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Block.one aspires to enable the (bank-) killer app

Rob Jesudason outlines his vision for how the company behind blockchain protocol EOS could disrupt finance.

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Cayman Island-domiciled Block.one caught plenty of attention in May when it raised around $4.1 billion through in initial coin offering – a staggering raise for any company, let alone one with no live product.

The company’s principals are based in Hong Kong, including founder Brendan Blumer and president Rob Jesudason.

Jesudason joined a few weeks after the ICO from Commonwealth Bank of Australia, where he had served as CFO. Other senior bankers have since quit their jobs to work at Block.one, including Michael Alexander, former Asia CEO at Jeffries, who now leads the startup’s $1 billion venture arm.

Block.one is using its windfall to develop EOS.io, a blockchain protocol that is meant to elbow aside Ethereum as the industry standard platform for decentralized applications. Its first version went live in June, and there are now about 150 developer projects.

The disrupter
Jesudason sat down recently with DigFin. He says the company will announce details regarding next iterations, product launches and thorny questions around governance of the blockchain (Block.one owns 10% of the EOS tokens that fuel it) early next year – with security applications a major focus.

But two clear messages emerged. First, it is unlikely a fintech such as a challenger bank – with or without blockchain technology – can reshape the industry. Second, technology companies using the power of blockchain in related areas such as identity and security can and will disrupt finance services.

“Technology will be the systemic break, even if it takes many years,” Jesudason said. Standalone challenger banks lack the ecosystem and means of changing user behavior to really shake things up, although they can carve out profitable niches. It will be easier for an Amazon or an Alibaba to usurp financial services, Jesudason says.

Blockchain is the profound technology to restructure financial services

- Rob Jesudason, Block.one

But he expects tech companies will need blockchain to make that happen.

“Blockchain is the profound technology to restructure financial services,” he said. Today’s banking and legal system evolved from, among other things, a need to establish trust. But papers can be forged, internet accounts can be hacked. Blockchain’s immutability and shared record of account changes the equation.

“The internet is insecure because it was never designed to be used at a global scale,” Jesudason said. “The mathematics behind blockchain is explicitly architected with real-world problems in mind.”

Too big to not fail
It is this question of operating at scale that he says is hamstringing banks and insurers. They are inserting middleware in their tech stack, trying to connect decades-old core systems of record to accommodate both longstanding business (think life-insurance contracts) and new, whiz-bang apps. The system works – but at the price of dedicating billions and billions of dollars to maintenance, upkeep and cyber-security.

In such a climate, innovation is difficult. The situation has been worsened by banks’ post-2008 need to cut risk and take fewer chances. People like himself, when he was CFO overseeing CBA’s $1 trillion balance sheet, have been trained to be good at cutting costs. “There’s no risk-takers left in management,” he said.

Finally, banks are simply too big to be easily managed with today’s technology. Governments have saddled them with overwhelming needs around security, know-your-customer rules and anti-money laundering requirements. Therefore, while the technology could be used to disrupt finance, Block.one's business model also includes promoting blockchain as a solution to banks' management challenges.

There's no risk-takers left in [bank] management

- Rob Jesudason, Block.one

Block.one’s developer community is working on areas such as identity and security, which Jesudason believes will evolve into blockchain’s “killer app”, much as email became the must-have function that propelled the internet. And the fact that banks have retreated from serving SMEs or other low-value segments means there are now plenty of use cases for blockchain-based solutions, either by incumbents or challengers.

But Jesudason expects the most powerful use cases won’t be “banking” apps, but applications that enhance security and trust. “The anchor product that can disrupt financial services isn’t a financial-services product,” he said, citing PayPal’s reliance on eBay to be relevant. “We’re working on things that are one step away from financial services, but inevitably lead to finance. People won’t use blockchain to rebuild banks: they’ll use it to rebuild banking.”

What is EOS?
EOS.io, the blockchain protocol developed by Block.one, uses a different consensus mechanism than Bitcoin or Ethereum.

Those earlier protocols are based on proof of work, in which miners and other participants expend “gas”, i.e. electricity, for their computers to calculate the hashes that allow them to be rewarded for creating and validating blocks of information – the immutable accounts records on the blockchain.

EOS uses delegated proof of stake. A pure proof-of-stake protocol gives participants influence based on how many tokens they dedicate to deciding a vote on the network. Ethereum, burdened by the slow processing time and other side effects of PoW, is attempting a transition to a hybrid model using PoS. Otherwise there is no PoS environment now in operation, other than EOS.

PoS in its pure form is criticized for unduly rewarding the rich, and for being as unwieldy as PoW in terms of transaction processing time and scalability. EOS’s solution is termed “designated” PoS because it has designed a system in which the network is clustered around 21 “supernodes” that are chosen by the community to validate trades. This is more efficient than requiring every single transaction be validated by the entire network, so therefore EOS is now processing around 4,000 transactions per second – as opposed to 10-20TPS on Ethereum.

The PoS comes into play after that: every year the software releases 1% more of the outstanding token count (so next year it will release 10 million EOS tokens), which go to the community of nodes and developers that participate; supernodes get more.

Block.one developers are gunning for a protocol that is safe and scalable enough for enterprises, as a more secure alternative to public cloud computing, but decentralized enough to retain the attractive features of a public, open-source ecosystem.

But EOS has its critics, who argue that 21 supernodes make the system more susceptible to collusion. Critics also think Block.one, which owns 10% of the EOS tokens issued during its ICO, has too much power – although so far the company says it has not participated in any votes.

Others simply believe EOS.io is too new to judge – or to serve as a meaningful alternative: it launched in June 2018, whereas Bitcoin has a 10-year track record and, for all its faults, does work. Despite Block.one’s enormous war chest, EOS’s programmers are under pressure to deliver a 2.0 version next year that points to winning mass adoption.

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Block.one aspires to enable the (bank-) killer app