E N G I N E E R I N G I N N O V A T I O N

Why Crypto currencies will

fail
Innominds Tech Talk

July 29, 2017

Innominds Confidential 2017

Agenda
Introduction to Currency/ Money
The functions of money
Cryptocurrencies overview and how they work
A look into the historic growth of cryptocurrencies
Prognosis and why cryptocurrencies will fail
Learnings from Blockchain
Disintermediation in the financial services world

Innominds Confidential 2017

What is Money?
Money A convenient term used to denote 4 Standard
for
important functions Deferred
Payments
Store of value Really?
Exchange of value (probably most important
function)
A standard unit just like Kilogram
An accepted or standard contractually deferred
Store
Medium

payment (Open your Wallets and read what is

written on every note)
Currency Addresses one aspect of Money
which is exchange of value Measure
Needs acceptance
Needs legal backing (at least not being banned if
not being legal tender)

Innominds Confidential 2017

Functions of Money
Store of value investors or speculators look at
the store of value volatility (risk), returns,
liquidity triangle
Exchange of value required by everyone in a
modern economy due to splitting of production/
consumption activities Needs acceptance and
availability (remember Demonetisation)
A standard unit Needs acceptance and various
levels of standards for liquidity (again the 2000
note)
An accepted or standard contractually deferred
payment (essentially this is a contract and this is
where smart contracts come in to the picture)
Currency Addresses one aspect of Money which
is exchange of value
Needs acceptance (acceptance should be based on
Lowest Common Denominator)
Needs legal backing (who is the ultimate Arbitrator) Tradeoff risk return liquidity
Innominds Confidential 2017
Cryptocurrencies
A digital or virtual currency (does not exist in real or paper/ coin form) Most
wallets including Paytm or Airtel Money are also digital or virtual currencies
Use Cryptography to secure the creation and exchange
There were more than 900 cryptocurrencies available over the internet as of 11
July 2017 and growing. New cryptocurrency can be created any time.

Innominds Confidential 2017

How Cryptocurrencies work
Creation
Mining is the way to create cryptocurrencies
unlike fiat currency which can be created at will
(literally peoples will)
What should be the basis for creating new
amounts (reward for work? What work? Whose
work?)
Deletion
No deletion or currency exits can happen on
Cryptocurrencies (that is why it is a haven for a
lot of crime including Ransomware recently)
Exchange
An immutable state transition cryptographically
managed unlike notes or coins which are based

on bearer
Innominds Confidential 2017
How Mining Works
Mining
The Economics
New money can be created only against some value otherwise
it will be inflationary
The value here is participating in the computing. Miners
compete to solve a cryptographic puzzle, known as a hash. No
real puzzles but just raw computation power
The Bitcoin block mining reward halves every 210,000 blocks,
the coin reward will decrease from 12 to 6 coins roughly in 3
years from now
Transaction fees will have to increase to make it profitable
going forward
The Technology
3 Key Principles
The Distributed Ledger
The Block
The cryptographic chains connecting the Blocks and hence Blockchain
Consensus as Multi-Party Computing (PoW, PoS, PoA or Hybrid)
Asymmetric Cryptography Encryption for secrecy and Digital
Signature for verification (authentication and non-repudiation)
The Process
Pooling is the best way since mining equipment is hardware
and energy intensive

Innominds Confidential 2017

How Exchange Works
An account is represented by a keypair

Private key and public key

Private key is secret. Public key can be freely shared

e.g.

Alice signs a transaction using her private key saying she wants
to transfer 1 bitcoin to public key of Bob

The bitcoin node broadcasts the transaction to the network

A consensus mechanism (simple consensus of 51%) uses digital

signature process on the public address of Alice to see if the
transaction was actually signed by Alice

If the transaction is valid, the bitcoin will be debited from

Alices account and credited to Bobs account
Innominds Confidential 2017
The Growth of Cryptocurrencies
Price of Bitcoin near all time high Price of Ethereum tapering

Near exponential growth in transactions

Innominds Confidential 2017

What is driving the growth
Plateau to 21 million BTCs
Demand has 3 sources

Trade
- People using Bitcoins for e.g. as a payment mechanism
- Not much growth here

Investment
- People using Ether or Bitcoins as an investment (US
currently treats Bitcoin as this)
- Good amount of growth here
Price
Speculation
- People wanting to speculate and do buy-sell to close their
positions over shorter time intervals with a view to make
money
- Much larger growth here particularly from Asia Volume

Innominds Confidential 2017

Prognosis
The demand growth will plateau for many reasons
1. The fixed supply will keep price high driving out small investors (talks of a Bitcoin split)
2. Trade in Cryptocurrencies and its acceptance will rise but volatility and a reduction in price will severely dent
acceptance then Cryotocurrencies will be almost like a foreign currency with associated risk of transactional,
translational and liquidity risks
3. The high price level and complexity will keep out ordinary Investors just like Art
4. Speculators will continue to be dominant on Bitcoins until there is volatility and movement both ways
5. A sustained bearish phase at some point will drive them out and break any Ponzi scheme behavior
6. Governments and Central Banks need control on monetary policy to deal with economy and cryptocurrencies will
not be able to provide that failures of pegs, gold backed currencies, common currencies such as Euro etc., the
baby sitting co-op example
7. In the end, Bitcoins will retain Speculators, mavericks, iconoclasts, free market proponents and other associated
illegal money such as laundered money, crime and dark web
Innominds Confidential 2017
Moving On Smart Contracts Blockchain 2.0
Scaling out Blockchain for a variety of applications

Blockchain 1.0
Primitive scripting interfaces
Decentralized Storage and Record Keeping rather than Computing
Mostly "serve a single function". e.g. namecoin is a bitcoin fork and used for name registration or just for payments

Blockchain 2.0

Turing complete interfaces with For and While loops

Executable piece of program that can run on respective nodes
Transactions visualized as contracts with terms and conditions based on which actions are governed in addition to payments
Peer to Peer file sharing developed
Development of secure protocols for inter node peer to peer communication
Payments can be embedded with the contract conditional to achievement of terms

Innominds Confidential 2017

 Use Cases
Finance Identity Utilities Pharma Healthcare Energy

Settlement Selective Microgrids / Clinical Trial Medical Records Green energy

disclosure Distributed Management Equipment credits
Remittance
Reusable KYC utilities Drug Serialization / certification Offshore Oil/Gas
Derivatives and
Real world Smart grids Provenance Health regulation
other financial
contracts authentication Infrastructure Supply chain insurance Fraud Core Sample
Monitoring Optimization Tracking
(+IoT)
Tariff Matching

3 Domains that are disrupted by the technology Financial Services, Healthcare, Supply chain
3 Foundation technologies that are disrupted Networks, Internet, Cloud, IoT
Biggest impact in public services and as core as property and titles management, identity, law and
order
Innominds Confidential 2017
 Financial Disintermediation

A Central Ledger that Businesses, Suppliers, Vendors, Partners, Intermediaries, Channel and Customers can participate in
Cut the intermediaries and multiple systems. Giving up control to de-risk but be leaner and efficient
Innominds Confidential 2017
2017 Innominds All rights reserved Confidential
What Lies Ahead

Low volume/ High cost of Transactions scale out

transaction Permissioned systems
Technology Open source foundations innovating on Open
Proof of Work
source
Other consensus approaches
Code is the contract - Digital
Analog contracts
Business/ Use Cases Smart contract
Low trust systems
Networked but centralized
templates with
automation
New ownership structures
Governments/ Enabled
Ignored to Concerned
Regulatory Adopted
BitNation

Disruptive as the internet, mobile, cloud, AI and IoT

Innominds Confidential 2017

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Questions/
Feedback

Innominds Confidential 2017