R3 CEV Takes on Bitcoin with Launch of Private Distributed Ledger Pilot

Bitcoin Magazine
R3 CEV Takes on Bitcoin with Launch of Private Distributed Ledger Pilot

R3 CEV is a New York-based financial innovation firm that Mike Hearn joined as the chief platform officer after his announcement that Bitcoin was a “failed experiment.” R3 focuses on distributed ledger technology and has partnered with 42 banks around the world, such as Goldman Sachs, HSBC and Toronto Dominion, over the past year to create a blockchain consortium of financial institutions.

R3 CEV believes in the value of a private “permissioned” blockchain, rather than a public “permissionless” blockchain. The entire world has access to a permissionless ledger, and it requires a digital asset, such as bitcoin, to operate as a financial incentive to encourage people and businesses to contribute their computing power to secure the network. This also deters fraud as the network grows larger. Only a select group of trusted parties is required to maintain a permissioned blockchain.

Since its foundation, R3 has operated mostly outside of public scrutiny. In an interview with Coindesk this past summer, founder David Rutter and partner Todd McDonald explained that “R3 CEV has been playing a quiet yet concerted game to bring blockchain technology to the world’s largest banks and financial institutions.”

Recently though, R3 has emerged from the shadows, and company leaders have begun to discuss their plan publically and how it affects bitcoin and the financial services industry. Rutter announced in a press release that “partnering with a broad range of institutions has always been central to our strategy [and] securing the backing of 42 of the world’s leading banks demonstrates the level of interest in our initiative, and we now look forward to exploring collaboration with non-bank institutions and expanding our already diverse group.”

On January 14th The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution hosted a livecast with a group that included Charley Cooper, the managing partner of business development and marketing at R3 CEV, in what was probably the most thorough explanation of their perspective on the market.

Cooper explained that the focus at R3 has shifted over the past couple years to distributed ledger technology after discussions with both Wall Street bankers as well as technologists. Wall Street bankers have become interested in understanding blockchain technology, and technologists, the ones building the software, need to familiarize themselves with the financial services market anti-money laundering laws and know-your-customer regulations.

Put simply by Cooper in the webcast, “there are amazing technology companies who are making really cool stuff that is totally irrelevant to what the financial services market is doing.” Financial services employees operate in one of the most highly regulated markets in the world, regulations that technologists must understand to ensure their technology has a real-life application.

Cooper adds that there are several instances in history where banking consortiums have come together to successfully improve the banking experience, such as Market Trade Web, FXall and E Speed Broker Tech. In an interview with American Banker, he explains that R3 CEV is building technology to custom fit the needs of the banking consortium, rather than many financial technology companies that are building software before showing banks, only to find their model doesn’t comply with regulations.

The belief at R3 is that innovation is more possible once all the market players are on the same team, rather than the decentralized and open source nature of innovation in the bitcoin blockchain community. In addition, both Cooper and Rutter believe the bitcoin blockchain is not suitable for use on the scale of the financial services market due to its limited block size, the complexity of transactions and regulators not approving of anonymous nodes varying the network. Cooper admitted, though, he might change his mind if regulators began to agree with a permissionless blockchain system.

On January 20th, R3 announced the launch of a private distributed ledger that connects 11 member banks using Ethereum technology and hosted on a virtual private network in Microsoft Azure’s Blockchain as a Service.According to International Business Times, the banks to join the peer-to-peer network first include Barclays, BMO Financial Group, Credit Suisse, Commonwealth Bank of Australia, HSBC, Natixis, Royal Bank of Scotland, TD Bank, UBS, UniCredit and Wells Fargo. The successful completion of this network marks an important step for blockchain technology; it is now being used by the world’s premier financial institutions.

Even if the R3 team is right in that a private network is the best way to stimulate innovation in the financial services industry, there are many applications for Bitcoin and the Bitcoin blockchain in industries outside of financial services. If either Bitcoins’ permissionless blockchain or the permissioned blockchain of the banking consortium picks up more traction in 2016, it will likely have a positive effect on the entire financial technology sector.

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Eric Lombrozo on 3 Ways to Scale Bitcoin That Don’t Involve the Block Size

Ciphrex CEO and Bitcoin Core Contributor Eric Lombrozo gave what was perhaps the most in-depth talk at the recent Blockchain Agenda Conference in San Diego. While most of the other presentations and panel discussions focused on topics such as regulation and disruption of traditional financial institutions, Lombrozo’s talk mainly focused on the technical side of things. In particular, the highly-experienced information security specialist spoke about the possibilities for scaling Bitcoin to many more users in the near future.

During his presentation, Lombrozo covered three key options for scalability that could eventually allow the network to handle much wider adoption of the digital cash system. Although all of the attention has been on a potential increase in the block-size limit over the past year, Lombrozo did not discuss this potential change to the Bitcoin protocol.

More Efficient Cryptographic Proofs

Cryptographic proofs are not something usually discussed in the wider Bitcoin community, but Lombrozo believes that finding more efficient methods of proving some piece of knowledge via cryptography could be helpful for scalability. He explained:

“We need to think in terms of scripting systems which are optimized for efficient proofs. A lot of the computational problems are not really easily amenable to this kind of stuff, but luckily, a lot of the kinds of problems we’re interested in for these kinds of things do offer efficient proofs, which means it’s much easier to verify the proof than to construct the proof.”

It’s possible that this option for creating a more efficient Bitcoin network is not often discussed because it is quite technical, but MIT’s Madars Virza gave a talk on the topic at Scaling Bitcoin Hong Kong. In his talk, Virza talked about the role of zero-knowledge proofs for Bitcoin scalability.

In Lombrozo’s presentation, he noted that some of the new breakthroughs in cryptography still need some time before it would make sense to incorporate them into Bitcoin:
“Some of the more cutting-edge crypto stuff, like zk-SNARKs, are still too fresh to apply to these financial networks, but there are potential ways in which we could generalize them to solve all kinds of different problems.”

Zerocash, a system for truly anonymous digital payments, leverages zk-SNARKs to fix many of the privacy issues in Bitcoin.

More Options for Transaction Validation

Another opportunity for better Bitcoin scalability comes in the form of more options for transaction validation. Lombrozo explained that not every transaction needs to be completely validated before someone may feel comfortable with accepting it as real:

“Since it doesn’t make sense to have every single node validate every single transaction by every single other node (because this will never scale), we need to have a way to have more of a spectrum where we can allow nodes to have partial validation where they may not be 100 percent sure, but if they’re 99.999 percent sure that things are correct, then it can cut down on a lot of the validation costs. That might be worth it.”

An often-used example here is that one’s purchase of a morning coffee at Starbucks doesn’t necessarily need to be broadcast and validated by every Bitcoin node in the world.

Lombrozo also added that opt-in models for trusting others could also be useful:

“We can have opt-in trust models where you could trust a server with the task of validation, but you choose to do that. It’s not something where you’re forced to do it.”

The key point here is simply giving users more options when it comes to transaction validation. If less validation is needed on a particular transaction, then accepting a lower trust model can help unclog blocks.

Off-Chain Protocols

The third way to scale Bitcoin discussed by Lombrozo was off-chain protocols. These are the sorts of options that take transactions off the blockchain and onto federated servers or other low-trust networks. Lombrozo seemed extremely bullish on this option for scaling Bitcoin during his talk. He stated:

“One of the most exciting developments this year is the development of off-chain protocols. I think this is one of the most exciting areas that we’ve seen. I think this is probably the most interesting development that has occurred since Bitcoin was created.”

Examples of off-chain bitcoin transactions include: transactions between Coinbase users, the Lightning Network, Open Transactions, and micropayment channels (best illustration being Streamium).

Although the focus of Bitcoin’s scalability debate is still on the block-size limit right now, it’s clear there are still many options out there to consider. Bitcoin Core and the increasingly-popular Bitcoin Classic will both continue to make cases for their scalability solutions in the coming months.

Kyle Torpey is a freelance journalist who has been following Bitcoin since 2011. His work has been featured on VICE Motherboard, Business Insider, RT’s Keiser Report, and many other media outlets. You can follow @kyletorpey on Twitter.

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