The Bitcoin Fork – An Overview

Posted on : 31-08-2017 | By : Tom Loxley | In : Blockchain, FinTech

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Bitcoin has once again been prevalent in the media this month thanks to the fork in the Bitcoin blockchain that resulted in the creation of Bitcoin Cash or BCash, as it has become known to try and avoid the obvious confusion.

As many of you will already be aware, on the 1 August 2017 we saw the creation of BCash. However, many may not be aware of how or why this happened, the implications and the fact it may happen again…and again.

The lead up to the split

Some years ago now, it became apparent that due to the increasing amount of traffic on the Bitcoin blockchain there were going to be scalability issues in the future. The current block size limit is 1MB every 10mins which is becoming strained.

Around 3 years ago the Bitcoin core developers began seriously discussing how to solve the scalability issue of more user transactions taking on the blockchain that supports Bitcoin. Ideas for how the block size cap should be scaled were put forward including increases to 2MB, 8MB, 20MB or a flexible/unlimited capsize.

About 2 years ago a meeting was called between the Bitcoin core developers, the miners (creators of the blocks on the blockchain) and other industry stakeholders where a consensus was reached on how to proceed.  The idea was to use a combination of a scaling option called Segregated Witness (SegWit), which was to be followed at some point by an increase to the block size to 2 MB. SegWit is an upgrade which would allow more transactions to take place within the 1MB block size by altering the way data is stored on the network.

However, despite the apparent consensus achieved, following this event some of the miners withdrew their support for the new plan. A stalemate on how to proceed occurred and the debates fell into the weeds.

Finally, in May 2017 over 50 mining companies and industry stakeholders signed a consensus known as the New York agreement. It looked very similar to the original agreement that was allegedly reached. They called the plan SegWit2x. In short, SegWit would take effect 1 August 2017 followed by an increase to the block size of 2MB in November 2017.

The Split

However, towards the end of July 2017, a group of developers lead by ex-Facebook developer Amaury Séchet that still felt unhappy with  took matters into their own hands by effectively splitting the blockchain and creating their own cryptocurrency, BCash. BCash is a clone of Bitcoin in pretty much every way except that it has an 8MB block size.

Considered by many to be a knee-jerk reaction to the situation born out frustration, BCash faced many teething problems like long periods of inactivity between blocks instead of the 10-minute new block “heartbeat” that Bitcoin is famous for.

Now that exchanges are beginning to allow for free movement of BCash the real value of it will become more apparent, although for many the notion of waking up and finding that you have (through no choosing of your own) a stack of a new cryptocurrency in your wallet maybe a little hard to get used to.

Ultimately this story will go on, as the social scalability increases on the Bitcoin blockchain this issue will likely come around again before too long.

Although the exact figures fluctuate, generally speaking, Bitcoin processes under 10 transactions per second compared to VISAs average of 1,667 per second and the costs of Bitcoin’s transaction are no longer as attractive as they once were. Transaction costs have increased significantly now that Bitcoin’s reward incentives to the miners are steadily decreasing. In addition, as the block size increases the costs will go up for miners as they have to store more information and these costs will roll down to the users.

Bitcoin seems to have come through the process so far relatively unscathed. In fact, since the chain split Bitcoin’s value has reached all-time highs.

That fact that people still want to use Bitcoin, despite the increased costs and uncertainty created by the appearance of BCash, speaks volumes about wider cryptocurrency benefits. It shows that people place great value on individual control and reliable, expedient and transparent financial services. For many including myself, Bitcoin’s appeal still lies in its grass roots methodology, philosophy and technical features outlined in Satoshi Nakamoto’s white paper from 2009.

 

The tech company threat to financial services

Posted on : 31-08-2017 | By : john.vincent | In : Finance, FinTech, Innovation

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We were interested to read the update from the World Economic Forum in their August 2017 publication “Beyond Fintech: A Pragmatic Assessment Of Disruptive Potential In Financial Services”. The report forms the third phase of work, started in 2014, into understanding the potential impacts of transformative new entrants to financial services, which fintech innovations were most relevant, the implications on consumers, existing providers, regulatory impacts and the infrastructure underpinning the future of financial services (such as blockchain).

Specifically, it considers;

  1. What are the innovations that have had the greatest impact since the report was commissioned?
  2. How have they changed the structure of financial services and how they are consumed? and;
  3. What are the broader implications for the sector?

At this point, it is important to note the contributors to the WEF report consist of a steering group and working group of senior leaders from mainly banks, insurers and payment providers, with some VC’s (largely at the working group level). That isn’t to detract at all from the findings, but is an important lens from which to consider the viewpoint (indeed, there are some points where the contributors are also presented as solutions to industry trend, such as “externalisation”).

So what are the conclusions? In a nutshell. whilst fintechs have so far failed to disrupt the status quo, they have “laid the foundation for future disruption”. In other words, we are still at the start of the beginning. No surprise really, given that whilst the barriers to entry in technology innovation have dramatically lowered, the implementation of there within the highly regulated, complex ecosystem of financial services has proved more challenging. Indeed, whilst changing the shape and approach to innovation has been a success, as well as raising the consumer expectation bar, the actual material changes have been largely periphery or improvements to existing infrastructures.

Whilst it is recognised that the incumbent players have responded to the pace of the fintech ecosystem, both by embracing startups and ideas, we don’t believe that this is as optimal as it could be. The report highlights that some firms have waited to see how new technology gain traction “before deploying their own solutions” is symptomatic of the issue. There is still an arms-length, protectionist attitude which pervades and is ultimately detrimental to the long-term business model of many financial institutions.

Of course, this is only human nature, and one might argue even more so in this particular sector.

The report cites 8 disruptive forces which have the potential to shift the landscape and competition in the coming years. Many of these are no surprise, from the power transferring to the customer interface (experience ownership) through to the reliance of financial institutions on large technology firms. The latter is something that we have written about a lot about over recent years, and we strongly believe that by accelerating technology partnerships and shifting delivery outside of the organisational boundaries, it would really benefit many financial services firms. Somebody will take the plunge and steal a march on the market…surely.

The report delves into the implications for different sectors (Insurance, Digital Banking, Lending, Crowdfunding etc.), what the end states might be and conclusions, such as in Investment Management the robo-advisors which are commoditsing the advisory value proposition whilst humans will still maintain a crucial role in products selection, particularly for high net worth individuals.

Let’s pick on Digital Banking though, just focus on a little. In this space the report highlights the importance of capabilities in customer-facing analytics and intelligence that are increasingly important from a competitive differential. Who are best at this, have a richness and, more importantly, a golden source, of data? The big four? The major insurance companies? Unlikely and, more importantly, the systems, people and processes are not going to change that in the short to medium term.

Given the conditions above, we are likely to see the usual technology companies that do excel in this space such as Google, Amazon, Facebook and the like (maybe Uber) chose to enter the market distribution of financial services products in the short term (see our prediction from 2011!). Whilst financial services firms establish technology partnerships with some of these tech firms, it is not a huge leap of thinking to have them pivot to providing competitive services very quickly. They have the data, the customer engagement, the brand, the scale and the capital to do this, plus the ecosystem of partners to plug any gaps.

Ah, but what about the regulators! From their perspective, we expect a softening of stance towards the distribution of products by tech firms, whilst having a close eye on the potential market dominance and systematic risk profile. In terms of the entrants, we already see technology easing the burden of regulation in the coming years, rather than employing an army of human beings, and the tech firms are again in the driving seat to benefit from this.

Maybe we are closer to “FaceBank” than ever.