Todai Finance Innovation Program Lecture 13

The 13th lecture of the Todai Finance Innovation Program, which served as the final
lecture in the technology series, was held at the Kojima Conference Hall at The University of Tokyo
Hongo Campus on 5th December 2017. The theme for the lecture was “Blockchain and the FinancialSystem”, with the timing of the lecture coinciding with the current surge in price of Bitcoin that hasbrought it to the forefront of financial news of late. We invited guest lecturer Dr. Kenji Saito, whocurrently lectures at Keio University’s Faculty of Environment and Information Studies while
concurrently holding numerous other positions including Representative Director of Academy Camp,
Chief Science Officer at BlockchainHub Inc. and CEO at Beyond Blockchain Inc. Dr. Saito after
graduating from his Master of Engineering Program in Computer Science at Cornell University, hasbeen performing research on digital currencies and P2P networks and is considered an expert in thefield.

What is Blockchain and why did it arise?
Our current society relies on financial institutions such as banks to send money from one
person to another. Although in Japan, people may not see why this is considered a risk, recently incountries such as India there have indeed been instances where notes have become void and people
have been frozen out of their bank accounts. Due to the lack of trust in such existing systems, thedigital currency bitcoin was created by an anonymous figure going by the name Satoshi Nakamoto
to “make it possible to send the money you have now whenever you want and not to let anyone stop
you from doing it.” Blockchain refers to the technology that was designed to send these bitcoin, andrelies on the principle of sending digital coins using digital signature and pairs of public / private
keys while maintaining public records of transactions. If you compare blockchain to a newspaper, 1page of the newspaper is a ‘block’ and inside this block there are lots of articles. The blocks (pagesof newspaper) are linked together to form a blockchain (the entire newspaper), and it is here wherepromises between two parties may be fixed. The reason that the system is operated by everyone isthat if there was any one person in charge of operation, the service could be stopped at any time at
his / her will.

Although the purpose of blockchain has already been touched upon slightly in theprevious paragraph, broadly speaking it was designed to achieve the following three main goals:⑴

To preserve and maintain records of content and their existence that cannot be denied byanyone⑵

Anyone can check whether ⑴ is indeed being followed⑶

Prevent ⑴ & ⑵ being stopped by anyone

It must be remembered that the 3 goals listed above are only aims and nothing more, inother words although blockchain was developed to fulfill the outlined goals, it does not necessarilymean that they are truly being fulfilled. Further details will be provided on the limitations of thecurrent blockchain system later in the report, including lack of real-time usability (hence not suitedfor use in IoT devices), lack of scalability and lack of sustainability, which has led Dr. Saito todevelop a new system to replace it called BBc-1 (Beyond Blockchain One).

Mechanism of blockchain – Beaker / Newspaper Analogy
The mechanism behind bitcoin and blockchain can be explained using a physical modelcomparable to obtaining liquid from a beaker and keeping records of exchanges of this liquid on apublic newspaper. Firstly, let us say there is a central tank full with 21 million cm3 (total supply ofbitcoin) of a valueless liquid (i.e. bitcoin: no value on its own but has value for exchange), and each
person wants to obtain some of this liquid for exchange purposes. Here, each person can have as
many beakers as they want to hold their portion from the central tank, each of which can hold 1 / 100
millionth cm3 of liquid (bitcoin). All these beakers are placed in a public space, and each personpossesses lids for the number of beakers they own. The lids of the beakers have the name of theperson who a person would like to send their liquid containing beaker to. Hence once the sendercloses their beaker with a lid containing the name of their desired recipient, the beaker may now
only be opened by that recipient using his / her private key.

So how do people obtain the liquid from the central tank in the first place? This is arandom process that is not operated by anyone, where each person under the same conditions has asort of raffle box of their own and draws from it at their own pace (although strictly speaking
whoever can draw the fastest has an advantage). On average every 10 minutes someone gets a hit on
the raffle and can obtain 12.5 cm3 of liquid from the central tank and transfer it to the beakers thatthey own (Bitcoin Mining).

A few conditions exist for the model outlined above in order to make it functional. One
important condition is that once a beaker is opened by a recipient using his / her private key, all of
the liquid must be transferred to other beakers (i.e. not possible to keep some for later. Thisfacilitates the accurate tracing of exchanges in liquid between parties). Furthermore, the people whosucceed in the draw of the raffle (those who succeed in Bitcoin Mining) also serve as auditors andkeep records of exchanges on pages of a public newspaper (proof of existence). In return for this,they receive the little amounts of liquid left clinging to beakers when transfers of liquid between
beakers are made as a handling fee. Finally, if the same page number occurs twice in the newspaper(can occur if two people succeed in the raffle at almost the exact same time), the page that is part ofthe longer fork is considered to be valid (the reason for this will be explained later “The NakamotoConsensus”). Bitcoin and blockchain are just things where the principles outlined in this physicalmodel have been implemented digitally.

Major Issue with blockchain
People say that it is not possible to tamper with blockchain but this is not true as it ispossible at a certain cost. The blocks in blockchain are linked together as each page includes thedigest of the previous page at the page top (referred to as Cryptographic Hash Function MessageDigest). Many people misunderstand that the long process to change each summary on subsequentpages is what prevents people tampering with records held in blockchain. However, in reality thiscan be performed in seconds. It is rather something called the “Proof of Work” that prevents thisfrom being done easily. “Proof of Work” requires the creation of each digest so that it is below aparticular 256-bit hash target. The smaller the hash target is, the harder it is for miners to obtain afitting digest, and because this hash target is so small it is considered next to impossible to tamper
with records stored in blockchain. It takes an average of 10 minutes for people to create one page(mining) with a digest that is below the hash target (for reference, altogether people are making
15,000 quadrillion draws of the raffle in the physical model described in the previous section persecond). The key to successfully tampering with the records held within blockchain lies in taking
advantage of the Nakamoto Consensus outlined below.

The Nakamoto Consensus refers to everyone following the fork that has been mined themost because it is logically the hardest to tamper with according to the methods mentioned in theparagraph above. However, from the perspective of computer science, The Nakamoto Consensus is
not actually functioning as a consensus as if someone inputs a lot of cost so that they can edit thesummaries contained on existing pages at a faster pace than the creation of new pages by miners(eventually catching up and creating new pages faster than current miners), it is possible to reverse
the consensus and people will think the fork that the person has edited is the true fork. This is one of
the major problems with the current blockchain system. At the same time, it is worth mentioning that
there are technologies that are currently in circulation which are not even blocks nor chains, and are
better than blockchain if they are properly designed. However, some Distributed Ledger Technology(DLT) utilizes hash chain but has no Proof of Work. This means that they can easily be tamperedwith and what is most frightening is the fact that such services are not uncommon. Therefore theutmost care must be taken when making a choice to utilize such services.

A system to replace blockchain: Beyond Blockchain One (BBc-1)
Given the shortcomings of the current blockchain system, Dr. Saito is currently involvedin the development of BBc-1, which sets out to achieve what blockchain originally intended to do.
Furthermore, it sets out to address the current major limitations of the blockchain system. Forexample, at present as mining succeeds at an average pace of once every ten minutes (in case ofBitcoin), the activity is stochastic so has no potential for implementation in real time (hence why notsuited for IoT devices). In addition, blockchain lacks scalability (expand when needed by inputting
cost, and decrease when not necessary) as it is a form of replication technology. Finally, there ispresently no room for experimentation in blockchain. If you look at the evolution of the Internet,
when people come up with a good idea they are able to test it first and if it goes well people adopt it,so there is a system set up where only the successful things get evolved. On the other hand, if you
look at the case of blockchain, people interpret new additions differently and some miners may
accept it while others may not, which can lead history to fork.

What the near future holds?
Currently the bitcoin price is going up rapidly, but it is a very dangerous position. If theprice of bitcoin increases, the incentive for mining also increases, so miners will introduce more costso that it is possible to draw the raffle faster and obtain more hits. This will lead to greater frequencyof hits, so every 2016 blocks the hash target will be adjusted so the interval between hits is once
again on average ten minutes, subsequently leading to difficulty getting harder. If while all of this ishappening the price of bitcoin happens to fall, at some point the cost of mining may no longer matchthe incentive (profit) so people may stop mining resulting in a large increase in block intervals
making Bitcoin harder to use. This could trigger a vicious cycle so that more miners will stop mining
and the block intervals will get longer and longer, eventually causing the system to come to a halt.
At present there are still many people buying bitcoin for investment purposes, but if these buyers
were to disappear the above scenario could become a very real possibility. Furthermore, if the above
scenario were to occur with other digital cryptocurrency systems such as Ethereum, the applications
they are used for will also come to a stop.

What the distant future holds?
Science fiction prototyping is a useful technique for showing how a particular technology
you are developing may be used in society in the future. Dr. Saito believes that there is a realpossibility that the monetary economy system will die out in the future and along with the financialsystem. The reason he gave for this is that they are both replaceable systems, in other words, if you
can do what you originally wanted to do in the first place there is no need for them anymore. Thismeans that the fading out of such systems becomes our ideal, and history has shown that technology
advances towards achieving our ideals. The costs of production, distribution, and consumption will
decrease so the things that an individual can do will increase (empowerment). In turn, the things anindividual can perform without relying on the financial system will increase, so relatively the powerof the monetary economy system will also decrease (embodied by the rise of the sharing economy atpresent). People often ask whether people will be willing to leave an industry that is so profitable
and simply put the answer is yes they will. With the monetary system the only base principle is thepursuit of profits, so we will try to do things as cheap as possible. If we take this way of thinking tothe extreme we will not use money at all in a sort of sharing economy that we are starting to see
lately (although services such as Airbnb and Uber are currently being run by companies, technology
will allow for this to be done independently).

Dr. Saito introduced the tetrad of media effects as a means of examining the effects onsociety of any technology/medium by dividing its effects into four categories and displaying themsimultaneously. It was initially proposed by Marshall McLuhan and is based on asking the following
four questions:
1) What does the medium enhance?
2) What does the medium make obsolete?
3) What does the medium retrieve that had been obsolesced earlier?
4) What does the medium reverse or flip into when pushed to extremes?
Applying this logic to the financial monetary economy system we obtain the following:(Translation of Lecture Slide 19)

Bruce Sterling released a science fiction work in 1998 called “Maneki Neko” which depicts
Japan as a gift society with people following the orders of their phones that are connected to a seriesof other people who are all trying to do small acts for each other, to help each other out. Dr. Saito’sprediction for the future follows a similar path to that of “Maneki Neko” in that people will nolonger be conscious of the monetary economy and the change has already begun as seen with
Amazon Go launched in Seattle in 2016. With Amazon Go, whatever people add to their basket
automatically gets added to their bill, and any applicable coupons would be applied by the computer
system so that customers no longer need to line up at registers, but more importantly theirconsciousness of the monetary economy is made thinner.

There are various digital currencies emerging, particularly on the national level so thatgovernments can properly collect all the tax due, leaving people unable to hide their money andevade tax. However, Bitcoin has already shown that as long as the incentive of price increase exists,
digital currencies serve little use as true stores of value. In this sense, the simple spread of E-money
usage has the potential to bring about considerable change, as ATM’s would become unnecessary
and there would no longer be any need to pay handling fees.

Final Words
Since 2011 Dr. Saito has been organizing Academy Camp for children in Fukushima andhas been working with primary and intermediate school children about new technology such as
digital fabrication and deep learning. It includes activities such as scanning other people’s bodies
and printing them using 3D printers and constructing an AI that identifies things as either cats ordogs. People tend to forget that it is these children that will be responsible for the financial andsocial systems of the near future, so we must involve them from an early age, and not just discuss
things between adults. In that sense, Sweden is highly advanced and the education system there
teaches kids that they are the ones responsible for thinking about and creating the rules for society.

The second point Dr. Saito emphasized was that although there has been much discussion
about who should be responsible for accidents caused by self-driven cars and such, at the end of theday these are all problems of ethics and we humans must be the ones to decide between what is
acceptable and what is not. AI is only there to implement these decisions for us. For example, thereis the classic example of the trolley problem where the brake on a trolley is broken, and it is moving
forward on the track, and you are by the point adjuster of the track. If you don’t do anything 5
people will get run over, if you adjust the track point then 1 person will get run over. What should
you do? Therefore, we must remember that such problems of ethics are problems that can only besolved by humans and should not place this responsibility on AI.