The secrets of the unusually successful Provenance Blockchain
- Future of Finance
- Aug 23, 2024
- 55 min read
Updated: Jan 29
A Future of Finance Interview with Anthony Moro, Chief Executive Officer, and Ira Miller, Vice President, Engineering, at Provenance Blockchain.
By its own estimation, the Provenance Blockchain is the most successful tokenised asset platform in the world. The business has identified large markets, such as second mortgages in the United States, with operational issues that can benefit immediately from the application of blockchain technology. Though Provenance has concentrated so far on tokenising assets that continue to exist in analogue form, a pragmatic approach is allied to an understanding that the full benefits of tokenisation ultimately depend on financial assets being available in native digital form only. The management also believe that the future of blockchain lies in open and public networks, which they expect to consolidate over time into a handful that interoperate not only in terms of seamless value transfers but also in terms of complex data exchanges. They do not consider this vision to be incompatible with the “common platform” envisioned by regulators such as the Bank for International Settlements (BIS) and the International Monetary Fund (IMF), collective projects such as the Regulated Liability Network (RLNN) and private ventures such as the Canton Network. To help users manage the transition to such a future, Provenance has developed some unusual techniques, such as embedding common functionalities in the protocol rather than smart contracts and providing private “zones” for regulated financial institutions on its blockchain rather than closing the entire network. Dominic Hobson, Co-founder of the Future of Finance, spoke to Anthony Moro, chief executive officer, and Ira Miller, vice president, engineering, at Provenance Blockchain.
Key Insights from Part 1 – Commercial
With US$10 billion in total value locked on-chain in home loans, private equity, alternative funds and life assurance policies, and a further US$1 billion of assets being added every month, the Provenance Blockchain believes it is the largest originator of tokenised financial assets in the world.
Although the Provenance Blockchain is presently focused on tokenising assets that continue to exist in the “real world,” the management believes that the full benefits of tokenisation cannot be captured without a long-term transition to native tokens which exist solely on the blockchain.
The Provenance Blockchain is designed and built specifically for financial services uses cases and its first application is to the home equity lines of credit (Heloc) market in the United States, where it has saved loan originators 150 basis points in issuance, warehousing and securitisation costs they can share with borrowers.
Having proved it can generate operational cost savings in the Heloc market, through the elimination of unnecessary forms of intermediation, the Provenance Blockchain is capable of extension to other forms of private credit such as holiday home mortgage, solar, automobile, student and commercial real estate loans.
Provenance Blockchain was one of seven firms that worked with J.P. Morgan and Apollo on a project under the auspices of the Monetary Authority of Singapore’s Project Guardian to prove that tokenisation enables less liquid alternative funds to be included in separately managed wealth management portfolios.
Provenance Blockchain is also working with NAV Lend to add liquidity to alternative investments by developing so-called “NAV loans” in which investors can borrow against the value of long-term investments in private equity funds with the lien on the investment recorded in a digital asset registry maintained on-chain.
Provenance Blockchain predicts that regulated Stablecoins which yield an income will develop into a scalable asset class comparable with tokenised money market funds invested in US government securities, with full financial reporting by issuers, independent custody and (unlike the funds) peer-to-peer tradeability.
Despite its own focus on finance, Provenance Blockchain argues that its provision of private “zones” enables users to escape the risk of being trapped in closed networks by private blockchains (however perfect for a particular use case) and the risk of losing their investment once an oligopoly of interoperating public blockchains is established.
Key Insights from Part 2 – Technical
The Provenance Blockchain holds that the blockchain interoperability problem will be solved by the rationalisation of multiple blockchains into an oligopoly of no more than five Layer 1s, which will provide the foundation for specialist services composed of functionality written into the protocols as well as smart contracts.
Current interoperability solutions are effective at moving tokens (or at least the value that tokens represent) between blockchains but they have yet to solve more complex questions arising from off-chain information associated with the tokenised assets, such as liens, concentration limits and mis-selling restrictions.
The Provenance Blockchain takes the view that smart contracts, including third party smart contracts, are useful for experimenting and moving quickly, but it is preferable to fold any smart functionality that proves to have multiple or common uses into the blockchain protocol.
By concentrating on finance only, the Provenance Blockchain aims to avoid the congestion and down-time associated with generic blockchains and manage the risks associated with un-intermediated custody and settlement and reliance on smart contracts to buy, sell and hold digital assets and collect entitlements.
The Provenance Blockchain aims to eliminate uncertainty by achieving deterministic rather than probabilistic settlement of transactions so that users can be confident that all transactions certified as valid by consensus and added to a block, within four to five seconds, are never dependent on subsequent blocks.
Although the Provenance Blockchain is a public Layer 1 blockchain, it incorporates private “zone” versions of the protocol where individual financial firms can control interactions with counterparties on the public version of the protocol or hold information that they do not wish to disclose publicly.
The Provenance Blockchain has issued a native utility token (HASH) that is used by holders to pay for transactions on the network such as settlement of trades (“gas fees”) and to stake their claim (Provenance is a Proof of Stake blockchain) to participate in the earnings and strategy of the network.
Transcript
00:14 Dominic Hobson: Hello, I’m Dominic Hobson, co-founder of the Future of Finance. My guests today are Anthony Moro, chief executive officer, and Ira Miller, vice president, engineering, at Provenance Blockchain, a public Layer 1 blockchain for turning real world assets into digital assets through collaboration between issuers, investors and developers. Anthony, Ira, thanks very much for joining us.
00:40 Anthony Moro: Dominic, thanks for having us. It’s great to be here.
Commercial
Question: How does the Provenance Blockchain work with Figure Technologies? 00:44 Dominic Hobson: Let’s begin with a look at the origins and history of the Provenance Blockchain. They’re often tied together with those of Figure Technologies, and particularly with Figure CEO Mike Cagney. Can you clarify for us what the relationship was, what the relationship now is? And I’m talking here not in terms of activities, but in terms of Provenance’s timeline, its ownership, its development, its management, and of course, above all, its intellectual property, its IP.
01:14 Anthony Moro: Sure. So I think a combination of myself and Ira will take that question because it is pretty in depth, depending on how deep we go. But the blockchain was founded by Mike Cagney and June Ou, who were co-founders at SoFi, the large neo-bank here in the US that scaled quite large over the past several years. They left in 2018 with the thesis that blockchain was going to revolutionise global financial services. The story goes, they went around to all of their banking partners and said, `Hey, let’s do lots of interesting things on blockchain.’ And all the banks said, `Hey, great, Mike, we like you, we’ll back you, but we’re not going to be the first customer.’ So with that thesis in mind, Mike and June and the team built a blockchain. And Ira was the leading engineer, so he can certainly talk more in depth about the technology side of it. But they built a blockchain and then they wound up building a business, or a couple now of businesses, on the blockchain that really show the power of blockchain technology. And it’s not blockchain for blockchain’s sake, but it’s blockchain to create efficiencies in financial markets. So the first large use case and really the only asset class in all of global blockchain that has scaled in a public layer 1 context is the business that Figure has built, Figure Technology Solutions, now previously called Figure Lending, home equity line of credit, or second mortgages, if you will. Last year, 6 per cent of all the Helocs [Home equity lines of credit] in the US were created on Provenance Blockchain by Figure and many of their partners. So it’s a B2B2C [Business to Business to Consumer] business. Movement Mortgage, Guaranteed Rate, Homepoint, are all of clients of the Figure tech stack that use the Provenance Blockchain to create mortgages for their customers. And in the process of creating these mortgages in home equity lines of credit, they save about 150 basis points off the process of issuing the mortgage and then warehousing the mortgage and securitising the mortgage. And what that allows them to do is certainly for the process to be more profitable for the operators, but very importantly, it allows them to lower rates for borrowers, because technology, if done right, is inherently deflationary. And with deflationary technology, you can put money back in the pockets of those users of the technology. So watch for more asset classes to come. But I like to say the revolution is coming asset class by asset class. You won’t just wake up one day and US$700 trillion of the world’s assets will have been put on blockchain. It’s going to happen asset class by asset class, because each asset class has its own individual needs of the chain and of the technology. And Ira has perfectly positioned us from the beginning. He’s been with Figure Technologies and now with Provenance Blockchain, and he can take it from here.
03:50 Ira Miller: Thanks, Anthony. I think on the technical side, I’d like to expand a couple of points. Unlike a lot of the blockchains out there, the Provenance Blockchain is started with a business case focus. And what I mean by that is that a lot of blockchains focus on maybe building the technology and doing an ICO [Initial Coin Offering], raising a bunch of money, and then deciding how they’re going to use it. And I think the difference here for Provenance, that really has shaped what we’ve done is that, because Mike Cagney was starting with a business, as a start-up, and start-ups, of course, [are about] moving fast and lean and pivoting from what doesn’t work to what works, our blockchain has developed with a singular focus on supporting those business cases. We have a little bit of a different technology stack. We focus on solving a few different problems in terms of what’s in the protocol and what’s not in the protocol. We focus on mitigating risk inefficiencies. And so it’s really, as we get to where we are today, and you look at it and you say, `Wow, this is quite a different environment than a lot of other chains.’ It’s because of where we’ve come from and how we’ve gotten here and focusing on those business use cases.
Question: Who benefits from the cost savings in Heloc loans – issuers or consumers or intermediaries? 05:08 Dominic Hobson: Talking of business use cases, Anthony, you’ve already brought up the first use case that the home equity lines of credit, the Helocs, what our European listeners would probably call equity release, what you call second mortgages. And you’ve explained that this has already devoured 6 per cent of the Heloc market. I saw a figure of, I think US$15 billion have been issued onto the blockchain by Figure and other lenders. Now you’ve touched on the benefits for the issuers. There’s 150 basis points that they save. I assume that there’s an upside for the consumers as well. Do they get decisions faster? Do they get access to the money faster? Is there a loser in this process? Or is it a win-win?
05:54 Anthony Moro: Love the question. So borrowers absolutely win. As I mentioned, technology is disinflationary, so it lowers the costs to access a home equity line of credit, or really any private credit in this contract. So that 150 basis points, not all of it is taken by the originators. A lot of it is given back to the borrowers. So that’s inherently a good thing. But also with the technology, because you’re using a shared ledger and you’re using … You’re eliminating the need to audit the loan package each step of the way, because, you know, the originator doesn’t hold the loan for the entire duration of the loan. Of course, it’s sold, and it’s often sold two or three times, often into a warehouse, and then into a securitisation type security down the road. And what blockchain allows you to do is create immutable proof or immutable truth that the loan package has not changed. And Ira’s technology has built what’s called an encrypted object store that takes all the offline documents, like the liens or the property condition report or the video notary session and allows you to keep that personally identifiable information offline in an encrypted storage space. But very importantly, be able to link those offline storage files to the … It’s an NFT [Non Fungible Token] that is actually created for each loan, so it’s part of the loan package. And that loan package then can move down the line and be sold and bought by others. But the beauty of it is you don’t need to re-audit it because you have cryptographically proven that each of those documents has not changed from the first audit. So that process reduces not only expense, but also significantly saves an amount of time. So in the Figure and Guaranteed Rate and [Mortgage] Movement and Homepoint Heloc examples, you can get a decision in five minutes, and you can get funded in five days. Now go to your bank and try the same process, and you might get a decision in 30 days, and you might get funded in 90 days. That also holds through to the secondary sales and the asset backed securities. Things that used to take three months are now taking three days. That time saving, particularly in an era of high interest rates, is material. And so it’s money and time. So that’s the first asset class that’s being really disrupted. I think it’s going to be well north of 10 per cent of all Helocs this year. So this is private credit. And private credit is a great asset class because it doesn’t have a well-oiled construct like the public equity market today, although that can be made more efficient as well. So what we’re doing is we’re making it more efficient from a technology perspective. And those who lose, and there are, any time you see a winner, you do see a loser, those who lose are the intermediaries. So I don’t think a lot of people will feel sorry for the banks and the auditors and the loan servicers of this world, but they’re the ones who are being disrupted in the process. Because in each, whether it’s a credit card transaction or a stock transaction or a mortgage issuance, Wall Street has evolved to have multiple parties involved that exist largely to prevent fraud, to protect investors or borrowers, at the end of the day. And all this is good, and all this is an absolute necessity in the Web 2.0, old school world. But if you could eliminate those intermediaries and replace trust with truth and allow bilateral exchange and transactions among two parties, you don’t need the intermediary. So you don’t need an escrow agent, you don’t need a trustee, you don’t need a triparty repo [it] is now biparty repo. Wall Street is being disrupted by this. And there’s trillions of dollars of financial services revenue at stake. A lot of it goes away with blockchain. It’s not like the trillions of dollars are just being transferred over to the blockchain providers or the blockchain companies. A lot of it is being eliminated. And what’s left over, there will be some fees for the blockchains to keep, obviously, the technology moving and the blockchain running, but you’re eliminating trillions of dollars of fees.
09:45 Dominic Hobson: Okay, so that 150 basis points is being split between the lender, the borrower, and indeed the Provenance Blockchain.
09:51 Anthony Moro: Really between the lender and the borrower. The Provenance Blockchain is just really the operating system that earns very small amounts of blockchain standard fees. But what it allows is that … So Figure … Other companies who are not using the process just can’t compete with someone who has so much … Technology that is so much more efficient.
10:11 Dominic Hobson: But you do need to be paid.
10:13 Anthony Moro: The blockchain gets paid, but de minimis in the scheme of things.
Question: Does Provenance make it easier to securitise the Heloc loans? 10:17 Dominic Hobson: You also mentioned that this process you described of collating and organising that data into this immutable ledger, so it is trustworthy, it is truthful. That obviously makes it easy to sell these things. Are you, when you talk about selling, are you selling these Heloc loans like one by one, or are these being packaged up into securities, being securitised and sold as packages?
10:41 Anthony Moro: So again, largely, it’s a Figure question. So what is Figure doing? And I can certainly answer what Figure is doing. Figure … They will create [the] individual loan, they will originate it on-chain. So you’ll be able to go to the Provenance Explorer and you’ll be able to see each individual loan in size. If you have the right permissioning, you can see duration and you can see the payment schedule. Of course, that’s not public, that’s private. But once they’re originated in a digitally native form, they’re warehoused together and then they’re sold as asset backed securities the regular way. And what I mean by the regular way is they’re bonds that are created by Wall Street, underwritten by Goldman Sachs and J.P. Morgan and Jefferies with a trustee by BNY Mellon, and they’re sold in generally US$200-300 million tranches. And that’s how you get the size off your balance sheet. For in the US, if you have a conforming mortgage, Fannie [The Federal National Mortgage Association, commonly known as “Fannie Mae”] and Freddie [The Federal Home Loan Mortgage Corporation, commonly known as “Freddie Mac”] the GSEs [Government-Sponsored Enterprises], the government service entities are the ones who will guarantee those. But for second mortgages, for Helocs, that [those] government entities don’t exist for that product, so they’re generally sold via asset backed securities.
Question: Could the techniques developed be applied to the mortgage market in general? 11:43 Dominic Hobson: It seems pretty obvious that this methodology is applicable to the mortgage market in general, to the first mortgage market, if you like. And I think I’m right to say that you have got into the mortgage market on the Provenance Blockchain as well, and they’re selling … I saw one transaction you did with Apollo, using a Stablecoin actually with an ordinary mortgage, not a second mortgage. So am I right to think that this is a potentially … an opportunity to revolutionise the economics of the mortgage market in general?
12:19 Anthony Moro: Yeah, I think Figure started with the mortgage market or the residential home equity and debt space, because it’s the biggest market outside of FX [foreign exchange]. It’s one of the biggest markets in the world, with trillions of dollars of size. And unlike FX or some of the other more straightforward markets, there’s a lot of moving parts. I think there’s something like 15 different parties involved in the creation of a mortgage or a Heloc here in the US. And if you could again remove most of that intermediation and bring cost inefficiencies down materially, you can truly revolutionise a multi trillion-dollar market. And again, doing some societal good, putting money back into the pockets of borrowers. And that’s what they’re doing. So again, in the US, there’s the government service entities, the Fannies and the Freddies of the world, who make that market more efficient. What Figure and many of its partners are trying to do is do the same construct for jumbo mortgages which aren’t covered by the GSEs [Government-Sponsored Enterprises], secondary mortgages, vacation homes, things like that aren’t covered by the GSEs. And that’s just one aspect of credit. So then you can go into auto loans, you can go into solar loans, you can go back to where Mike started with student loans. Really any kind of consumer credit is ripe for this kind of disruption. And then from there you can go into commercial real estate loans. Really, any kind of private credit is one of the first shoes to drop. There’s a couple of others, but that is one of the first markets that will be massively disintermediated by blockchain.
Question: What is Provenance Blockchain doing in the tokenised funds market? 13:44 Dominic Hobson: It’s a wonderfully classic blockchain story of disintermediation in the debt markets. I see you’re also getting into the tokenised funds markets as well. You’re working with, not just with Apollo, who I mentioned a minute ago, but with Neuberger Berman and Hamilton Lane, who of course have cropped up all over the world in this tokenised fund sector. So tell us a bit about that. What types of funds are we talking about? Are we talking about alternative funds or `40 Act [1940 Investment Companies Act, or mutual funds] funds? And which types of asset classes are we talking about? And I ask that question because we’ve seen quite a lot of activity on the alternative side in other jurisdictions. But maybe you’re getting into orthodox equity and debt `40 Act funds as well.
14:24 Anthony Moro: Yeah, so we did … Good question … So we did a project with J.P. Morgan, Apollo and Wisdom Tree called Project Guardian, and it explored how tokenisation can really revolutionise wealth management. So the press called it the holy grail of wealth management. And basically, it was really a first step for J.P. Morgan to allow their wealth managers to purchase and rebalance alternative asset portfolios across multiple investments and multiple interconnected blockchain networks. They really showed how to reduce 3,000 operational steps to one automated process, how to reduce portfolio level fees by like 20 per cent as a result of reducing cash drag and through faster and programmatic settlement. Now what the project did not talk about was, you know, in order to rebalance a portfolio among the right funds, you need the choice of 1,000 or more funds on blockchain that you can use in the process. 1,000 funds don’t exist on blockchain today. There’s a very small number of them and it’s not growing as fast as the press would lead you on to believe. And why is that? Private funds are private for a reason. They’re available only to accredited investors. And chopping them up into US$100 shares and putting a token or a coin on the back of them and offering them outside the US to get around SEC [Securities and Exchange Commission] regulations is not how to scale the market. With that secondary market trading, because again, private rules and accredited investors, and there’s something called PTP [Publicly Traded Partnership], publicly traded partnership rules and tax implications, they’re not going to be widely available. A private fund, a private alternative investment fund, unless it’s done under what’s called the 1940 Act and available to retail investors, it’s not going to ever be in a position where it’s actively traded in the secondary market. So that’s thesis of a lot of firms out there, and unless you go the full registration and list on a proper exchange, you’re not going to see that. So in the alt[ernative] space, we think the killer use case will be what’s called NAV [Net Asset Value] lending. So if I have a million dollars in an Apollo fund and it’s a seven to ten year life, which most of these alternative investment funds are, what I do is over the first two years Apollo invests my million dollars and my million dollar sits there for seven to ten years, and at the end of the period I get it back. Maybe I get some dividends or some distributions during the process, but my money is generally locked up for the entire period. What we think the killer use case is something called a NAV loan put on the back of that alt[ernative] fund. And by doing that I can now take out, if I’m the investor, I can now take out, let’s say a 20 per cent loan to value NAV loan. So if I have a million dollars, I can take out a $200,000 loan, pledging the collateral of my investment, and I can then go off and use it for other purposes. So that creates some liquidity. We’re excited about that use case. It’s only really scalable because of blockchain technology. In order to do that we need to put a lien on my loan position which we can do that through something Figure really invented called Digital Asset Registry technology. It’s essentially a registrar for digital assets. It puts a lien on your hold, on your wallet, and from that I can now take a NAV loan on it. We’re working with Figure Markets and a firm called NAV Lend to do exactly that process and we think this will unlock digitally native funds on Provenance in the scores of funds coming onto market over the coming years. And that’s how we get to the J.P. Morgan Project Guardian vision.
18:06 Dominic Hobson: When you refer to Project Guardian you’re not referring to your Project Guardian with JP Morgan, you’re referring to the Monetary Authority of Singapore’s Project Guardian, I assume?
18:13 Anthony Moro: So Project Guardian is the overall construct of Monetary Authority of Singapore’s blockchain endeavours. The one we did with J.P .Morgan and Apollo and Wisdom Tree was November, December of last year. I know there’s several other iterations of it but this is the one we call Project Guardian. Our participation in Project Guardian is this.
18:39 Dominic Hobson: Separate from the interoperability Proof of Concept you did with …
18:43 Anthony Moro: Yeah, this is the same one. Yeah, it was really … I mean, interoperability was a part of it but zooming out to 30,000 feet it was J.P. Morgan’s ode to asset management and wealth management. It was showing the future of wealth management. Interoperability was a feature of it but the true reason they did it was to show the future of wealth management.
Technical
19:03 Dominic Hobson: Okay, but interoperability is more than a feature. It’s pretty crucial to the growth of these markets, isn’t it? If you’ve got lots of tokens issued onto different blockchains the investors are going to want to move easily between them, aren’t they? So interoperability is not just an aspect here. It’s actually pretty central to growth, is it not?
19:20 Anthony Moro: Very good point. Our contention is there’s going to be an oligopoly. Zooming out ten years, there’s going to be an oligopoly of public layer 1 blockchains that manage and distribute the world’s trillions of dollars of financial assets. And I’ll kick it over to Ira in just a second to talk a bit about the vision of this. But, yeah, from credit cards to custody banks we see a global oligopoly of financial networks arise because of regulatory pressures and security and of course interoperability. So we think those networks will have interoperability solved and whether it’s a bridge or IBC [The Inter-Blockchain Communication Protocol], which the Cosmos network uses and we think is far superior. Interoperability will absolutely be a feature. But the future, we don’t think, in financial services is 50 chains. I think it’s more like five or four that have the majority of the world’s assets because you just don’t need 50. And for that, you also aren’t going to be seeing trillions of dollars of assets issued onto what I call the generic blockchains or those that are purpose built to be everything for everyone. And the way that you get to those things is you put what I call a Jenga Tower of smart contracts on top of a generic protocol to get to a Metaverse use case or a meme coin use case or a regulated financial services use case. But I want Ira to talk a little bit here on that.
20:45 Ira Miller: Sure. Thanks, Anthony. I think the interoperability desire is really just about accessibility of this technology. The Project Guardian example here was saying that if you have these different blockchains or you have these different companies that need to work together, they don’t all go directly to a blockchain. They might be starting from their own blockchain or they might need to work between them. I think the IBC use case is interesting because it’s really talking about the proof of correct operation of the different blockchains and then how those communications can work between them. And so with Project Guardian, what they were able to do was, starting with the J.P. Morgan private blockchain, they were able to reach out from that trusted standpoint through a partner called Axelar, which talks between their different blockchains, and show that these different technologies can be interoperable and that a transaction can start in one blockchain and propagate to another. To Anthony’s point about smart contracts, each of these different pieces that you layer on adds complexity and it adds risk and it adds sort of this technical debt that you have to maintain and you have to carry forward. And so by focusing on these blockchains that are purpose built, what we see is that the capabilities required can be unified into that protocol. You can reduce these different friction points and streamline the process. And because you’ve streamlined it, you reduce risk, you reduce operational complexity, you reduce maintenance complexity. It really makes something that’s more maintainable long term. And I think that that is going to be a really important part that we’ll see going forward is blockchains specialise in these different use cases. The extra piece that’s on this that we don’t really talk about is that you really need to take a long-term view on these different technologies. One of the things that we’ve seen as we’ve been carrying the Provenance Network forward over the last several years is that there is a focus on building brand new shiny blockchains or brand-new technology and not really carrying something forward long term. And so what I see on the technology side is that entities that haven’t had to maintain a system long term, that haven’t worried about stability, don’t really appreciate these decisions that they’re making. They don’t really appreciate how hard it’s going to be to carry something forward with this stack of smart contracts. And I think that we’ll see this play out over the next couple of years, this complexity, and it’ll be just a drag on some of these other blockchains that are working in that manner.
Question: Does the proliferation of tokenisation engines make the interoperability problem worse? 23:51 Dominic Hobson: Ira, can I ask you something else? You heard Anthony refer to these dozens of blockchains proliferating and they will over time collapse or reduce to a complex oligopoly of public chains which will, [be adequate] for the vast majority of the business. Something else we see proliferating a lot are what I call fund tokenisation engines, sometimes called fund tokenisation platforms. I put J.P. Morgan’s Onyx platform into that category, for example. HSBC has one called Orion. When we tried to compile a list of these tokenisation engines we found that it would be a very long list indeed. Now am I right to think that – and to harp back to the fund tokenisations which you’ve done, I know Anthony referred to the Digital Asset Registry technology, but Figure also created this Digital Fund Services (DFS) platform as well – is that … does that count as a tokenisation engine? And if it does, what’s the relationship between the Provenance Blockchain and that engine? Do tell me if I’m barking up the wrong tree, but I hope the question makes sense.
25:00 Ira Miller: It does make sense. I think one of the things to realise is that the blockchain itself, Provenance itself, has these tokenisation capabilities, these constraints built into the protocol. But as a blockchain, fundamentally users interact with applications and to some extent they don’t necessarily need to understand what’s behind it. So in the case of DFS [Digital Fund Services], that Figure has built, it’s really just showcasing what the protocol can do. And the user doesn’t necessarily see the protocol directly. They’re working with their application. And so in a lot of these cases, you’re talking about these examples, these companies are really trying to show their application, build their relationship with their customers. But underneath they can and they will eventually streamline behind some of these different blockchains that Anthony is talking about. Because the company that’s building that relationship with the customer, they want that to be as efficient and as reliable and streamlined as possible. So the engineers that are supporting that customer or that client, they will actually go and build these things on these blockchains. And so that’s where Provenance really excels, is that it does a better job of that than these other kind of platforms we’re talking about. DFS is one example. You could build another one on there and it might look like, you know, kind of a competing platform, but in effect, because they’re on the same lower level, they are interoperable. They are, you know, it isn’t necessarily fracturing the landscape. And I think that as these pieces develop over time, we will see that lower level, through its efficiencies, create an emergent standard for how these assets work and how they evolve and go forward in the industry.
Question: What do platforms and exchanges gain from integrating with the Provenance Blockchain? 26:56 Dominic Hobson: I’ll come back to that question of the capabilities of the platform in a minute because I think it’s very interesting, particularly in the context of what Anthony was saying and you were saying about smart contracts. But before I do there is another area we are working on quite closely at the moment, which is trying to understand the digital asset exchange space. And basic questions like, `What is an exchange?’ are coming up because the term is being used quite widely by organisations which don’t really correspond to what we think of as an exchange which is a capital raising or secondary market trading place. Now I see that you are working with organisations which we will probably classify as exchanges. One of them is quite well known to us, Oasis Pro, for example, but you’re working with Figure Markets, with HAMSA, with Texture Capital. Now these are integrating with the Provenance Blockchain. What’s their thinking and what’s your thinking about the contribution that’s going to make to the growth and evolution of the tokenised markets?
27:58 Ira Miller: I’ll start with some of the technology side and then hand it back to Anthony. These companies that you’re talking about that are integrating with Provenance, what they’re finding is that the protocol has settlement features which really streamline this process. Anthony had mentioned it early on, moving from a trilateral to a bilateral settlement. When you’re talking about these different exchanges of these assets, these transactions, the features that we’re putting in the protocol really streamline and reduce that risk. And so these companies are able to leverage that. A concrete example would be if I have an asset and you are wishing to purchase it, that process on our blockchain, because of the way that the protocol can handle the settlement, I can present something to you and it can create a hold on that asset within my wallet while I still retain control and benefit. So if that asset was, for example, something that was yield bearing or something that was receiving dividends while we’re in negotiation or during the process of arriving at this settlement, I can still be receiving the benefit for it. But while we’re in discussion, there’s still a hold on it. So I can’t, you know, double pledge this thing. On your side, you can actually review the terms of that and maybe offer payment when we settle – it’s directly you and I facing off. There’s no third party that’s holding these assets. The protocol itself is protecting that exchange. And so those settlement features are really important for an agency or a group like Oasis Pro that’s building on it and handling these assets. And I think that’s going to be something that we see more of, because it is just an efficiency, and it’s an efficiency that wouldn’t be possible without blockchain technology.
29:55 Dominic Hobson: Anthony, did you want to put a commercial spin on that efficiency gain from working with these various markets? These ….
30:01 Anthony Moro: Yeah. I mean, the protocol that Ira built, again, is purpose built for financial services. It’s … It makes us … And having … I spent my career growing up at BNY Mellon, and I was there for 22 years. I’ve sat in more risk committee meetings than you would care to ever sit in your life. And I can tell you that decisions are not made at the C suite. They’re not made by the tokenisation group. They’re made by the risk committees. Because, you know, reputational risk or counterparty risk or cyber risk, I promise you will derail any project in five minutes and it will never come back to life. So we try to get in front of that and we try to say safety is our first priority. We sound like we’re building automobiles or flying aeroplanes, but safety is our first priority. And I’ll give you a couple of examples. So when I mentioned the hold module and the exchange module, you transact on just about any other blockchain, you put your bid or your ask into a smart contract that you do not own. When you execute, it’s executed in yet another smart contract, which you do not own. If you get a dividend or interest, as I was mentioning, it goes technically into those smart contracts. If the owner of that smart contract goes out of business while he or she has your assets, you’re going to have to unwind that in bankruptcy court. Very few people in crypto land are thinking about that. I would also add that we think of our network as a good control location. And that’s a very nerdy Wall Street phrase, but it’s a custody bank or a broker dealer, someone that entrusts that you have control of your assets. BNY Mellon and State Street and Northern Trust here in the US are the large custodian banks. And they control trillions upon trillions of dollars of assets in their systems. And they are bulletproof systems. They’re always up, they’re never down. And if one of those three banks went down for five hours during a trading day, the stock price gets cut in half because they’re not fulfilling their mission. Blockchains? The larger public layer 1 blockchains go down seemingly all the time, and their token prices don’t ever take a hit. Sometimes they even go up, which just tells me that – and I’m not throwing shade – it just tells me that no one is thinking of them as a good control location for financial services. So when the market is in turmoil and you want to get largely out of your asset markets in a freefall, I want to sell, sell, sell, but my network’s down for five hours, and when the network wakes up, my price is down 20 per cent. What’s the recourse in a public blockchain scenario? There is no recourse. In the Wall Street world, if BNY Mellon’s down for five hours, and you can’t get your assets out, I can assure you there’ll be a lawsuit. So we try to think of ourselves as a good control location where we’re always up, we’re never down. Our network is as protected as a public layer 1 can be. And Ira can expand on that if you need him to. But being built for financial services means exactly that. You’re not going to see the Metaverse on Provenance. You’re not going to see the latest meme coin trend on Provenance. You’re not going to see gaming on Provenance. Because all that are great use cases for other blockchains, but they congest the network. They interject risks that our users are not willing to take. There does need to be a very professional, financial service oriented blockchain, or blockchains, that I think will come to dominate the space.
Question: What are the benefits and risks of building functionality into the Provenance protocol as opposed to relying on smart contacts? 33:34 Dominic Hobson: Now, there’s a risk that I’m going to stray far outside my comfort zone here, but I think from everything you’ve been saying it’s quite important to understand the technical aspects of the Provenance Blockchain. So if I start by saying, as you’ve said more than once, this is purpose built for financial services. As I think you’ve said, one of the risks you’ve identified in alternative blockchain solutions is this smart contract. What if the smart contract falls over when it’s actually holding your assets? Good luck litigating that. If I understood your model correctly, you’re looking to dispense with smart contracts. You’re looking to build the specialist financial services capabilities directly into the platform – the settlement, the asset servicing and so on. So you’re not using smart contracts, you’re actually building this stuff into the protocol. I wonder, is that a risky approach in the sense that the imagination of potential issuers is potentially boundless? People are going to come up with all sorts of assets and asset features which are really difficult to predict. So how do you, if I’ve understood your model correctly, and I’m assuming it kind of reduces the flexibility a bit, is there a risk that you won’t be able to meet, satisfy the imagination of all these investment bankers and other entrepreneurs that are going to be coming up with all sorts of clever ways of creating digital assets because you’re sceptical about the risks associated with smart contracts? That was a question for Ira I guess.
35:17 Ira Miller: I think there’s actually, there’s nuance here in complexity. Provenance does support smart contracts and we do use them and they get used in specific areas. But when you’re trying to decide, well, when does a smart contract make sense and when should something be done in the protocol, you parse that statement very carefully, like Anthony mentioned, based on risk and who is responsible and when are you introducing a third party. If you’re not introducing a third party, if you’re talking about maybe some special water flow or waterfall calculations, and it’s all owned by the entity that you’re transacting with, you know, in those cases, it might make sense to use a smart contract if you’re, as you alluded to, if you’re talking about sort of emerging functionality or something that’s new and cutting edge, and it may or may not be the direction that the overall protocol wants to go, or maybe it doesn’t know if it wants to go there yet. Smart contract is great because it allows you to rapidly prototype and prove out that something is a legitimate direction for the protocol. And so from an engineering standpoint, we like to leverage those smart contract capabilities as sort of that leading front in terms of, you know, we might implement or prototype or test out some sort of new capability using a smart contract, and then if it proves effective or we fully understand the problem, we’ll fold that functionality back into the protocol when it makes sense. And so I think, you know, in both cases, in terms of being able to explore rapidly directions things might go, as well as allowing, you know, different entities on the blockchain to enhance their capabilities through smart contracts, yes, we would support those things. But we believe firmly that certain aspects that are common, that are well understood in terms of different parts of tokenisation and settlement and things, since those are common rails, they make sense to have in the protocol to be de-risked and to be optimised. You know, I think one of the things that is a constant challenge for an engineer who’s working in a smart contract is that they are very limited. You know, there is not a lot of data processing that they can do. They, you know, they’re less efficient than something done in a protocol. And so you have to be very strategic and very careful about how much you do in one, or you’ll run out of resources to execute that transaction and your transactions will fail. So I think that, you know, it is complicated, but there are a couple of paths forward there from a technology perspective.
Question: Is the Provenance term “marker” just another word for “token”? 38:11 Dominic Hobson: Just sort of on a narrow point, this term “marker,” which I see you use, is that just a term you use for those functionalities you’re either building into the protocol, or which maybe began life as a smart contract and are later built into the protocol when they’ve sort of proved themselves? Or does “marker” mean something completely different? Where did you get this idea from anyway? What does the term mean?
38:38 Ira Miller: So “marker” was a term that I chose back when I was trying to develop something that basically represented the management and organisation structure for a token. The reason why we didn’t just use “token” is because a token has a well-defined meaning of these innumerable coins, basically, or something that you’d see in another network. But what it doesn’t encompass necessarily is a specific set of permissions for who’s allowed to mint and burn and transfer authority and things along those natures. So we needed a new term that described, what is that thing that encompasses that organisation? And so a marker makes a lot of sense. It’s something like you might use in golf to put down on the ground, to say, this is a point, you know, that I’m going to be working from. It’s related to token, but it’s not the same thing, so you don’t end up with that kind of overload. On our network, a marker has a lot of capabilities, and it’s all centred around management of that token. You can do things like mint or burn or have a fixed forever unit of token supply. You can define in a very precise way the transfer authority that’s associated with the token. So we can define something that the users can hold and own, and they own it completely. They have self-custody over that asset, and yet they can’t necessarily transfer it to another entity without an advanced set of token authority that goes along with it. So I think there’s a lot to it, but that’s what that term is for.
Question: Does building functionality into the protocol make the Provenance blockchain less flexible? 40:31 Dominic Hobson: Understood. Now, this may be a stupid question, but I’m going to ask it anyway. One of the reasons I got very excited when I first read about the Provenance Blockchain was that it was public, that it was open. So it fitted with my personal vision here of lots of developers coming to an infrastructure and writing code which gradually adds to the functionality and richness of the infrastructure, enables newcomers to compose those bits of open source code into new products. And this is how the token markets are going to grow, because you’ve got lots of people working in a standardised way, creating bits and pieces, the Lego blocks, as they say, which can be built into entirely new products and services. My question is this, if you are building a lot of stuff at the protocol level, is that bad news for those entrepreneurial developers who come along, or is it good news for them? In other words, does your model encourage contributions to the development of the blockchain by these independent developers, or does it inhibit it?
41:38 Ira Miller: I would say that it clarifies the way that that participation would work, perhaps. So, stepping back, if you look at what Provenance is and how it works, there’s a lot of Open-Source technology that’s involved. We’re based on the original Tendermint, now called Comet, consensus algorithm, for routing blocks, in structuring blocks. We’re also using the Cosmos SDK, which is another very large Open-Source effort that standardises the way a lot of pieces work. And then when you get … And so both of those efforts have numerous engineers all over the world, and they’re kind of a foundation of a lot of different products and a lot of different blockchains out there. When you get to actually the Provenance code, it’s really that specialisation, that narrow refinement for those financial services use cases. And so it, by definition, that specialisation and that refinement is a smaller community, but it is still Open-Source. It’s still built in the open on GitHub. And any of these other engineers that wanted to participate can choose which level of participation. Are they more of a generalist and they’re working in the Tendermint consensus layer, or are they a little bit more focused on the blockchain concepts and they’re working in the Cosmos SDK layer, or maybe they’re participating and making contributions, for example, to, like, the bank or accounting modules, which are used by a lot of different blockchains? There’s people that that’s the interest that they have. When they get down to the very precise refinements we’re talking about for financial institutions, they might be contributing or auditing the Provenance source code directly, which is layered on top of all those things. And so I think there are a lot of different layers, and it just kind of depends on what type of an engineer and what type of focus you’re interested in.
Question: The Provenance Blockchain is built on Cosmos SDK. Why pick Cosmos SDK? 43:40 Dominic Hobson: You mentioned Cosmos. What was the logic of choosing Cosmos? Why pick Cosmos?
43:47 Ira Miller: So that was a really interesting time. This is back in about 2020 within Figure, when I was working with the blockchain there. Figure actually started with Hyperledger Fabric. And you have to understand the context. Figure being a start-up, being able to rapidly innovate and go in different directions when it makes sense. What we were finding when we started with Hyperledger Fabric is it was, there was a lot of friction in the operational space. It was really difficult to get … As a private permissioned network it was really difficult to scale the participants, to get access to different technology and pull in the larger ecosystem. At that time, facing these frictions, I looked around and I said, `Okay, well, how can we benefit from the larger Open-Source ecosystem? How can we benefit from the ways that we’re seeing this stuff evolve? Sort of the work hardening that the refinement of these tools that we’re seeing with a lot of different large developer communities, but still retain that ability to precisely focus on the needs that, you know, the business use cases that Figure was driving? And so as part of that wide canvas of a lot of different protocols, a lot of different technology that was out there, the Cosmos SDK emerged because of their original ethos, which was the `Internet of Blockchains.’ They recognised early on that supporting interoperability, the ability for different blockchains to communicate safely and reliably with each other, just like the nodes on the Internet communicate with each other, was going to be really important. My background in sort of research and distributed systems and things, I recognised that the kind of, some of the tenets that they had there were going to be really important. I also was impressed with sort of the high quality of their initial engineering, you know, the type of people working on the project and their commitment to excellence was also really high. And so that was a reason we selected it at the time. We did a comparison, we looked at the operational complexity. It had massive benefits there. We thought the community was strong. And so it was a really good move to basically say, `Hey, I’m sorry, the work that we’ve done over the last two years, we’ve learned a lot. We need to go this other direction for various reasons.’ And we ultimately pivoted into that direction for a public layer 1 built on the Cosmos SDK.
Question: The Provenance Blockchain is a Proof of Stake blockchain. How does it maintain a sufficient number of validators to execute transactions all the time? 46:28 Dominic Hobson: You mentioned the consensus algorithm you’ve chosen as well. Now, the problem is the Provenance blockchain is a Proof of Stake blockchain. And one of the challenges that sets for you is you have to keep enough validators excited to process all the transactions which you’re going to be hosting. I mean, is that a challenge for you? And if so, how do you keep the number of validators sufficient to process what needs to be processed?
46:54 Ira Miller: So it is a significant challenge. It’s also a significant challenge based on the economic model that Provenance uses. So one of the things that we were strongly trying to avoid was sort of the hype based economy that you see with a lot of ICOs [Initial Coin Offerings], where you end up with a kind of a very inflationary token that has a lot of speculation and a lot of retail focus. We wanted something that was based on fundamentals. And so, as part of that, the utility token that powers the staking and sort of the gas transactions of the network does not use inflation, which means that the fee revenue that validators can earn is based on the use of the network. Literally, the utility of the network pays for the network. And so that does put a kind of an upper bound on things. You don’t have that easy lever to pull where you’re basically devaluing stake that’s not participating and transferring that value to the validators. You’re only using these fees. I guess from that standpoint, the size of the validator network and the size of that community is directly proportional to how much the network is used. And so if we use the network more and we pay more fees, then it supports more validators. And so we’ve found a balance point based on the current workloads and the current utilisation of the network with our current set of validators. And I think, you know, as these new applications grow, both from the Provenance and the future of ProvLabs [a blockchain development firm that creates infrastructure software as a service (SaaS) products for the Provenance Blockchain.], as well as Figure Markets and some of these things. As those grow, the validator set will also grow to reflect that.
Question: What is a layer zero? 48:41 Dominic Hobson: Now, I thought I’d seen it all in blockchain, but as I was looking through your documentation, I came across a new term, which is, and forgive me if I should have named this, but a layer zero, as well as a layer one and a layer two. Can you explain what a layer zero is?
48:57 Ira Miller: Well, I mean, layer zero is actually, there’s a company named Layer Zero. Layer one is what we think of ourselves as the Provenance blockchain itself. I don’t know if you’d want to expand on that further. Anthony, you want to talk about that?
49:14 Anthony Moro: I think some people might consider Cosmos as a layer zero. It’s a layer upon which you build. Avalanche I’ve also heard of being thought of as a layer zero. And then you build the c chain or the other chains on top of it as layer ones. I mean, none of these … What I find infuriating about the crypto industry is the definitions are fast and loose. An exchange is not an exchange. A symbol is not a symbol. A layer zero, a layer one is ambiguous, for sure. Yeah.
Question: Are “zones” the same thing as “nodes” on the Provenance Blockchain and, if so, do the users operate them or do you do it for them? 49:46 Dominic Hobson: Talking of terms used, is your term “zones,” is that the same thing as a “node,” what we used to call a node? And if I’m right about that, are your users, your owners operating them, or do you have to do it for them?
50:01 Ira Miller: So a zone, actually, it comes out of the Cosmos SDK-based chain ecosystem. So when they were proving their interoperability between blockchains, they had this contest called `map of zones.’ And it was really these different blockchains. Each blockchain was a zone in that in that model. We’ve leveraged that a little bit further, in a little bit different direction within Provenance, because we have our mainnet, which is sort of the standard public layer one. Technically, that’s a zone also in kind of the Cosmos SDK world parlance. But we also have this concept that we will offer a private zone, which is something that makes sense in financial services. And literally, it is an instance of the Provenance Blockchain protocol, but operated entirely by an entity. Typically that … I mean, it could be used publicly, but generally that’s going to be a full private, intranet type application where that entity may want to ledger a bunch of extra information that they wouldn’t want to disclose publicly. So they might ledger like a full cap[italisation] table or something privately and then selectively participate in the public layer one. It also provides a kind of an on-ramp for companies that wish to get started, but they don’t necessarily have the regulatory clarity, or maybe they’ve got regulatory restrictions that prevent them from working with a public layer one, but they want to be positioned well for that, because the future definitely seems to be towards a public layer one. So they can build a private zone using the exact same tools and things on the private network, and then seamlessly transition to our public mainnet layer one.
51:52 Anthony Moro: And J.P. Morgan used that exact set-up in a private zone for their Project Guardian. So they use their ODA [Onyx Digital Assets], which is a private network, a private instance of Avalanche, and a private instance of Provenance. And that’s where the interoperability went with the bridges.
Question: Why does the Provenance Blockchain need a native utility token (HASH)? 52:11 Dominic Hobson: One last technical question. You’ve issued a native utility token called HASH. What do you need that for?
52:20 Ira Miller: So the HASH token literally is our staking token, it’s the utility token that the network uses. It’s important because you need something like this to have a little bit of independence, but still retain kind of a common way to pay for all of the transactions. So, case in point, if you’re doing settlement, you might be paying fees on that settlement. You would pay those fees in our HASH token, which allows kind of a common fee payment for gas for any of these assessed value of settlement. It also is the same thing that you would use to stake in the network. It represents your interest. It’s something that’s used as part of a proof of stake network for basically putting the weight and the value behind the votes for validators in the network, which that, you know, that basically is meaning that the more of a stake you have in the network, the more weight that you carry in the votes for blocks and for transactions and for governance. Yeah, that’s the HASH token.
Commercial
53:30 Dominic Hobson: Can we talk a bit now about the piece which will, I think, interest potential issuers and investors, which is the tokenisation itself, the size and progress you’re making there. The figures I’ve seen suggest that blockchain, the Provenance Blockchain, has around US$10 billion in total value locked of these real world financial assets, and more than US$30 billion in supported transactions, by which I mean lending, private equity. Can you explain to us a bit more about those figures, just to give people some colour about what they actually mean?
54:08 Anthony Moro: Sure. So we believe we’re the largest public layer 1 in the world, as measured by real world assets. And those real-world assets are largely driven by Figure Technologies and their issuance of home equity lines of credit [Helocs] and mortgages on chain. That business is by far the largest digitally native originator of financial assets on blockchain – any blockchain anywhere. And they’re adding over a billion dollars a quarter currently. And a billion dollars, over a billion dollars, is roughly [comparable] in size to the entire tokenised treasury market. That gets a lot of press, and we’re doing that every quarter. So we’re the biggest, we’re growing the fastest as well, which is great, and have the construct to tackle other markets. Other assets on Provenance are private company equity, including Figure’s own private company equity. Figures is not listed on the New York Stock Exchange but employees have been able to trade to non-employees on the figure ATS [Alternative Trading System] alternative trading system here in the US. Obviously, it’s a security and it needs to trade on an exchange or an ATS. And then after that, it’s a few hundred million dollars of private company funds like Apollo and Hamilton Lane and the others that you mentioned. We’re putting on new asset classes every day. Just last week, we announced a smaller insurance company called Infineo [had] minted almost US$10 million of whole life insurance policies. And their intention is to follow the Figure playbook and to be able to offer loans on the back of a life insurance policy in the same way that you take out a loan on the back of your mortgage. And we think that’s a US$3 trillion business that can be disrupted. It’s very inefficient, capital inefficient, time inefficient. Today, Infineo is making that process a lot more efficient by, again, using a shared ledger, using all the encrypted object store data provisions for PII [Professional Indemnity Insurance] and for efficiency. And then as you go through the process of issuing, warehousing and securitising, you just really follow the Figure playbook. Again, it’s a private credit type asset, so we have the solution for that. You have to tweak at the margins, but the infrastructure is roughly the same for all that. Then there’s lots of other interesting use cases as well coming on that we think are going to be wonderful. And among them are receivables. If you can prove that a receivable is valid to the payable, you no longer have, you know, the factoring rates, which can approach 40 per cent because of the risk involved in factoring – you’re not sure if the borrower has sold the factor two or three times. But if you can prove that the creditor is the creditor, you can reduce rates materially and make things more efficient. So imagine if you’re Amazon or someone like that. You can bring efficiency into your supply chain, which is really interesting. And then the other, I think the first trillion-dollar asset class that we’re going to see in blockchain land is going to be a yielding Stablecoin. It’s the thing that I’m personally most excited about, [and] I think will scale. In order to make everything else work in the space, we need to move away from the existing Stablecoin options, which have been pioneers for sure, but not the type of things that will scale globally. And the reason for that is in their current construct. Are they securities? Are they not securities? That hasn’t been clear, certainly here in the US, but at the end of the day you’re taking private company USDC [Circle, issuers of the USDC Stablecoin] or private company USDT [Tether, issuer of the Tether Stablecoin], Tether or Circle, risk when you’re owning the Stablecoin that they back. And again, going back to risk, from a risk perspective, I don’t want to take Circle risk when I own a debt of Circle. I want something more sure. Which is why the tokenised treasuries have come up and done well. It’s a bit more structured from that perspective, and it certainly yields, which is great. And the Stablecoins don’t yield. But generally to create and redeem, as a construct, it’s generally not tradeable peer-to-peer. Generally, I can’t use them for settlement, so they have, while they’re a big step in the right direction, they’re not the solution. I think the solution is [to] imagine a PayPal type Web 2.0 type interface that held a SEC [Securities and Exchange Commission] registered yielding Stablecoin. So I have a dollar coin that yields 5 per cent. It’s backed by the 10Ks [Annual financial reports to the SEC] and 10Qs [quarterly financial reports to the SEC] that I have to file with the SEC. Full transparency on the money market fund securities that it would own. Proper Wall Street trustees and custodians in the mix. Then you start thinking big picture. Again, [it’s] good for the US dollar in that it can scale globally. And now you start to be a little bit afraid for the banks, because why do you need a checking account and a savings account? And that’s just here in the US. Now imagine if you have an emerging market currency in a hyperinflationary environment. Now I can have a US dollar bank account yielding 5 per cent, I’m just going to put all my money in that. Crypto enables massive infrastructural change throughout the global financial services system. I’m not saying it’s a bit like AI [Artificial Intelligence] that needs to be controlled, because I think AI needs to be controlled. Crypto enables entirely new use cases that we have to be careful with, and the regulators move slower than technology in all cases, as they should, but it’s massively disruptible and it can move really fast. So we got to be very careful in how we do it. And we, again, safety, safety, safety. We’re speaking to the regulators as much as possible, trying to tell everyone what the users of the Provenance [Block]chain are doing and being part of the solution, not part of the problem, is always our mantra.
Question: Where does the Provenance Blockchain stand on the pros and cons of “native” over “asset backed” or “digital twin” forms of tokenisation? 59:55: Dominic Hobson: Well, what you’ve just referred to is a Stablecoin functioning like a money market fund. It takes us back to the 1970s, when the banks became very worked up about the early money market funds obviously taking away their deposits. I can see that this opens up a whole new level of anxiety for Gary Gensler [Chairman of the Securities and Exchange Commission, or SEC], what you described there. Anyway, that’s an observation. You may want to say more about it, but I just put that out there. I’d like, in fact, to put whatever Gary Gensler thinks is a security and what is not a security, without getting too, hopefully, too theological. I’m interested to get your view on this debate, which is gathering steam about the distinction between a native digital asset and what I call an asset backed digital asset that might also be called a digital twin. You were referring a minute ago to tokenised treasuries, for example. So what I mean by a native asset is something that doesn’t exist except on the blockchain. It’s a pure data or digital object. It doesn’t exist outside the blockchain. Whereas an asset backed, or a digital twin, asset does continue to have a life in the analogue world out there. Where do you stand on the pros and cons of native versus asset backed or digital twin tokenisation?
01:01:18 Anthony Moro: So, great question, existential question that we see in the industry right now. And Mike Cagney always talks about, there is an IBM commercial here in the US, the supply chain tokenised strawberries. So the strawberries picked in the organic field, that’s put on the blockchain and it moves through the whole system and you go to Whole Foods, and then at the end of the story, the mother’s feeding the child an organic strawberry because you could track the journey of the strawberry through the blockchain.
01:01:44 Dominic Hobson: The provenance of the strawberry.
01:01:46 Anthony Moro: The provenance of the strawberry. But how do you know at any point during the supply chain, someone didn’t swap out a GM [Genetically Modified] strawberry with an organic strawberry or a raspberry with a strawberry, or a piece of coal with a strawberry? There’s just no way to prove that a real-world asset is the real world asset when you tokenise it and stays that way forever. Same thing with a piece of real estate. You can tokenise a building, but is someone going to go there every day and knock on the walls and make sure the building is still there, it hasn’t been knocked down by floods or earthquakes or whatever? Big step back. I think all the world’s assets, like Larry Fink, will be put on blockchain because blockchain, at its core, just replaces the cap[italisation] table. Really, at its core, it doesn’t do much more than that. And everything needs a cap table. And the blockchain cap table is just more efficient. Now, from there, if that’s a one, on a scale of one to ten, great. It can be one more efficient. It can be a little bit more efficient. But if you want to hit the ten, you need digitally native assets. If you want to be on the right-hand scale of much more efficient assets, it has to be digitally native. Because if it’s not digitally native, you’re always going to run into the problem, `Okay, I’ve got a cap table, but I don’t have anything. I still don’t know the provenance of the strawberry,’ where if it’s a digitally native asset, digitally native loan, digitally native receivable, it only exists on blockchain. I can perfect my ownership in it, meaning I know I own it. I can file in the US, [where] we have the uniform commercial code. I can ensure that in case of bankruptcy of another party, that I actually own my asset. I can ensure that my payment flow is made. Digitally native is much better than digital twin. But I’m not going to say digital twins are not worth it. I think they will be put on … Their cap tables will be put on blockchain. But the payment flows and everything else like that is going to be a bit more of a stretch. So if that’s a light touch use case, a heavy touch use case is the digitally native. Ira, you might have a thought on that.
01:03:48 Ira Miller: I mean, kind of stepping back and objectively looking at it, you should only use a blockchain if it’s cost effective, if it’s giving you something that is worth the cost. And I think that when you talk about something, digital twin is a great term because you’re like, `Okay, well, that means I have two of something and it’s two of the same thing. And so now I’m paying cost twice.’ But, you know, a blockchain also adds efficiency. So basically, on the whole, in my mind, the only things that make sense is when the additional cost of using a blockchain is offset entirely and then some by the cost savings. And so if you can figure out a way to add an additional process on your existing asset, you know, basically twin it and get cost savings, then it makes sense. If it’s just adding cost to add cost, it just doesn’t make sense, right? Like somebody is going to go do it more efficiently and it won’t, you know, cancel out.
01:04:47 Anthony Moro: Yeah. Tokenising an asset – we see this all the time- doesn’t make it more liquid. Tokenising an asset doesn’t make it a more attractive investment opportunity as well. We see those theses play out all the time. Digital twins add expense for sure. That being said, I think all the cap tables will eventually move to blockchain at some point because it is going to be more efficient, but at the low end of the scale, it’s just going to be less of a value proposition.
Question: What is different about the Provenance Blockchain custody offering? 01:05:14 Dominic Hobson: Can I ask you something about … Something simpler to do with your tokenisation capabilities? Which is that the problem is blockchain provides custody, it provides settlement. I’d like to tease out a little bit what’s different about the way you do it. And I’m going to read to you how the custody function is described on your website. It says, “full featured custody within your zone, protected by a firewall that defines permitted assets, rate limits and other security requirements.” I’m interested to know what that means. Perhaps deal with that first and then we can talk about settlement. What’s different about your custody offering?
01:05:59 Anthony Moro: I was looking for the webpage.
01:06:01 Ira Miller: I’m not looking for the webpage. I was going to see. Do you want to take a first crack at it, Anthony and I’ll follow up?
01:06:07 Anthony Moro: That’s for you, man.
01:06:10 Ira Miller: I would say what’s different about our custody then would be just our focus on how we avoid the use of some of these third-party participants in settlement, right? I think in the custody aspect we’ve got … Starting with the settlement where we don’t use a smart contract, which is a third party, continuing through some of the capabilities that we see with our, what we call a group account, where you can actually have as an entity, you can have an address where you choose, like maybe another custodian or you choose to manage your keys or offline keys, those kinds of things. I think those pieces are really unique in terms of how those assets are controlled.
Technical
Question: Is “deterministic finality” on the Provenance Blockchain the same thing as “atomic settlement” and does it achieve settlement finality? 01:06:59 Dominic Hobson: Since you have brought up settlement, Ira, the term I see on your website again is “deterministic finality.” I’m just wondering if that is different from settlement finality. Here in Europe, we have endless theological debates about whether atomic settlement achieves settlement finality because settlement finality is a legal term. It’s actually defined in a Settlement Finality Directive of the European Union. What do you mean by “deterministic finality”? Is that just your term for atomic [settlement] or does it mean something different?
01:07:36 Ira Miller: So it’s actually, in this case, at least from my perspective, it’s very specific to a technical concept related to blockchains. So there’s two main types of finality in a blockchain. You have deterministic and you have probabilistic finality. One of the things that’s really important about the way that Provenance works is it basically goes all in on being deterministic and having safe and reliable ledgering of transactions. And by that I mean that it’s impossible for our network to fork. It’s impossible for there not [to] be consensus when a transaction is included in a block. And if a transaction is in a block, it has achieved full consensus and it has achieved deterministic execution. So from a technical perspective, it’s a really important bar to meet. It means that as soon as a block is cut, all the transactions in it are completely certified and valid, which, given our block time, between four and five seconds, each of those transactions at that point can be trusted completely throughout the network. Whereas if you were a network, say, like Ethereum, where you have the possibility to fork, or Bitcoin is kind of like one of the standard originals, you need to wait ten-15 minutes with many subsequent blocks to be cut to ensure with some degree of increasing confidence that that transaction was properly executed and can’t be rolled back.
Question: What’s the long-term solution to the interoperability problem? 01:09:17 Dominic Hobson: There’s a couple of final questions for you. One which I must ask – we touched on this earlier – [is] interoperability between blockchain protocols. When you refer to interoperability in the long-term vision of where this industry is going to go, does it mean interoperability between all blockchain protocols that might exist? I know Anthony referred earlier to an oligopoly of these things, but in the short-term, medium-term, we’re going to have lots of these things. Are you talking purely about interoperability between blockchain protocols, or are you – having talked about digital twins, so assets are going to continue to exist in their analogue form – so there’s got to be interoperability between the blockchains and traditional financial markets as well. And what’s your view of how this interoperability is going to work? So how extensive is it? Does it cover traditional as well as blockchain digital assets? And how’s it going to work? Do we need standards? Is it just a question of writing some new pieces of protocol? What’s the solution in the end to the interoperability problem?
01:10:22 Ira Miller: So I think that the solution is still something that’s coming. When we talk about interoperability between blockchains, we can start at the ground floor and say, `Can these two things talk to each other?’ It’s sort of like, when do you have an Internet of Blockchains? Well, first step is you need to run the wires and literally get these things connected. And then as that base layer is achieved, you can layer more things on top of it. I think as a larger industry, there’s a lot of people who focused on getting the initial connectivity there. And I think there’s a lot of different solutions out there, taking that from a lot of different directions. On top of that, the easiest thing to solve was to transfer token representation, fungible or non-fungible token representation, between chains. And so we’ve seen that relatively kind of mature as something. What I think is still coming, what I think is going to be a lot harder to solve, are the more complex assets that you’ll see in the financial services world. So it’s not enough to just move a token. Some tokens have, as I alluded to before, kind of a transfer agent involved that approves transfers, that maybe sets concentration limits on ownership, that vets different clients, that it’s not just enough to move the representation. You have these rules to go with it. And I think that’s something that we’re still seeing evolve. It hasn’t necessarily established exactly the best way to do it. We’ve seen some implementations where you might have a contract representation on multiple chains. And the actual act of moving the asset doesn’t really move the asset, it moves a request to move the asset. And that kind of balances out between. So that’s sort of emerging. But along that same line, even more complicated, and will take even longer to represent, is when you’re talking about a digital asset that’s a little bit more complicated. So something like a Heloc [Home Equity Line of Credit] that is on, you’ll see on, the Provenance Blockchain, it’s not enough to have just the token that represents the Heloc. You have potentially the whole asset perfection piece that’s behind it. So you’ve got liens and you’ve got documentation, and you’ve got a whole bunch of data which lives off-chain and some that lives on-chain. And so for something like that to move between blockchains is going to be orders of magnitude more difficult. And I think that the industry is still coming to terms with exactly what that means. How much of the asset needs to move? Can it just live in its kind of originating inception point and then some sort of a pseudo representation be exported? The ideas and the technology is being explored. Like we talked about early on Project Guardian, one of the things they wanted to show was, `Hey, this asset lives on this blockchain. So we’ll talk to that blockchain to do a common operation, but we’re not going to move that asset out of that chain somewhere else. We’ll just reach out and do something with it in that network.’ And so in that case, interoperability is a little bit easier to achieve because it’s just moving an intention, it’s not moving the asset. And, yeah, I think that as the industry evolves, we’ll find that balance point between moving things seamlessly, between moving intentions, moving partial representations, we’ll find the answer, but it’ll take some time to see what works and what works well.
Commercial
Question: Does the Provenance Blockchain see its personality as consistent with “public” blockchains such as the Canton Network or the Regulated Liability Network (RLN) or the “unified ledger” proposed by the Bank for International Settlements or the “X-C” platform proposed by the IMF? 01:14:04 Dominic Hobson: Okay, this is my final question for you both, but it’s in some ways the one which I find most interesting, and it’s about the character of the Provenance Blockchain. As I mentioned earlier, I got excited when I first read about what you were doing because of this word “public.” And from what you’ve said this afternoon, I understand that Provenance is this public, Open-Source software, general purpose blockchain. Any old developer can come along – actually I assume there’s some constraints on that, having said any old – but any developer can come along and they can build apps to service issuers, service investors, service … Create things which none of us would think up on our own. And another layer of what’s public is that, I don’t know, two or three years ago, institutional money, it was said, would never come to the blockchain unless it was private, unless it was permissioned. And that was the sort of default model. We now see quite clearly that institutional money is getting more and more comfortable with so-called public blockchain, simply because they’ve woken up to the idea that actually the Internet is public but private at the same time. Thus public and private are not actually binary alternatives. You can go to anybody’s website, but you don’t get access to everything within that website. So there is that. And we also see, I suppose, what I might call public initiatives starting to develop. And I’m thinking here of particularly of the Regulated Liability Network (RLN). I’m thinking here of the idea put forward by the Bank for International Settlements of a common platform, a single programmable platform they call it. We’ve seen the IMF [International Monetary Fund] talk about an X-C platform and you see even private initiatives like the Canton Network. There is a kind of movement here in favour of public, but with corners of it which will be private. And if I’ve understood your model correctly, those zones you talk about are actually the private corners. They can be as private as a user wants to be. But my big question is this. How would you characterise the Provenance Blockchain on that spectrum of open, public versus private, permissioned? And I suppose, do you see yourselves as a private infrastructure that is going one day to be part of that oligopoly that Anthony mentioned, which is openly accessible by all sorts of creative entrepreneurs to build services which we can’t even dream of at this point? Where do you fit on that spectrum?
01:16:49 Anthony Moro: I would just say, again, we built this blockchain for the current and future environment of regulated financial services firms. I mentioned the Project Guardian with J.P. Morgan that was done in a private and permissioned zone using exactly the same protocol as [our] mainnet. But J.P. Morgan controlled all aspects of [the] tokenomics and their validator set and governance and permissioning. And the beauty of what they built is it’s completely interoperable with mainnet at a point in time of their choosing. So if you go out and you spend a whole bunch of money building a bunch of Dapps [Decentralised applications] and ensuring that the network is perfect for your need, if you’re in a completely private and permissioned network owned by the one of the big private permissioned DLTs [Distributed Ledger Technologies], generally you’re paying them a lot of money to build it for you. And then when you decide in the future to move to a public mainnet, you really have to stop what you’re doing and rebuild in the public protocol. Our construct is you can build all that in the private and permissioned zone, and then when it’s time to move over to public mainnet, you can use the IBC [The Inter-Blockchain Communication Protocol] transfer and move the entire project over into public mainnet. So you future proof your builds on Provenance. And Ira designed it exactly in this way. And I think only in Cosmos is it possible to build in exactly this way. Maybe Avalanche as well, I’m not 100 per cent sure. But it’s a massive selling point for regulated financial firms whose regulators require them today to build in a public and permissioned zone. So we do some work with the USDF consortium [a forum of ten banks and technology vendors that are building a network to further the adoption and interoperability of a bank-minted tokenised deposit], which is a group of community banks doing tokenised deposits. And in the US, the banking regulators must pre-approve any interaction that a bank has with blockchain. It’s the only technology that they have to pre-approve any bank using, which is a bit strange, but it’s the world we live in. And again, technology moves a lot faster than regulation. I know the banks are trying to push back on that as much as possible and saying, `If we just want to operate in a sandbox, we shouldn’t have to come to you and ask for permission ahead of that. If it doesn’t touch our internal systems, we shouldn’t have to come to you.’ And we just want to do some experimentation because they know things like a yielding Stablecoin are coming. And if the yielding Stablecoin comes before the Regulated Liability Network [RLN] comes up, tokenised deposits come up, strange things could happen. So Ira and the team built the private networks to perform this function. I firmly believe the future is public, but the present, because of regulatory concerns, is a mix.
01:19:41 Dominic Hobson: Well, I think we should probably leave it there, though I would happily continue this conversation for many hours more. It’s been absolutely fascinating. But thank you. Anthony Moro and Ira Miller from the Provenance Blockchain for taking the time to share all your knowledge and experience with the members of Future of Finance. Thank you very much.
01:19:58 Anthony Moro: Thanks for having us.
01:19:59 Ira Miller: Thank you.
