incorporates this thing which people refer to as Nakamoto consensus. So it’s sort of the blockchain holds together and bitcoin really is just about transferring money from one person to another or bitcoins from one person to another now people then thought this is a pretty cool idea. We could use this for thousands of things. And what many people did then is they repurposed Bitcoin and started doing different versions of it that would do different things like naming systems and identity systems and so on. And Ethereum came about then basically because people thought, well, we need a general purpose blockchain. We need something that can move money, but we also need something that can execute arbitrary blocks of logic and can be used for all kinds of applications, which we may discuss later, like tokenisation and digital identity and so on. So Ethereum is very much the Swiss army knife of blockchains. So in addition to being able to move this currency called Ethereum from one person to another, you can write applications on it, decentralized applications, and it’s much more powerful.

[7:20] Lory: Are there others other than, we spoke about Bitcoin, Ethereum, are there other blockchains out there too?

[7:25] Donal: Thousands. Yeah. So, I mean, it’s very easy to start a blockchain. I mean, you know, the code is freely available. You can write new code. Starting a blockchain is not the issue, but it’s kind of gathering the community around you is, you know, getting people to support it and people to not to ignore it. So I would say that Bitcoin and Ethereum are the two very big ones, but there’s thousands after, you know, running down from that with varying descending degrees of popularity down to joke coins, coins that have one specific purpose in one specific application. Yeah, so many.

[8:02] Lory: Okay, got it. A term which gets or has increasingly been referenced, Trevor, is this term of Web3. So what is Web 3? And how is it different to Web 2 and even what the hell was Web 1?

[8:16] Trevor: Yeah, that’s a great question. And one I’m often asked and that I do cover, like we are familiar with Web 0.1, which was the introduction of the Internet email, as we know. Around, you know, after the dot com birth, we saw the introduction of Web 2.0, which was largely facilitated by the advancement of cloud technology. All of a sudden we had social media and rather than content being, you know, pushed to us in the internet web 1.0, we were actually pushing content out. Web 3.0 is more about, you know, giving ownership back to the end user in terms of personal identity, you know, security, social, but using AI and blockchain technologies. And it’s very interesting that you mentioned different types of blockchains because, as Donal mentioned, there are thousands and hundreds of these variations. But most interesting for me are the protocols which underline these actual, you know, applications that supposedly are running on this new evolution of the Internet called Web 3.0, which is more about you owning your identity, more governance, more, you know, giving the consumer back the ability to look. I don’t want my data residing in the cloud. I would give it to you for 24 hours, but I will take it back again. And essentially what we’re seeing is, you know, a lot of new applications under the guise of Web 3.0, which are AI enabled, blockchain enabled, and some of them which are decentralized. So this evolution of Web 3.0, it’s in its early infancy. But I’d say over the next five to 10 years, we’re going to see new, what we would call in Web 2.0, which was the Facebooks, the YouTubes. We’re going to see an advancement of a proliferation of Web 3.0 and decentralized AI underpinned applications.

[10:01] Lory: Is it all just marketing?

[10:05] Trevor: That is a very good point. But anytime I’m asked for advice on a particular protocol or a blockchain, a token, you have to do your due diligence. Read the white paper, read, you know, what are the rules surrounding, as Donald mentioned there, it’s like for your protocol or your blockchain, your app to actually gain traction, you need the community. And oftentimes people will issue these unrealistic marketing claims to bring the community there, as we’ve seen with ICOs and various guises like that. But I truly believe that Web 3.0 is something from an end user interface that is going to allow us a lot more security. The idea of, you know, data vault where all my personal data is held in a personal vault. And if, let’s say, an insurance company come to me with their, you know, requirement to see my data, I’ll give them the access to the keys for 24 hours, but I’m going to take it back. I’m going to take it back. that control is what I envisage which will make, you know, Web 3.0, more than a marketing claim or a marketing call, I think, but it’s still in its evolution. So I’ve seen a couple of use cases. Some of them have, you know, what’s the word, sustainability, but others having read the white papers, it is all marketing, as you would say.

[11:24] Lory: And as a follow up to that, you know, if we look at Web2 companies, like the companies you mentioned there, in a Web3 world, what happens to those Web2 companies? So if I’m creating content, content, I own the content. What happens to Web 2 companies because that is a challenge to their business model?

[11:40] Trevor: It is a challenge and as we know these companies run on big data. So the idea that you wouldn’t have access to pool of this big data to know consumers needs or consumers. But as with Web Point 1.0, the business models needed to change. You know, in the dot-com bubble burst the business models which weren’t robust you know they were susceptible but as web 2.0 has shown you know these business models morphed and i do see an evolution in web 3.0 where businesses who are currently operating as you said in web 2.0 will have to morph also you’re gonna yeah.

[12:16] Donal: Well i think one of the driving forces behind web 3 is that it’s uh it’s almost like a revolt people are trying to get away from the heavy dependence that we have you know, over the Web2 development, we’ve become enormously dependent on entities like Google and Facebook and so on. You know, they issue our identity. If they cut off our identity, we’re bunched. You know, so many things won’t work. Your email won’t work. Your calendar won’t work. You won’t be able to navigate. So the Web2 has this huge dependency. And then the Web3 vision is that you could get away from all of that. So you could have Facebook-like social media-type services, but Facebook wouldn’t be involved. You could have YouTube type video delivery services, but there is no YouTube, no central entity that’s advertising to you and so on. And there are prototypes of those. So there’s a thing called DTube, for example, that’s decentralized YouTube. There are many efforts at doing decentralized Facebook. You know, you asked what the companies are going to do about this, so one famous thing, at the beginning of all this is Mark Zuckerberg decided that this was a huge threat to the Facebook business model. So he decided to take a year to study decentralization. Now, what he came back with was changing the company’s name to Meta and this concept of the metaverse, which is heavily influenced by VR helmets and so on. But beyond that, this virtual world, you know, how are you going to identify people in the virtual world? How are they going to own things? Will they sell things to each other? Will they perform services? All of that will likely draw on Web3 technology, which potentially could take the centralized entity out of the picture. So I guess, you know, the users want more independence, but the operators of the older systems like Facebook, Instagram, and so on, are intent on trying to stay relevant in this new world.

[14:03] Lory: Okay, okay. We shall wait and see with bated breath on that. Donal, another term that gets mentioned a lot, right? And this is the kind of the buzzword bingo that almost that we’re playing here, but are these things called smart contracts? So, what are they?

[14:20] Donal: So, smart contracts was the big addition that Ethereum made to the whole thing. So, Bitcoin gave you an element of decentralization and the ability to move money around. But this notion I mentioned earlier, the idea that instead of having this third party who might do something useful to you, you could just rely on a network of interconnected blockchain nodes. Now, imagine that network of interconnected blockchain nodes could do much more complicated things. So, for example, let’s say you wanted to organize, you wanted to be a bookie betting on a horse. horse. You know, that’s a fairly simple operation. Conventionally, we go to a bookie shop and we say, you know, I want to bet on horse number three in the 330 at Cheltenham. You know, you record that and then you go back two hours later, you know who won the race and it’s just a question are you getting paid out or not. That’s a little block of logic. What smart contracts allow you to do is kind of encode that block of logic as a piece of code and then deploy the code onto the blockchain. So it’s running on those thousands of nodes modes that are out there. So, you know, the horse betting analogy is just one thing, but you can do arbitrarily complex things. So you can build applications, you can do insurance contracts, you can do complicated money movements. You know, the limit’s kind of your imagination.

[15:33] Lory: And for people who are familiar with kind of, I guess, if statements and macros in Excel, how is a smart contract different to those kind of functions?

[15:43] Donal: The way a smart contract is coded is exactly the same way. So you use a programming language and it has if statements and it holds state and that state is held in the blockchain. But I guess one of the, so the process of constructing a smart contract is the same as writing any piece of code. But in terms of how you think about it running, maybe a good analogy is that you’ve got a soft drinks machine in the corridor. So, you know, you don’t, you no longer have a person that you have to ask for the soft drink. You know, the deal is fairly clear. You go, you insert some money, you select the product, the product comes to you and there’s no human intervention. So, it’s those kind of services and potentially any kind of service can then be just pushed onto the blockchain and be available for anyone in the world to interact with 24-7. No human party involved.

[16:29] Lory: Do you think they’re the present slash the future?

[16:34] Donal: Well, I mean, there’s a number of things that they’re really good at. And I think obviously moving money and doing financial type products, that’s where we’ve seen most of the initial deployments. I don’t think we’ve seen massively imaginative new smart contracts. You know, and obviously the number of things they can do because the inputs to them are digital and the outputs to them are digital. So, you know, you’re constrained by that.

[17:01] Lory: Binary functions.

[17:03] Donal: Yeah, but nevertheless, so that covers pretty much all financial activity when you think about it. But you could imagine all sorts of other interpersonal interactions that could be encoded in that. that and I think we’ve maybe only scratched the surface on that so far.

[17:17] Lory: Got it. Okay. Another term, Trevor, is this thing called DeFi or decentralized finance. So yeah, could you break that down for us please?

[17:27] Trevor: So decentralized finance, you know, it’s the opposition now to centralised finance. But it’s a really innovative area that I’m quite impressed with and probably one of the areas where I, you know, I kind of lecture and research most use cases. The idea, as I said, going back to the Bitcoin question earlier, that this form of decentralised finance that you disintermediate, you know, a traditional financial broker from the system is something quite innovative. And I kind of operate in technology stacks. So I’ll try and explain it the best way I can. So in terms of a stack model, you have a blockchain at the bottom. You have at the top of that, the blockchain is kind of the settlement layer where these transactions get settled. On top of that, you have your kind of asset. Now that can be a token or traditional CDBC or whatever it is. Then you have your gateway, which is usually a customer wallet. On top of that, you have your application, which could be credit, insurance, finance, and at the top of that you have your aggregator, so your Coinbase or Binance and so on. And all these information flows are going back and forth without any real human interaction and it’s all been underpinned by this concept of smart contracts. But what’s really interesting to this technology stack is this idea of oracles, where live information is being fed in to cause massive financial collapses and so on. So when you see this on a technology stack and you compare it to the centralised type of world that we’re living in, it’s a complete and utter innovation that I have not seen in the last 20 years of covering technologies. It’s quite amazing. And one platform that I often use as a use case is Compound. So the ability that if I have, let’s say 100,000 worth of Bitcoin, I wish, and I pull it into a liquidity pool, I can then get an over collateralised loan for about $70,000, sans or without traditional KYC processes, in a matter of minutes. You know, is something that is incredible. Now, the only drawback are the interest rates, which can fluctuate depending on, you know, the liquidity of that pool. But it’s quite fascinating when you compare it to traditional methods of getting a loan. We have been through that burdensome process. But when you see it and the amount of users that are using Compound, the one caveat is with Compound is that it hasn’t got to terms with the idea of under collateralised loans, because when you start looking at under collateralised loans, you have to bring in traditional elements of, you know, the fiat world. But when you see this in operation, that if I, let’s say, put in 100,000 worth of Ripple, I can get 70,000 worth of Bitcoin and so on. It really is an impressive, you know, feat that’s been accomplished on the Ethereum blockchain using smart contract technology, using a token called COMP.

[20:24] Lory: Wow. Okay. And so for listeners and viewers out there, basically you have crypto in your wallet, you plug it in to the compound site, and then within a matter of minutes, you can either, I guess, earn interest or take out a loan.

[20:41] Trevor: Yeah. You just leave it in your liquidity pool. If you want to convert it into something and take it out of another thing, you can do it. The only caveat is, and we mentioned earlier, the idea of smart contracts. There was an issue, I think it was two years ago, where they pushed out, I think it was a reverse rug pull. There was an error, a tiny error in the code, and they pushed out a substantial amount of the user’s money to users inadvertently. And I remember a Twitter call out by the founder that please, can you return it? This was so there are little, you know, issues that have to be resolved with the underlying technology, particularly with smart contracts. But as an innovation, it’s something that’s quite impressive.

[21:20] Lory: And okay, two other kind of quick follow-ups there. So is there a credit check then done?

[21:26] Trevor: No credit check.

[21:27] Lory: Okay.

[21:27] Trevor: So SANS, KYC, SANS without know your customer.

[21:31] Lory: So going back to what you’ve both been discussing around disintermediation, traditional finance, centralized finance, how the banking world works today, today, this is quite a deviation. And I guess this is something that is probably, you know, discussed by the banks. Is this something that they’re, you know, thinking about, worried about, regulators too?

[21:56] Donal: Well, yeah, I mean, I think one of the things you’ve seen in DeFi is you’ve seen a huge number of coins getting traded. You’ve seen a huge amount of volumes of people exchanging them. This DeFi allows you to take various operations and chain them together. So if you think about it in the conventional currency world, you could come in with some Japanese yen and you could put 100,000 of that into a pool somewhere, use that to borrow 50,000 US dollars, then change that into Canadian dollars. Then you can do sections of these things. You can chase arbitrage opportunities. opportunities. So the underlying capabilities of doing that, I’m sure, are very interesting to banks. Again, they would probably worry about what their role in that process should be. But one obvious role, of course, is to get people into it and get people out of it. So acting as the bridge between this DeFi digital world and the conventional fiat currency world that we all live in. Regulators are obviously worried about it. Trevor mentioned the notion of bugs. You know, You know, you can have mistakes in these things. So a smart contract is like any piece of code and, code has bugs. This code is sitting out there 24-7 with hundreds, thousands of people looking at it, trying to find ways around it, trying to find bugs in it, trying to find ways of squeezing value out and so on. So there’s a fairly substantial crime element associated with Bitcoin. Lots of people attempt to attack and rug pull people and so on. I guess regulators are interested in it because it’s potentially an avenue for, you know, illicit funds could be flowing around. So, yeah, I think regulation is a growing thing.

[23:42] Lory: Okay. I think people are saying, as, you know, we’ve discussed in this show a couple of times, the markets and crypto assets regulation, MICA or MICAR, depending on who you are and where you’re from. And so we’re seeing that come into effect at the back end of June of this year. I think for stable coins at the back end of the year for CASPs or crypto asset service providers. But there’s already talk, I think, of MEEK R2 and what will be included in that. So whether that’s NFTs and DeFi and other things. Okay. So yeah, watch this space on that front. Now, another term which kind of goes with DeFi is staking, Donal. What is staking?

[24:21] Donal: Staking. Okay, well, what staking essentially means is that you take some piece of a digital asset it. And whereas you would have had that in your possession, you’ll be able to buy things with it, you’ll be able to move it. When you stake it, you essentially put it into a vault and you put it beyond your use. Now, why would you do that? You would do that because hopefully someone will pay your reward for leaving it there. And so in many cases, there needs to be some mechanism of revenue generation. So in the case of Bitcoin or Ethereum, for example, they, you know, they regularly mine, You heard the talk of mining Bitcoin. So a certain number of Bitcoin are produced every 10 minutes. And the question is, who gets those? Well, who gets those are the people involved in the mining process. An alternative way of doing it is to basically say, okay, if we have a lot of people who are holding, let’s say, Ethereum, we can ask them to stake their Ethereum. And then when the rewards come as new blocks are created, then those rewards will get distributed among the people who have put their coins beyond use. So, generally staking is where you take a liquid asset and you take it out of the system, you put it beyond use in exchange for some kind of reward.

[25:33] Lory: Got it. And this is also, I think staking in DeFi falls under the term of yield farming. Is that fair, accurate, Trevor?

[25:41] Trevor: It is. I think Donald’s done a great job there of explaining what staking is. But if you delve a bit deeper up at a macro level, Bitcoin works under a proof of work consensus mechanism. So if you think of the analogy of miners racing to solve this complex puzzle, first miner to solve it, you know, they get the reward. And if you go into Blockchain Explorer, you’ll see the little transaction, you know, cost that’s get rewarded to the miner. Now, the problem with, you know, this consensus mechanism is the environmental damage it causes, as we’ve seen and read in the media. And the move then was these new blockchains or new protocols towards a proof of stake type system, where rather than solving these complex puzzles, you now were validating transactions based on, you know, how much was staked. And the benefit from the end user, as Donald was saying, there is the yield or the interest that they gain on these, you know, the pool that they stake into. to. Now, one caveat is that these pool stakes, the question I’m often asked is, but what if everyone withdrew their money at once? You know, that was stakes. Surely it would bring down the ecosystem. But when you do stake your cryptocurrency into these pools, you’re in for a 30-day, 60-day or 90-day lock-in period. So you have to wait 30 days, 60 days or 90 days before you can withdraw your money. And based on the lock-in period, you’ll get a higher range of interest. But it really is such a nice mechanism and a lot of the new blockchains or the protocols that I would see operate under this proof-of-stake system.

[27:14] Lory: Okay, so proof-of-work, we saw a lot of blockchains using that model or just Bitcoin?

[27:21] Trevor: Bitcoin is the first, you know, using of the proof-of-work type system and a lot of them, some of them, you know, they kind of used it also. So now I’m not pro or against, you know, proof of work because essentially Bitcoin still has its use. It’s one of the most used cryptocurrencies in the world. But what I do see on the ground level is that a lot of them have moved towards proof of stake. And if you read the white paper, they go on about we’re using proof of stake. It’s environmentally friendly and so on.

[27:51] Lory: Got it. it. Another area which has been, you know, in vogue, out of vogue, and apparently is coming back are NFTs. Non-Fungible Tokens (NFTs): Uniqueness in the Digital WorldSo yeah, what are NFTs?

[28:03] Trevor: So the NFTs, the acronym is for non-fungible tokens. So, you know, I’m often asked before we go into NFTs and non-fungible tokens, what’s a fungible token? So Bitcoin would be an example of a fungible token, something that’s divisible and has a value that can be transacted. A non-fungible token is something that’s unique and has a a perceived value. And I suppose, you know, I first came, I was at a conference in 2018 and I was given an NFT as just a little card and the majority of the attendees at the conference were given it, but they were all thrown in the bin. So, you know, the idea of something of holding unique value back then was something that was brand new, but going into COVID and going to lockdowns, non-fungible tokens became this kind of rock star phenomena. So you saw unique art pieces, you know, now being created as non-fungible tokens, which were given off on the illusion of being unique. But, you know, that uniqueness, you know, was widely diversified. And all of a sudden you had JPEGs, which were selling for astronomical amounts of money. You know, it was a digital asset that you held on your computer. There was no physical form of it, which could be transacted from one person to another. other. Its uniqueness was proved by a smart contract. So you had that digital receipt to prove its uniqueness and that held a type of value. But consequently, over the last few years, you know, in NFTs, the prices have dipped. Its awareness has kind of gone under the radar again. And we’re kind of back into seeing, you know, what’s going to be the next rock star that comes out of non-fungible tokens. It might go back to NFTs. They have more functions than I would say just the art world. You know, they are being used in real estate. They are being used in academic certifications, diplomas and so on. But we’ll be interested to see the next evolution of non-fungible tokens.

[29:55] Lory: Are they dead, Donald?

[29:56] Donal: Well, I think the NFT idea is a very good one. So, you know, NFTs typically represent digital goods and digital goods are in digital form. So you can replicate them, you can make a thousand copies, you can send them around the world and so on. But if you can convince somebody that a particular digital good is yours. So let’s say if you’re a Banksy or something and you create some amazing image and it’s in digital form, you know, who owns a Banksy or who owns the digital Banksy? If you can convince the world, let’s say with Banksy’s endorsement, that this NFT represents the original of that work, Once you’re over that mental leap, then it becomes so much more convenient because then you can transfer these things. You can possibly subdivide them. You know, and the notion, I mean, you see this in things like video games. So, you know, characters in video games have collectibles. They have shields. They have swords. boards. You can imagine a situation whereby each one of these things is expressed as an NFT. Maybe the issuer of it limits them and says, we’re only going to issue 100 of these NFTs, each one unique. Once they’re in that digital form, you can transfer ownership of them within the game. You can give them as prizes. You know, so that’s sort of a digital gaming level. There are other instances where people have used the NFTs to represent real-world artifacts, even apartment buildings, you know, paintings and so on. Now, all the focus in the media has been on essentially collectibles. And collectibles are a frothy thing at the best of times. You know, so a T-shirt with a footballer’s signature on it is either worth one euro or 100,000 euro, depending on your perspective. So I think what we’ve basically seen is collectibles expressed as NFTs, and we’ve seen them yo-yo up and down in value. But I think the fundamental notion of an NFT as an expression of digital ownership of an asset is something that’s not going anywhere. And I think we’re yet to see kind of sensible mass marketed examples of it.

[32:05] Lory: Got it. Okay. Watch this space on that one as well. Well, an area that we’ve discussed on this series before is this whole area of tokenization or what people are saying, you know, RWA tokenization or real world asset tokenization. But what exactly is it?

[32:21] Donal: Well, I mentioned this leap that you have to take that something on the blockchain represents ownership of a real thing. So I guess the one I’m most familiar with is there’s a blockchain called MakerDAO. That has done an awful lot of work in real-world tokenization of things. And they have taken, well, they’ve taken some things that are paper assets, they might be loans on apartment buildings and so on, and they have created digital representations of those on the blockchain. Now, all of that has to be accompanied by a whole lot of legal agreements that essentially means that the holders of the real asset, you know, agree to be bound by the transactions in the digital assets. But again, once you have them in that form, it’s very convenient. If you wanted to finance, for instance, a huge wind farm, you know, you can issue tokens on those, you can transfer them between the owners, you can stake them, you can borrow based on your ownership of that asset. And, you know, it just, it opens up a whole new layer of commerce that isn’t possible with with things being represented by legal paper contracts.

[33:32] Lory: So we’ve heard Larry Fink, the CEO of BlackRock, talk a lot about tokenization. Also Franklin Templeton has spoken about it. Is it the future?

[33:46] Donal: You know, I think people need time to get used to these kind of things. So we need to see a few successful experiments. And I think we’re only in the last one or two years, we’ve seen the beginnings of people starting to take real world assets and tokenize them and do useful things with them. Unfortunately, one or two of those things have been backed by high profile banks, crypto banks that have subsequently gone bust. And, you know, so the experience hasn’t necessarily been good across the board. But, you know, I think it’s an idea that’s in its very early stages, but will probably take five, ten years for, you know, to grow and for people to get genuinely used to this and to trust it.

[34:23] Lory: Based on your experience of cryptography, and this is going back, right, even kind of prior to Bitcoin and blockchain and all the booms and bust cycles that we’ve experienced.

[34:33] Did you think blockchain would take off and be adopted at a faster level than it has been?

[34:42] Donal: Well, it’s almost two speed in a sense. So, you know, blockchain went from the concept of Satoshi Nakamoto’s paper to a community of, you know, hundreds of thousands, possibly a small number of millions of people. He got to a situation where I think it was more than 50% of American citizens own some cryptocurrency. That was a survey of last year sometime. So in that sense, the dipping of the toe into the water has been hugely rapid. But in terms of the deployment of applications that are changing people’s lives, I think we haven’t seen as much of that as we might have expected.

[35:22] Lory: Okay. Okay, and I’ll come back onto that in a second. Trevor, another area within this, you know, at times complex and busy world within blockchain, crypto, Web3 and digital assets, people talk about layer ones and people talk about layer twos. What are layer ones and what are layer twos?

[35:44] Trevor: So layer ones are essentially, you know, the protocols, which are the blockchain itself, and the layer twos are the applications that are built on the blockchains. But as Donald said, going back to that point in terms of the layer ones and twos, I think what we saw with cloud computing was the mass consumerization of applications on your smartphone. And Donald made a very good point that, you know, we need decentralized versions of Facebook, YouTube, Airbnb. And once consumers are actually using those on their smartphone, I think we’ll see mass, further mass adoption. option. But in terms of the layer one and two protocols, they’re kind of nuanced in terms of the white papers that they would be indigenous to the actual application or the blockchain or the smart application. So I might pass on to Donal, he might know more of the intricacies of the actual layer one and two protocols.

[36:38] Donal: Yeah, I mean, so one of the things that we mentioned that the notion that the blockchain is running on thousands of computers all in parallel, One of the problems with that is that they’re all doing the same thing, but the throughput is very limited. So there’s only a certain number of blocks, a block every 10 minutes, let’s say, or a block every 10 seconds, and there’s only room for a certain number of transactions in each block. So there’s a limit to how fast it can go. And what that translates into is that if people want transactions at a busy time, then it’s going to be expensive. So the blockchain is slow and it’s kind of pricey because the amount of usage, principally from things like DeFi that we’ve talked about. So what the layer two really, I guess, is a way of taking some of the load off the blockchain onto some other system. And I guess one of the ways I would often explain it is the concept of a bar tab. So if you have 100 people in a bar and they’re all using the same credit card to buy drinks, it’s going to be slow and it’s going to be very expensive. So one of the things you might do is you say, I’m going to open a tab. You might use the credit card to open that tab. And then from then on, the tab is just each little drinks order goes on it. It doesn’t cause load on the credit card system every time someone buys a gin and tonic. And then at the end of the night, you batch up all what’s remaining on the bar tab and then do that as one transaction. So what the Layer 2s really are about is taking load off the main chain. The benefit for the users is they get to have faster settling transactions that are way, way cheaper. I guess the downside of it is, just like in the bar tab, you’re in your own little world there that only operates in that bar, so you can’t go across to a food truck and buy a meal using the bar tab. up. So it means that you’re fast and cheap, but you’re in the smaller world. And the problem is there’s quite a lot of worlds.

[38:28] Lory: So based on that example, then if we’re saying layer one are the kind of underlying blockchains, does that mean that there are, you know, the equivalence of lots of internets, if you know what I mean? There are lots of primary internets out there that potentially are running independent and don’t talk to each other, you know, which is unlike what we have today in terms of the World Wide Web?

[38:52] Donal: I think that’s true to an extent, all right. Yeah, because we mentioned earlier on that there are thousands of cryptocurrencies. Some are popular, some are not popular.

But in general, each cryptocurrency operates in its own private little world. Now, of course, there are ways of bridging between them, but usually they’re complicated and often they’re fraud prone. So, yeah, under ideal circumstances, what we’d have is one blockchain that was acceptable to everyone, that was fast and cheap. Instead, we’ve kind of got two main ones and then a whole lot of others. And we mentioned with these layer two worlds as well. So there is a lot of fragmentation. No blockchain has come up yet that’s capable of operating at the scales, let’s say, the global credit card network. But, you know, it’s both a technology problem in terms of speeding things up and also an acceptance problem. So if we, you know, if we get people to rally around what the successful solution is.

[39:51] Lory: Some people say that the best application of recent years of blockchain technology and of crypto are stablecoins. Donal, what are stablecoins?

[40:01] Donal: I guess the crypto coins that are out there, we’re used to them fluctuating in value hugely. So, we’ve seen Bitcoin go from, the range is at the moment, I think it’s about $43,000. It’s been as high as $60,000. It was hovering around $20,000 for a long time. Now, if you’ve got a coin whose intrinsic value is changing all the time, that’s a real pain to do commerce with. You know, you negotiate something and the price you end up paying ends up being much more than you’d agreed on. So, what a stable coin is, is an attempt to produce a digital thing, a crypto coin, but to engineer it such that its value is pegged to some real world asset. And usually that might be a US dollar, although there are Euro versions of it and Japanese Yen versions of it as well. So one of the easy way to do that, I suppose, in a centralized world, is to just get some bank and the bank will say, you give me deposits in dollars and for every dollar I get, I’m I’m going to issue one of these coins. And then if anybody wants their dollars back, I’m going to destroy one of these coins. So you know that the pool of coins that are out there is matched by a pool of real dollars. Now, there are all sorts of other ways of achieving that same goal, but that’s the simplest one. So what a stable coin then is, hopefully, is then something that you can move around on the blockchain, but you can depend on its value not changing. So that’s really, really, really handy. I guess you just want to do big payments internationally. So if you want to send, you know, $10 million from the US to South America or something, you know, you can do that in a single transaction, 24 hours a day for a small fee. It’s also one of the things in DeFi where people are speculating against all of these, you might call them dodgy assets, but lots of the coins and so on. If they want to take a break in that activity or they decide now is not the time to trade, one of the things they’ll do is move all their assets into a stable coin. Then they can kind of relax and wait for the condition to come around again before reinvesting. So as a kind of a store of value and as a quick way of making banking, international finance. It’s pretty useful for that.

[42:09] Lory: Okay. Potentially cheaper, better, faster. Okay. What are central bank digital currencies?

[42:16] Trevor: That’s a good question, Laurie. I suppose these are digital forms of fiat currency. Now, we’ve previously discussed during this podcast, you know, the idea of decentralized digital currency. Well, these are centralized digital currency, fiat currency. And I suppose they’re a way of a government’s, you know, countries, you know, progress towards either keeping up with modern technology like the digital euro will be. So we’ll have a traditional fee currency and we’ll also concurrently have the digital euro. In other countries, what I like about these innovations is that they’re, in each country, the requirements when they are rolled out are tailored to the actual specific country. So there are specific countries where they’ve been rolled out for this idea of financial inclusivity. So you would have a population, maybe the majority are not tethered to a traditional banking system. So they’re rolled out as a means to provide access to financial inclusion. In other countries, which are more modern type of financial fee currency systems there, it’s a means of just keeping up with modern progress of technology. The Chinese Yen, that’s been rolled out across the EN, has been rolled across three cities. I was reading about it there only last week. It’s a more mature form of digital currency. The US government are looking into it. As we know, the digital euro is going through a kind of a pilot process in the background, a bit of an R&D phase. But, you know, as Lagarde said, that is coming down the line. We will be issued with, we’ll have our traditional fee currency with the, you know, the concurrent operation of a digital euro. And it’s funny, it does elicit some, some, you know, some positive reactions, but also a lot of negative reactions. So for example, a negative reaction would be if we eliminated our traditional fee currency and rolled out 100% digital. Because with digital, as I said, with blockchain, you can track transactions, there’s timestamps, it’s largely open. But for when a country rolls it out in this scenario, it won’t be open, it will be a centralized system that a government has control over.

[44:27] Lory: So does that mean they can track everything that I’ll have done and spent my money on?

[44:36] Trevor: Essentially, yes, if they take the initial innovations of blockchain technology and timestamp and you’re given your ID, they can see those transactions a bit like Revolut. They are now answerable to the regulators. There’s a timestamp of when Laurie went into SuperValue, he purchased his two bottles of Evian, the time, date and so on.

[44:57] Lory: Okay. Donal, thoughts on the digital euro?

[45:02] Donal: Well, I guess, so we’ve seen stablecoins. we mostly came from private companies. There have been worries about the stability of those private companies and whether they, when they tell you every coin is backed by a real dollar, you know, is it true? I guess in the central bank issued digital currency, we kind of rely on the government to guarantee that. And governments, I guess, also like to keep control of their currencies in that way. So we trust, I don’t know, the European Central Bank or the Federal Reserve, we trust them to produce dollars at a reasonable rate or euros at a reasonable rate, not to flood the market, not to tighten it more than it should. So really, I guess what we’re, in a central bank issued stable coin, we’re just replicating the normal process they have issuing currency, except for the thing is now in a convenient form on the blockchain. So I think the countries that are thinking about doing this are thinking, well, We’re just opening up our currency to new technology, this new blockchain technology, allowing people to move it around a little bit and so on. For the user’s point of view, they probably should trust the government ones more than they trust the privately issued ones. And there may be an element of power going with that. The governments are a bit nervous of big companies taking control of, in some way, of the dollar or the euro and so on. They’d like to keep that.

[46:26] Lory: Got it. Something you touched on earlier was in relation to applications of blockchain in our lives. Can you give any examples of where you’ve seen blockchain deployed or is meant to be deployed in the near future?

[46:42] Donal: There’s probably a few examples I could give where it hasn’t. You know, so a huge amount of the blockchain activity is focused on things like DeFi and swapping coins and doing elaborate convoluted financial transactions. But, you know, I think that the idea of digital ownership of things, I think that’s huge. A whole lot of real world assets, a whole lot of property in the world being expressed as NFTs with the proper kind of legislation backing that up. It’d be very interesting to see blockchain being used as a ready digital identity mechanism. That’s something we all need. I mean, you know, obviously we all have 20, 30 passwords and password safes and so on. So having a blockchain version of digital identity might be a whole lot more convenient than that. Yeah, so I think the two big things are ownership of things and identity of people. And, you know, money movement is important too. But if you take those three simple things and you incorporate them into gaming or you incorporate them into social media and so on, I think you’ve got a very powerful end result there.

[47:46] Lory: Okay. And Trevor, another term that you mentioned earlier was oracle or oracles. What is an oracle?

[47:53] Trevor: So oracle, essentially, it’s a live feed into the blockchain of what’s going on in the current world environment. Without that live feed, you could just imagine some global crash or some seismic event and that not being reflected into the settlement area of the blockchain. So essentially it’s like the NASDAQ, it’s live updates constantly being fed into the blockchain and they play pivotal roles in a DeFi successful world of these transactions occurring on a blockchain or on a smart contract.

[48:26] Lory: Okay. So a smart contract will call on one of these oracles or data feeds for certain functions to execute.

[48:36] Trevor: Yeah. Particularly if there’s a large consumer buyout of a liquidity pool, that oracle will feed the information across the peer-to-peer network and to safeguard it, essentially. Without those oracles, there’s no safeguarding and you could have a, as you would have in a traditional financial global crisis, a crisis going on in that particular blockchain.

[48:55] Lory: And how do you know that the oracles are providing accurate info?

[49:00] Trevor: Well, that essentially boils down to the protocol gatekeepers, I would say, or the owners, whoever created that particular protocol or blockchain or application. So essentially, it’s a trustless system where you’re basing the trust on these, not only on the community, but the gatekeepers of that actual protocol.

[49:21] Lory: Got it. Okay. Donal, you’ve mentioned wallets a couple of times. So, yeah, when you say wallet, what do you mean? And in a Web3 world, what is a wallet?

[49:33] Donal: Yeah, a wallet, I mean, it’s not such a great term in a sense. I think it’s a misleading term. But crypto and blockchain in particular is built basically on the notion of individuals identifying themselves with public and a private key. So, if you want to move money around or you want to execute something on a smart contract as you, then you use your secret key to do that. And the world will see that this is, well, they will see your public key, but they will see that there’s valid signatures that could only be applied by use of the secret key. Okay, so these things, the secret keys associated with these things must be securely held, not divulged to anybody, but yet be readily available every time you want to do a transaction. So what the wallet software really does is it holds those keys for you, hopefully in a reasonably secure way. So, I guess the best example in blockchain is probably this popular wallet called MetaMask. So, what that does is it operates as a Google Chrome extension. So, it’s basically an additional piece of software that sits inside your browser that keeps the keys associated with your thing, you know, available. So, you go onto a website and you say, I want to move five Ethereum from A to B. At just the moment that you need to sign that contract this wallet will pop out your private key sign something and deliver the transaction so people i mean though the word wallet would make you think that the money is in the wallet the money is not in the wallet the keys are in the wallet the money is all on the blockchain um you know and they say if not your keys not your blockchain not your not your crypto uh you know and that’s just to emphasize the notion that But if anyone else gets the keys, then the game is up. They can be you. So if someone can leak keys from your wallet or somehow convince the wallet to send them on the network and stuff, then all kinds of fraud is possible.

[51:30] Lory: Okay.

[51:31] Donal: One of the things I guess the great things about blockchain is it means that it has given rise to this new form of software where people on their phones and on their desktops and so on have crypto keys ready that they can do a million things with. It’s also probably the weakest link in the human interface is that humans are just not good at managing this they don’t have the conceptual model that tells them the importance of these keys, you know they they just like they find it difficult to remember passwords they can’t remember the keys just managing them is probably one of the single biggest user interface issues in blockchain donald.

[52:07] Lory: We hear about dows um what is a dow or what does it stand for.

[52:11] Donal: It stands for a decentralized autonomous organization and the notion is that you know the blockchain can make things happen so for instance it might make money move from a to b it might, cause value to move around. Now, ordinarily, that would be directed by one person, the owner of the money. But in certain situations, you might decide that this is going to be some kind of a collective. So you could nominate a whole bunch of people, each represented by a blockchain public key, to take control of funds, for example. So the classic example of the DAO, one which was actually broken into an early stage, was really about almost trying to run a venture capital firm from the blockchain. So the creators of this, the creators of the DAO, you know, pooled money into a blockchain contract. And then they arranged rules for, you know, giving out small packages of that to entities, new companies, startups, that kind of thing that everyone and all the members of the DAO agreed upon. Okay, so a DAO is really a mechanism, I suppose, for a bunch of people to come together as a collective and express their views, ideally in elections of some sort, to move money around on the blockchain. That’s the basic idea of a DAO. There have been more advanced user use cases then where people attempt to run all kinds of things, grants, programs, anything that involves basically agreement between bunches of people and transfer of value.

[53:44] Lory: Got it. Trevor, as we look across 2024, What do you think the big trends within the crypto blockchain web three digital asset space are going to be?

[53:58] Trevor: That’s a very good question. I suppose, you know, for me, blockchain is something that’s not new. I have these two papers I present, one from the 80s by a guy called David Chom, who discussed this idea of sending virtual currency back and forth to people. He had an unsuccessful startup in the early noughties called DigiCash. And unfortunately for him, the convergence of technology just hadn’t reached. We hadn’t cloud computing or scalability or social. And there’s a paper from the 90s by Stubbs and Huber called Timestamping. So all these technologies have converged into what we know was Bitcoin and with blockchain. So, you know, I’m very interested in the idea of decentralized, but particularly the idea of decentralized artificial intelligence or AI. AI in its current form is very centralized, black box, no one really has a clue what the data is trained on. And you mentioned earlier this idea of decentralized autonomous organizations. I’ve read a few papers where in the future we could have this idea of decentralized marketplaces where these decentralized AI are put up there and you want to train your decentralized AI and so on. on. So for the future, for at the moment, I would see is if I’m looking at technology stack, you know, model framework I was discussing earlier, that you will, you know, we will see the emergence of decentralized applications that will be on the base layer, which is the blockchain. And on top of that, we’ll have Web3 applications, we’ll have decentralized applications, could be decentralized AI. But the big thing for me with blockchain and so on is this idea of it’s a  timestamp, really. It’s that ledger of trust that you as a community and peer-to-peer group can have consensus that something has happened. There is evidence there. There’s many use cases along supply chains, food, you know, and so on. You know, I’m even looking in agriculture, the life cycle of a particular cattle, you know, that any type of food that they eat or any type of, you know, you know, medicine that they’re given goes into this particular, you know, life cycle of that particular cattle. And for me, blockchain really works when you look at, you know, a minute level of KPIs that you store on the blockchain. It works really well in small use cases, because when you look at a traditional supply chain, you could have thousands of actors. It really does get frothy when you start executing, you know, across groups. So for me, the future is, we’re going to see a lot got more, you know, use cases on blockchain, it’s going to be decentralized applications. But until we as a consumer are downloading, you know, decentralized apps on our iPhones or Androids, you know. Mass adoption of what we know as blockchain or web 3.0, it’s still a trajectory. It was the Gartner hype cycle would call five to 10, maybe 15 years and so on.

[56:59] Lory: Okay. Donal, what about you for 2024?

[57:02] Donal: For 2024? Well, so one of the things I guess is blockchain had a huge day in the sun. It’s been eclipsed lately by generative AI as kind of sucking all the oxygen out of the room. So one of the things that’d be nice that if blockchain sort of stabilized a little, I think, you know, in the early years of blockchain, I think there was efforts firing off all over the place. These thousands of coins, most of which are worthless, you know, so it’d be nice to see a lot of them die out. It’d be nice to see the innovations that came about in DeFi sort of percolating their way back into the financial world. And I guess things like stable coins and stuff, they’re very useful and they should continue to see lots more deployment. And beyond the financial world, I think there’s still lots of hope in terms of blockchain as a solution to the identity problem. And I think there are many other problem areas that could be tackled. And hopefully, you know, in an era of more calm surroundings, we will see that happening in this year and the following years.

[58:03] Trevor: And just to add to Donald’s, I think the less we talk about blockchain and crypto and Web3, the better. We just use the piece of software. You know, when I first started researching cloud computing nearly 20 years ago, no one knew what a cloud was, but now we’re using, you know, social media, Facebook, and no one discusses what cloud is. So we use the application, it’s running underneath, but we get the advantages of it. And as soon as we start talking less about the application in behind and start using and get the advantages, hopefully for 2024, we will see that evolution.

[58:37] Lory: Trevor, a podcast or an audio book that you like or listen to frequently that you’d recommend?

[58:44] Trevor: A good podcast I listen to is The Bunker. It’s a really good podcast on current affairs and yeah, I’d recommend that podcast.

[58:55] Lory: Okay, The Bunker. You heard it here. Donal, what do you listen to or recommend?

[59:01] Donal: Yeah, so many crypto podcasts, it’s hard to, yeah, I think that, you know, different podcasts for different topics, I think.

[59:09] Lory: Okay, there’s no one that jumps out?

[59:10] Donal: There isn’t, there isn’t any one. Well, of course, this one, the Blockchain Ireland podcast.

[59:14] Lory: Okay, thank you, thank you. No, no, glad you said that. Trevor, if people want to learn more about you, follow your research, where do they go?

[59:23] Trevor: Well, I suppose the first port of call is that I’m chair of the education group and the Blockchain Ireland working group. And if they want to pop onto the Blockchain Ireland website, you’d see the various fantastic working groups that we have there. I’m kind of responsible for the education, skills and innovation. They can find further more information out there, Lory.

[59:42] Lory: Thank you very much. And Donal?

[59:45] Donal: Well, Google me.

[59:47] Trevor: Www.money.info.

[59:49] Donal: Is a quick way.

[59:50] Lory: Okay. Super. Super. Well, thank you both very much for your time. We covered a huge amount of ground in a short period of time. I imagine what we’re going to see are lots of comments, more questions, areas we didn’t cover. So I would like to extend right now an invitation for round two of this in the coming weeks and months. So you’re very welcome back. But look, I think three quick things for me on today’s episode. Number one, which is really quite evident from the rich conversation we’ve had is that blockchain is always changing, always innovating. And also to look out for some real world use cases, whether it’s identity, which has come up a few times now in our series, and also asset ownership. So we’re seeing a lot more and hearing a lot more about that in various guises. Number two, I think the importance of doing your own research and educating yourself on all these new trends that are coming out. And then last, but by no means least, in a  fast-paced environment which we live in when it comes to technology and emerging technologies more specifically, it’s just critical to stay curious. So thank you very much for watching and listening and see you again soon.