Michael Mainelli — Z/Yen

Professor Michael Mainelli is Co-founder and Chairman of commercial think tank Z/Yen, Emeritus Gresham Professor at Gresham College in London, Alderman of the City of London, and founder of the Long Finance Initiative. His career has consisted of numerous ventures in the fields of technology, economics, and finance.

At the second Internet of Agreements® conference on the subject of world trade, Prof. Mainelli introduced Z/Yen and the think tank’s work on “smart ledgers,” providing some context which challenges the novelty of blockchain (distributed ledgers have existed as far back as 1978) as well as explaining some of Z/Yen’s preferred taxonomy of ledger technology. He then highlights quantum-resistance as a key concern for these ledgers as the goal ultimately is to create databases which can persist into the next century. He defines blockchain as a “multi-organisational database with a really good audit trail” and doubts the purpose and efficacy of tokens if there is sufficient executable code available. While unimpressed with the use case of blockchain in payments, he discusses the three main use cases of digital identity, record-keeping via timestamping, and automated agreements while explaining various Z/Yen projects. He concludes by addressing the economic impact of blockchain in comparison to the field’s current market valuation.


Thank you very much, Vinay. Welcome everyone. I’m conscious that it’s a Friday afternoon and I’m between you and the weekend, let alone some drinks, let alone probably several other things.

What I’d like to talk about today is the economic impact of smart ledgers on world trade, and that is very much a theme that’s been running. I’m going to open with a few remarks. I hope to speak for about 30 minutes, and then Vinay says it would be kind of fun to close with a short, sharp panel of about 20 minutes today, and so hopefully we will break at five [o’clock] if I keep to time. I’ve also put on your seats a handout which summarises the current state of the research that we’re at; I’m afraid I’m not best on infographics and things, but it’s a kind of an interim report, the final report is due out in April. The sum total of this talk is to walk you from the beginning and close on this report, so I won’t be offended if you’re glancing at it while I’m chatting, don’t take it at all seriously.

I’m conscious that many of you know me and that some of the slides here will be somewhat repetitious. Those of you who find I’m going through them rapidly, well, I am, and you can come up afterwards if you need further justification or what have you. I’ll cover briefly who are Z/Yen and what is our role in life, our focus on smart ledgers. I want to look at what do smart ledgers actually do for trade and trading systems, but I’d like to close on the economic impacts and then we can have our discussion session.

Z/Yen is, we argue, the City of London’s leading commercial think tank, we’ve been in existence for 24 years. We’re small house, about 25 people, and we pretty much range wherever finance and technology meet, as well as technology itself, doing things on low loss, long distance, high voltage cables at the physics end, and we also do pure financial work, which has got very little to do with technology, so we span a lot of things. We have obviously, like any firm, a fair number of credentials.

In the space of fintech though, technology actually meeting finance, I’m afraid I’m not a big aficionado of the word “fintech”. I’ve moved into the city in ’84 ~for a big bank/bang~, what the heck do you think I’ve been doing for 34 years but putting computers into technology, and a little bit of lipstick on a retail pig on a British bank doesn’t really interest me. [laughter] “Great, you’ve put it on your phone, well done.” I’m much more into the high wholesale end of life, where things matter, which is I think what is very exciting about the distributed ledger or smart ledger space.

You might notice something else here, one is my age. Young women who are interested, if my wife is away this weekend, I’m really younger than I look, but unfortunately I am happily married.

One of the things I’d point out is we built our first distributed ledger back in 1995. I currently am running a research programme at the moment called Prior Smarts, we really dig into it, and you would be stunned at the number of blockchains that existed as early as 1978, you would truly be stunned. If you’d actually dig into the research papers and you take the terminology out and you start looking at what the people were doing, it’s there. We happened to do it in ’95, so we’re not even claiming we’re early or first. In fact, the blockchain instantiation of a distributed ledger isn’t a particularly great way to do it. There are a lot of different architectures out there that achieve similar or better purposes.

Therefore we get into terminology wars. If you google some of the stuff I’ve done over the years, you’ll find that I’m a bit of a stickler for the terminology, because I just hate the word “blockchain”. I can live with most other things, but to me it’s kind of like saying, “Well, there’s a pointer. – What do you mean? – The database has a pointer in it. – What do you want? – I want one of those pointer things! – Well, don’t you want a database? – No, I want a pointer!” and I kind of go, “Great, but what are we driving at here?

I think most of us in the room know where we are: ledgers, nice, solid, boring pieces of accounting kit, records, whatever have you, it keeps civilisation together, a minor detail. Distributed. Anything that is distributed is interesting, because it increases the resilience, that’s the whole basis behind the Internet and TCP/IP, etc. As somebody who’s been on the Net since ’76—node 12—I used to chat with Vint Cerf to try and get the servers working between Harvard and Dartmouth, it’s what it’s all about. But it also introduces an instability. There is no such thing as decentralisation. If you distribute the things, then we’ve got to run an identical copy of the software everywhere to make the darn stuff work, or work on a similar standard.

We then move into mutual. People in business tend to have the hardest time with the concept of mutual, because a mutual is in one sense it’s owned by everybody and in another sense it’s owned by nobody, it depends on how you structured your mutual. I would argue the Internet is owned by nobody so mutual in that sense, but we could equally set up an exchange mutual where we’ve all got participation in it. One of the things I particularly have troubles with with people in business is they go, “We’ve never done this before,” and I go, “Do you know how email works? – Well, I don’t.” They may be paying a lot of money to Microsoft at the tail end of the stuff, but they completely forget GNU/Linux in the middle and all the servers and all the donated time. So there’s not really that much new about mutual.

So if you put it all together, I like the term “mutual distributed ledger” for the basics, but then of course people want to put smarts in it, so you want to put pieces of program elements. Again, those of you who ever did anything proper in LISP will know this goes back 1958, so again it’s not particularly new. But it’s nice that we’ve got this out there, it’s nice that we’ve got acceptance, it’s nice that Bitcoin created enough furore and all that, that people go from “My god, the last thing I want is my data on different machines!” to “Please, spread my data to the four winds so I can have a blockchain,” so it’s kind of interesting.

We do a lot of research to back up my prejudices; you’ll gather I don’t have too many, but the few I have I like to justify [laughter], and we have loads and loads of reports. We’ve just brought out a report this week on what are the effects of quantum computing on smart ledgers, and, quite interestingly, this is probably the most vulnerable sector to quantum computing as opposed to anything else. Why? Well, we’re trying to build databases for 100 years, and we do remember before ‘99 we failed to do that, so this is round two, to see if we can build a database for 100, and we’re writing data out onto these databases that we would like to have accessible permanently. So think very hard about the data that you’re putting out, if you we do not have a quantum-resistant approach to it. The data you’re writing out now, will it be embarrassing 20-30 years from now? If not, and there’s quite a few cases where that’s not the case, no problem; but if so, there are things you need to think about. So we’re very active in research, and most of the research of what we do is free and shared.

I’ve got two more slides, I’m going to show you some examples of what we do, and then we’ll move onto the economic impact. This slide here is really just to emphasise one thing about them. I think Joe and I have had our… Joe and I are deep thinkers: we meet in hallways, we talk long and hard 15, sometimes 20 seconds with each other, and I keep saying to Joe, “It’s just timestamping, you know, what we’ve got here is just timestamping. You can put a token on it if you like, you chew up a lot of energy, but you’re still just doing some timestamping.” so there’s some interesting problems I think in this space. What’s good about it? Well, it’s actually that it’s a multi-organisational database with a really good audit trail, that’s what we’re talking about, a pretty basic piece of kit. I’ve already said it’s old, it’s really not that complicated. It’s also a pretty crap database: it’s slow, you’ve got to keep a lot of things in sync, it’s flat file, and anybody who’s going to do anything practical is going to roll that database up into a buffer database, and therefore you’re not really working on it, so you’ve got really just a ledger of record.

Now, that’s still a very powerful thing, and the reason it’s powerful is an economic argument: it reduces the power of central third parties, that’s what it does. Central third parties are finding themselves in a position not where they’re gone, we’ll come onto that in a minute or over the discussion, but where they are weakened, and that’s really got to do with two things. Some of their functions flow immediately into the technology. Normally, the central third party keeps the ledger, that’s their job, they keep the ultimate copy of the ledger. I bring up your university, have you got a degree, and they go back to the ledger and say yes or no, or maybe in my case, but anyway… So yeah, that’s the kind of thing that you have.

The second thing though is that by doing that it also reduces switching costs. Why is that? Well, I do not like the central third party that’s running that ledger, and they say to me, “No, it’s my ledger, it’s my data,” and we say, “No, that’s not your data, everybody’s got a copy. We don’t like you add new entries to the ledger, we’re going to switch you,” so that’s the economic argument behind it: central third parties, reduce switching costs, and that’s the key element.

The other thing that’s interesting of course, and I do find intriguing, is the role really of the executable code, I think that is absolutely fascinating. In a way, in my world, I look at tokens, code and the distributed ledger and I see it as a triangle, any two of which is essential to do the job, but I think you can do a lot of the job without any tokens at all, just with executable code and a decent ledger.

What are the sort of things that we do? Well, here’s one example. We’ve been running for almost three years now the government timestamping engine for the States of Alderney. It’s a small project, let’s be frank, 2,000 people, 2,000 drunkards clinging to a rock in the middle of the Channel, and that’s what they call themselves, they do… [laughs] Amazing self-awareness in the Channel Islands… But they’re using it.

Another example, a much more material, in the clinical trial space, we do a lot of stuff on clinical assessments in the clinical trials space. This is a heat map of clinical assessments that we do for a variety of people, one I can name is actually the University of Middlesex; they don’t do a particularly large amount of work on it, but some of our private clients do quite a bit. We did 2.8 million clinical assessment recordings in 2016, and we did 15 million clinical assessment recordings last year. So, what is it? Well, it’s a timestamping engine, it’s just a gigantic ledger recording what’s going on. And why is that? Well, it’s actually so people don’t cheat, these are anti-cheating devices, that’s what they do, and it’s, again, where multiple organisations have been trying to work together, and in some way shape or form fudge the data.

Now, why would I be up here, why would I care about all of this, if I wasn’t excited in some way? I’m going to put a little cold water on things, but not a lot. I’m actually really excited about areas like identity. For me, these things are about identity, documentation and agreement exchange. If you look at broadly four abstract application areas: identity documentation, agreement and payments… I think the previous speaker pointed out that payments isn’t a big thing, and payments isn’t really a big thing.

Up until last year, for over 20 years, I ran a commercial vessel. Trust me, a commercial vessel, when you move it, there’s a lot of paperwork, tons of paperwork. Take a piece of paper, and I mean this in the abstract computer sense – whatever you like, it’s still a paper – I’ve got to fill the darn thing in and I send it to somebody. Well, that somebody is working in another organisation or working in the government or working with the Maritime and Coastguard Agency or Lloyd’s Register or something like that. Well, their job is worthless if they don’t question that paper, isn’t it? I mean, that’s their job. So, what do they do? Come on, you’ve all been subject to this: they send the paper back to me, they’ve got some queries, and we bounce it back and forth so that it’s proof that they’ve done some really valuable work. [laughter] Then they send it to their boss, who then says, “Out of every 20 of these, I better bounce something back, or my job is not going to be any good,” so the thing keeps bouncing around.

If you need 40 pieces of paper to move a boat, you start multiplying that by the number of times people bounce things back, I can come to a sum and you can come to any sum you like, but it’s something like 20 to 40 bucks per document is what it is going to cost, it’s an hour’s worth of somebody’s time normally, so it costs money. You can say, “It doesn’t cost you that money.” Yeah, but then I pay the application fee for the manifest, so it does cost me that. And then some banker comes in and says, “Look at this, look at this! I can use a distributed payment system, and sometime in the distant future when this is actually accepted, and I’m not lying about my proof of concept being real… [laughter] What I’d really like to show you is that I could reduce this to maybe five bucks from 10 bucks!” and I’m sitting there, saying, “I just spent 2,000 bucks moving a vessel from one port to another in paperwork, and you’re going to save me five dollars? – Well, I was going to save you five dollars, until the cost of processing a Bitcoin went through the roof, so really I need to charge you 35-40 bucks, plus the five bucks I need to make to make a profit on it… But anyway, it’s a really cool thing!” So, you can see where I stand on identity, cool. Documentation? Big savings for me, and this and that, what was the version of the document you had and all that. Agreement? Yeah, definitely. Payments? Not at all.

Brilliant, brilliant incident at ~Cybus~ 18 months ago in Geneva, when the chap from MasterCard was there, Ripple had announced that in eight weeks, with eight programmers they’ve managed to do a payment in eight minutes and it only cost $8, and some guy from MasterCard put his weedy little hand up and said, “Excuse me, I just want to understand what I’m seeing. – What do you mean? – I just want to understand what I’m seeing. Because in MasterCard we move money around the world in five seconds for about three cents.” [laughter] Yeah. If MasterCard didn’t exist, it would help to set it up so a central third party doesn’t have control, but MasterCard is a long way to compete against these systems.

One of the myths that I like to tackle is that we’re going to get rid of central third parties. I said we would weaken them, I said that we can reduce the switching costs, but I think what you find is the minute you try and push far out on the Ethereum and Bitcoin end, you immediately run into governance problems, governance about how these systems are going to evolve. That’s why I’m very excited about the sponsors of this conference, Mattereum, because I think they’ve recognised that, and they’re trying to work and make these things work in the real world. The real world is not let the robots run it; maybe at some point in the future, but will be long after I’m dead, or after this afternoon when you all try and kill me. Anyway… [laughter]

I think the second thing is that economics don’t matter. This slide is achingly old and I didn’t have time to update it, because, as you know, the cost of processing transactions has gone through the roof, in line with the mining cost, but real-world applications are going to need to be millisecond and they’re going to need to be cheap. Anybody that comes in and says, “I’m giving you a database for $5 or $35,” is an idiot, okay? I just cannot see what that application is that justifies it. I assure you, when we did 15 million clinical assessments last year, we did not get $35 a pop or $5 a pop or anything close to that; the rig cost about $15,000 a year to run. That’s the real world.

We therefore have been running some of our achingly old systems, they’re not very trendy, they’re just things that work and work fast, so we test with the Natural Physical Laboratory rig we did 25 billion transactions a day, invert that, the reverse of that is obviously the cost per transaction, which is fractional. In fact, the NPL agreed that we could do about a trillion transactions a day with a moderately scaled-up rig, which was not the one that we gave them. That’s more what we’re talking about. Why? Well, go back to shipping. Shipping is a global industry; if we’re going to have a global unowned mutual commons, it’s going to need to do a lot of transactions and at costs that are affordable.

So, I thought what we ought to do is work towards the numbers, and so within the Distributed Futures research programme we launched a report of which Vinay kindly asked me to come and present, and it’s not quite done so you’re kind of getting a preview, and it’ll be coming out in April, as it says on the handout that I put on your seats. What prompted this report? Well, the first thing was I wanted to get a handle on what was the scale of savings that we could actually have within trade? People talk about it, they talk about the grotesque wastefulness and the numbers, and that’s great. I’ve talked about the frustration of the documentation, but I would like to understand what the potential scale is.

I was at a conference up in Sweden in November, when a chap from NASDAQ was haranguing the Swedish electricity industry about their cost of settlement, and kept saying, “You should put it on a blockchain, you’ll will save tons of money, and we, NASDAQ, will do this for you…” and a question was put to him, “Well, that’s great, but what’s it going to mean for the average Swedish consumer? – Well, huge savings, as we get rid of the wastefulness in the industry, and the clearing and settlement is going to be really, really important and all that. – Yeah, but how much are we going to save? – Well, you know, all the people who… – Okay, are there 5,000 people in this?” and he says to me, “No. – 500? – Well, I’m not too sure. – 50?” with this, the Head of the CEGB gets up and goes, “Yeah, this guy has been talking to us for three years about all the great savings he’s going to make, and we keep showing him the door and he doesn’t understand. – Why is that? – Well, there’s probably about 50 people in this.” If you take the savings of 50 people and you divide it by nine million Swedes, you’re not even talking about a few krona per payment, so actually some of these sums can be quite modest. They sound great, they could be very important in particular spot areas, but in terms of overall savings they may be modest.

We’re doing some work with the Singaporeans, we’ve built a trade system which was launched last November, it’s got about 500 companies on it, so I’m starting to accrue genuine data on activities and savings in this area. The ASEAN trade area is a large one, we know that, $609 billion and growing, imports and exports extremely substantial between them.

In this space we see a lot of competition. Probably the biggest competition in this space is Alibaba. Just as many people here fear Amazon, if you travelled in the Far East, they fear Alibaba. Why? Central third party. Here we go again, it’s the central third party. Now, does Singapore want to create a Singababa? I wouldn’t think so. You’d just wind up with Singababa fighting Alibaba, and that’s not a good thing, that’s a trade war you don’t want to get into.

What they really did was they created effectively an unowned ledger, that was the key element to it, and they happened to base it on our ChainZy software, which is really simply because it’s hyper cheap, runs very, very fast, and, frankly, does the job, that’s what they wanted. They’ve got some interesting estimates of the revenues that they’ll make, but these aren’t necessarily the savings, that’s very important. Just because you managed to pull some revenue estimates in, how much do you pull from other people is a bit of a problem.

This is a slide of the cover screen, just to prove that we even have a cover screen with a login area, but this gives you just a little bit of the flavour of the depth of it. So anything you can imagine in Alibaba ~has effectively been built~ here. “I’d like to buy some erasers from you, I’d like to buy some pencils from you, I’d like you to please put the pencils and erasers together and ship it to them,” so all this kind of interaction, the Prudential and five banks are in there providing the trade credit and finance for it… Again, it’s quite a sizeable, real system based on blockchain, if you want to call it blockchain. I prefer to call it a smart ledger, but there you go.

What’s intriguing about it is that the architecture for it is very much down there at the bottom, that’s the distributed ledger bit, that’s the ledger of record, that’s the ledger that everybody synchronises with, but above it you need to build all the normal IT that you would have for anything else. In fact, if the stuff up top existed, you could easily do it just a simple write-out. So the great blockchain revolution or transformation isn’t really that transformative or complicated; it’s just simply getting people to agree to use a ledger of record.

We’re very excited about this project nevertheless, but the reason is probably because our firm is only 25 people, so a project like this is really good for us; a project like this is not even a day’s fees for Accenture doing the PowerPoints to think about it. So you’ve got kind of a problem here in scale, and I think this leads you into some interesting problems about how you estimate what the savings are. In my world of economic analysis, I boil savings and improvements down into three things. I would ask you to imagine with me if you might, imagine a kind of a distribution function: this is my distribution function, and in the middle is the kind of my expected outcome, and over here is kind of very bad and over here is very good, okay? So, what can you do in life? Well, the first thing that you can do is you can move the distribution function to very good, and that’s actually what most people do. How do you achieve that? Well, you reduce costs, you make more profit, that’s cool, you train your staff so they’re more effective, that’s really cool, you get better marketing and that’s really cool, so that’s improving it.

The second thing you can do is you get rid of some of the bad stuff. I want to lop off the stuff over here, I just want to get rid of it. What if there was a fire? That’s a good idea, let’s buy some fire insurance and off you go. I’d like to reduce wastage, I’d like reduce my loss of goods, so all that stuff over there, so I lop off the bad stuff.

The third bit, which is the subtle bit, is I could in fact increase certainty, I could pull that distribution together a little bit, and that actually has value. In financial theory terms, it really turns the volatility in your potential outcomes, it reduces the volatility, and you can price that as effectively a variation of either a call or a put option, and that gives you a value. We’ve been doing this technique for 20-30 years, it’s just often overlooked by people in that area.

That, in many, ways applies to what’s going on in this space, because you’ve got different levels here. Down at the technology level, down at the base, which is fairly simple, I really don’t see much that’s increased in terms of revenue. In fact, it’s an additional cost to have even this tiny little ledger out there being the ledger of record. But what I am doing is I’m reducing a lot of risk over there on the documentation.

The next level up is the business process stuff. Well, I’m definitely improving my outcomes, because what I’m achieving here is cost reduction in all the paperwork and the processing and the claims and the bureaucracy. Then at the very top level I’m actually increasing certainty, and that’s very, very important, particularly in areas like trade and logistics. What I need to know is that my supplier is coming through the chain, and this has a number of other knock-on effects. Longer supply chains are bad, but longer supply chains are good. Why is that? Well, if I’m using the right type of supply chain, then I’m going to be providing a better product. I’m also therefore increasing specialisation globally, and as we know from economic theory, specialisation is probably the biggest driver in terms of improvement. These are the sorts of things that you want to come together with.

So we decided we’d try and put it all together in this report, and I’m afraid the early indications aren’t really that thrilling. Just to give you a flavour, we’re looking at something like 15 to 27 billion a year increase over the next five years as we move forward. But it’s a big planet out there. 25 billion divided by the planet starts to sound a lot like the Swedish energy industry. Savings, definitely. Worth doing, definitely. But against the cryptocurrency valuations… A little tough to figure that one out, so I’ll leave it there. I know they’re slightly different worlds, but I’m trying to give you a flavour of the scale of these things when you look at it from a global economic point of view.

The second thing is that volatility reduction, of which I’m so fond, we’re coming up with an estimate circa 1 to 1.5 billion a year. Not very, very high at all. We’re clearly testing a lot of our assumptions, I’m trying to see what gaps we’re missing. We’re conscious that there are potential savings in the area of money laundering and know your customer, but these numbers do not justify all of the tokens that are out there claiming that they’re going to be intrinsic stores of infinite, internal value, so I have some qualms here.

Finally, we’ve obviously looked at this because politicians don’t give a damn about numbers; heck, they can’t count above 10, and that’s hoping that they’ve found their other hand. The point is that what we struggle with here is jobs, possibly in the order of about a million jobs spread across the planet. So we’re talking about an interesting area, something that clearly needs to be done, something with some savings, but I’ve been unable to find the mega blockchain revolution that’s going to really turn up in genuine trade bureaucracy numbers and justify some of the valuations of what many people talk about.

Very worthwhile – I hope, because I want to do it too – but not that big. So kind of in a funny sense, you’ve noticed that there are fish all over the planet and they’re going to be big, and I run a pet store in London, and I’m trying to tell you that all the fish on the planet are not going to fit in my fish store. I hope that’s at least a sobering thought on a Friday, without being too depressing. [laughter] Vinay, over to you. [applause]