Blockchain Beyond Bitcoin

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The potential benefits of blockchain go beyond the finance industry. While the current hype surrounding blockchain is mainly due to Bitcoin, this technology has the power to transform multiple industries in both private and public sectors.

Blockchains are shared databases, where all records are linked chronologically and secured through cryptography. Blockchains are resistant to data modification, thus providing a secure, transparent system without any intermediaries. Marc Andreessen, the co-creator of the first commercial Web browser, described blockchain as “the distributed trust network that the Internet always needed and never had”. [1]

(Note: One of the best video explanations was found on wired.com, unfortunately it could not be embedded into this wiki. Click here to watch the video [1].

Contents

Definition

What is Blockchain

Don & Alex Tapscott, authors of Blockchain Revolution, defined blockchain as “an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value”. [1] Blockchain is a shared database. It is a ledger, or spreadsheet, which holds data of all transactions within a network. All network members have access to view this database, but to change data on it requires validation. There is no central database to hack as blockchain runs on many computers on the network.

How It Works

Blockchain contains two types of records: transactions and blocks. When a transaction gets verified, a new block is created containing that transaction and all of its history. Each new block is connected to the one before it, creating a chain of blocks. Changes in a past record will break all the blocks after it. This iterative process ensures the data integrity of the blockchain.

Activities within blockchain is end-to-end encrypted. Every transaction is linked to an unique cryptographic signature that is easy to verify, but nearly impossible to falsify. This to due to the fact that blockchain is maintained by a scalable network of computers, often called “nodes”. These nodes coordinate with each other to make updates to the database in a lockstep method. Here is an interactive website demonstrating how a blockchain works. [2]

Blockchain vs. Bitcoin

Blockchain vs. Bitcoin

While sometimes being used interchangeably, Bitcoin and blockchain are not the same. Bitcoin is an application of the blockchain technology. As such, the blockchain that supports Bitcoin was developed specifically for the cryptocurrency. This leads to fundamental differences when comparing Bitcoin with other blockchain applications.

Blockchain members can be limited and selected

Bitcoin is open to the public, which means anyone can join and view all transactions that have happened in the network. A blockchain built for businesses can be made private so that only invited members get access. It can also be permission based, in which participants are only given information that is relevant to them.

Blockchain can exist without tokens/cryptocurrency

This is fundamental in understanding blockchain applications outside of currency and finance. Tangible assets, such as gold and real estate, as well as intangible assets, such as bonds and patents, can be registered on a blockchain for tracking and security purposes.

Anonymity is not by default

One of Bitcoin’s greatest promises is anonymity. However, any Bitcoin veteran would know that Bitcoin is only pseudo-anonymous [1]. Users can take additional actions to guard their privacy; however, anonymity is not built in by default in a blockchain. This means businesses that require precise identity verification can operate on a blockchain and reap solely the security benefits.

Read more: Public and Private Blockchain

Verification of transactions does not always require network consensus

In Bitcoin, for a transaction to be added to the shared ledger, it needs to be verified by miners who use special software to solve math problems and get awarded with a certain number of bitcoins. This is not necessarily the case for other blockchain applications. Each blockchain can decide who gets to verify the transactions [2]. This person or a group of people may or may not be in the network. For instance, a company can use a legal representative to verify their contracts. However, this reduces the security effect of blockchain, as well as the benefit of decentralization.

Why Blockchain is Revolutionary

How the Blockchain is changing money and business

Tapscott, co-author of the book Blockchain Revolution, believes that blockchain can revolutionize the economy [1]. The power of blockchain lies in three features: security, transparency, and decentralization. Most importantly, blockchain technology is changing the structure of information and data on the web.

Security

Since transactions have to be verified and approved by consensus among network members, fraudulent activities are more difficult. In fact, it would take an enormous amount of computing power to hack a blockchain system. As the size of the network and the number of transactions increases, the system becomes more and more secured.

Furthermore, members are given incentives to validate new blocks. For instance, Bitcoin miners are rewarded 50 BTC in block number one and halves every 210,000 blocks [2]. Since the cost-benefit of validating a new block is higher than overwriting an old block, based on game theory, people are more likely to work for the system instead of going against it.

It is worth noting that not all blockchains operate based on consensus. Different blockchains can have different protocols on how transactions are verified. Additionally, blockchain security does not take into consideration coding issues. Therefore, the security of a given blockchain depends on the code written by the developers who created it.

Trust and Transparency

Blockchain can change how people do business by providing trust. Because blockchain is tamper-resistant, participants in the network do not have to trust each other to do business. This reduces the need for intermediaries’ involvement, such as banks and insurance providers, which reduce transaction costs and time.

This implication of trust can also help governments. For instance, Ukraine recently announced that they will use blockchain technology to manage its registry of farmland [3]. With a high corruption rate, it is difficult for Ukraine to attract foreign investment and do international business. By using blockchain technology, Ukraine can gradually regain public trust. This will be explored in a later section in the wiki.

Decentralization

A good number of similarities have been drawn between the Internet and blockchain; primarily the power of decentralization [4]. Some believe that blockchain can make the Internet truly decentralized.

The Internet was initially invented to be a decentralized platform. However, it evolved to be centralized with a handful of tech giants supporting critical components such as web hosting, search engines, email services, social media, and more [5]. This centralization creates multiple problems, including undermining individuals’ rights to privacy and information democracy. The Internet’s centralization issue is serious enough that Tim Berners-Lee, the father of the web, started an open source project called Solid. In his idea of a better web, “users control where their data is stored and how it is accessed” [5].

Blockchain can change the Internet by providing a peer-to-peer system that does not require any intermediaries. Instead on relying on trusted third parties, blockchain technology relies on mass collaboration and some clever coding to create an immutable and incorruptible database. Digital applications built on a blockchain can provide users with complete ownership over their personal data. Users can decide what to do with their data, including monetization policies and sharing permissions.

Ethereum

Ethereum is a blockchain platform founded by Russian born Canadian programmer Vitalik Buterin. Before founding Ethereum, he created BitTorrent, a file sharing application that was the first decentralized application. Ethereum has received immense media coverage following the wake of the Bitcoin burst from 2015 to present day (2017), tailing Bitcoin as the second largest public blockchain. Ethereum is a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats, and ownership transaction functions.[6]. This section will expand on: How the Ethereum platform functions, what role Ethereum is playing in shaping the future of blockchain networks, and what challenges Ethereum faces.

How does Ethereum Work?

Ethereum is open-ended by design, as mentioned in the definition above, this platform allows anyone to write smart contracts and decentralized applications with their own unique set of rules, formats and transaction functions. This open concept allows blockchain advocates from around the globe to contribute their own flare to the blockchain ecosystem while following the Ethereum programming language, Ethereum Virtual Machine (EVM). EVM brings a standard language to blockchain applications and contracts while Ethereum’s approval process brings standards and protocols to this wild west web of innovative code. When analysing the growth and development of Ethereum, it is worth drawing comparisons to the early days of the Internet. As the Internet began its rapid expansion, platform applications such as email were created to communicate vast amounts of information with other connected networks. Email was chunky, poorly designed and used by the masses who wanted in on the internet. From this development, the World Wide Web was created. Savvy internet users could publish information and less technically literate consumers could access that information. One might argue that BitCoin offers the same functionality as Ethereum, but BitCoin is unfortunately the equivalent to one type of website; meanwhile Ethereum is the platform and protocol that allows clients to create a variety of websites.

Ethereum vs. Bitcoin
This comparison of functionality is critical to understand Ethereum and has rarely been communicated in online forums or media clearly. Ethereum currently offers the development of 3 types of decentralized apps; financial, semi financial and governance. The financial applications are those created for purely financial reasons; for example, crypto asset wallets and trading platforms. Semifinancial applications refer to decentralized applications involving the exchange of currency (crypto or fiat) for items or services; for example, digital rights management, rental services or goods, and prediction blockchains. Lastly, governance applications refer to a blockchains that concern itself with information; for example, land title rights, venture capital voting or any decentralized autonomous organizations. Ethereum runs on Ether, the value token traded on cryptocurrency exchanges. Miners, users and clients alike all hold value in Ether while engaging with the Ethereum network and all of Ethereum’s applications run on Ether. This is significant because as the development of blockchain applications increase on the Ethereum platform, Ethereum gains more market share. This brings a standard to the blockchain environment in a similar way that the TCP/IP structured the world wide web. Consider this, Ethereum miners, clients and users are forced to transact with Ether because the applications are not compatible with other blockchains yet. This brings a degree of stability to the platform. On the contrary, BitCoin users, exchange their BitCoin (the primary asset) with other crypto-asset entirely. Therefore, each time a BitCoin user buys another crypto-assets, they essentially leave the BitCoin blockchain ecosystem and make it susceptible to the potentially large price fluctuations as certain crypto-assets become desirable to own. Currently in 2017, that desirable crypto-asset is BitCoin; however, the tides can quickly change as the public gain a better understanding of blockchain technology and competition expands into the market. On the contrary, as user, clients and miners engage with Ether and Ethereum applications, they stay within the ecosystem. This marginal shift in concept captures the foundational principles of the blockchain more effectively and more efficiently as more engagement/development truly brings more value versus just hype. As the volatile blockchain industry grows, this subtle difference in functionality will give Ethereum the upper hand as larger and more conservative organizations transition into the blockchain in hopes to capture the benefit of the blockchain technology. This trend can already be seen in the Enterprise Ethereum Alliance (EEA), which continues to grow with the support of large organization such as ConsenSys, Toyota Research Institute, Microsoft, Intel, JP Morgan, Deloitte, Accenture, ING, Banco Santander and National Bank of Canada.

Now a quick intermission, Vitalik Buterin explains Ethereum.


Ethereum by Vitalik Buterin

Ethereum's Role in the Blockchain Future

What role is Ethereum playing to shape the future of blockchain? As mentioned above, their stability and open concept ecosystem is proving to be a successful strategy in attracting large organizations; however Ethereum also has its own avid group of blockchain enthusiasts. Keep in mind that Vitalik Buterin used to be very involved with BitCoin and after large disagreements with the BitCoin community, he decided to start Ethereum. As mentioned above, Ethereum is bringing structure to this developing market, but beyond that, it is creating a valuable platform for developers to engage with and contribute towards. Google’s open source android platform pushes the same values as they entered the global tech market to compete with Apple’s closed iOS ecosystem. This comparison is useful today because Apple’s and Google’s dominance occurred when widespread adoption of consumer technology was successful. This adoption of technology is occurring again with the growth of the blockchain industry. Therefore, analyzing blockchain based on sound principles of consumer adoption is a rationale way to cut through the clutter and gain deeper insight into blockchain technologies. There are three components to consumer adoption of technology [1]:

  • Abstraction
  • Whole product
  • Complementaries

Ethereum and Abstraction

Starting with abstraction, Ethereum is helping decrease the barrier of entry into the technologically sophisticated blockchain market by allowing laymen to build, run and engage with a variety of Dapps, and DAOs. Abstraction is essentially taking the skill set of consumers and putting it to use in order to increase the rate of adoption of a given technology [2]. Ethereum is helping give consumers the power of applied cryptography, which we predict will change the fundamental structure of the information exchanged online. Therefore, “it stands to reason then that by abstracting away these new skills currently required in a distributed application, the creators of blockchain applications can accelerate the adoption of their products.” [3].


Ethereum as Whole Product

Moving forward to analyze Ethereum from a whole product perspective, the blockchain platform is attempting to bring a whole blockchain product to market by creating two calls to action. First, for developers to make blockchain apps on their platform, and second, for consumers to use these apps knowing they are a part of a blockchain ecosystem with standards. This is where Ethereum starts to gain quantum leaps over BitCoin. Ethereum is building a platform from the ground up, getting consumers accustomed to their platform and developers accustomed to working within their standards and protocols. Like the search engine race all over again, ask yourself, did Google or Yahoo win? Yahoo had search engines for a long time, but the ‘whole experience’ wasn’t there; meanwhile, Google understood it was all about the ‘whole experience’ of giving people what they are looking for and make it easy. As people continue to engage with Blockchain technologies they are forced to gain more technical knowledge while engaging with Ethereum in the long term. This knowledge disparity will lead to a quicker, more stable mass adoption of Ethereum versus the frantic hype adoption we’ve seen with BitCoin.

Ethereum's Complimentaries

Lastly, to the discussion for complementaries is short. To date complementaries of blockchain technology are platforms that allow users to turn fiat currency into digital crypto-currency such as Quadriga - a Vancouver, Canada based crypto-asset exchange or Coinbase. However, other complementaries to blockchain could include sustainable renewable energy, as the power required to run blockchains increases. In summary, Ethereum is playing a critical role in the blockchain industry by establishing a closed ecosystem that truly benefits from the energy expended on its construction by setting the foundation of protocols and standards for both the developers and consumers. Thus, decreasing the barriers to entry for the layman and applying sound technology adoption principle to their platform.

Challenges for Ethereum and Blockchain

Albeit, the statements made above portray Ethereum and blockchain technology as an unstoppable development of technological innovation that could shape the Internet of tomorrow, it is vital to understand the key challenges the blockchain industry currently faces. The main challenges are the following:

  • Regulation
  • Consumer adoption
  • Scalability

Regulation

Regulation and governance is the largest barrier for blockchain technology. Currently the blockchain industry is the wild west, analysts are drawing comparisons to the dot-com bubble - but it’s important to remember that before organizations such as ICANN, Internet Governance Forum, internet Engineering Task Force and W3C, the Internet itself was the wild west. The only difference between the internet and its bolder counterpart blockchain is that the blockchain is aiming to restructure information and decentralize data. Seize the power of data from the hands data giants and financial institutions and give it to public consumers. This decentralization of power will not occur without turmoil. This is where regulators and government need to move swiftly to establish regulations pertaining to the blockchain before the mass market hype dwindles. [4]


Consumer Adoption

This massive consumer adoption is another barrier for blockchain. As discussed earlier in detail, Ethereum’s strategy is weakening this barrier; however, there is still substantial consumer adoption that needs to occur for this technology to cross the chasm - from early adopters to early majority. The biggest threat to this adoption is the lack of knowledge consumers have regarding how blockchain technology actually works because the frantic media coverage leaves the public more torn and confused than informed. This inefficient marketing of blockchain technology allows for large organizations to capture the ideal attributes of blockchain technology, leaving the public to fend for itself to establish their own public blockchain [4]. Therefore, the true magnitude of decentralization that could occur in society through the blockchain will likely be hindered by the public's inability to effectively and efficiently adopt the new technology.


Scalability

When looking at the challenge of scalability pertaining to the blockchain, two concepts need to be addressed; firstly, as the length of blockchains increase, the longer it takes to verify the complete ledger, and add a block. Secondly, as blockchains grow they become centralized due to the economy. Addressing the issues of resources, it becomes quite clear that computing power and energy supply needs to sustainably grow at the same rate as the blockchain (which current isn’t happening). Emphasis is put on sustainability, because creating an information infrastructure that requires more energy and computing power over time doesn’t make sense, especially when it is at the expense of the environment. As great as a secured decentralized network would be for society, if it takes equal energy to power a house for a month or run a single BitCoin transaction then the world isn’t going to be a better place with blockchain[5]. The second part of the scalability issue stems from the current economic structure, this is not an issue for Ethereum because they are helping consortium and private blockchains arise from within established large organizations (more on this: Public and Private Blockchain); however, this does pose a major threat to public blockchains such as BitCoin and their claim to fame on decentralization. Believe it or not, BitCoin is already centralized, three mega computing warehouses mine 51% of all full nodes on the blockchain [6]. But what does this have anything to do with economics? It’s all about capital resources, the capital required to establish large mining facilities which can mine a complete BitCoin node at this point is immense, therefore as much as your personal CPUs power can be used to mine the blockchain, this truly decentralized structure no longer exists because large companies have invested large sums of capital that dwarf the accumulation of consumer CPU power. Furthermore, we predict that when blockchain technology becomes widely used, the public and private blockchains will be viewed similarly to the public and private sectors, where the private sectors brings ‘innovation’ and the public sector lags behind.

Blockchain Applications - Dapps and DAOs

High level comparison of Dapps and DAOs

Decentralized applications (Dapps) and decentralized autonomous organizations (DAOs) are both applications of blockchain technology that originate from the Ethereum blockchain. In essence, both Dapps and DAOs are just sophisticated smart contracts and lines of code that execute themselves based on predetermined parameters and rules.[7]

Decentralized Autonomous Organizations - DAOs

A DAO is a new type of organization that exists in the form of computer codes on the blockchain. The pinnacle of a DAO is one that requires no human intervention for the organization to carry out its functions and operations. Furthermore, DAOs use a system that incorporates an internally tradeable asset with value to reward and incentivize good behaviour in the organization. The designation of good behaviour is predetermined in the code and decided by the creator(s) of a DAO [7].

Unlike a traditional organization, there is no hierarchy in a DAO. Everyone who wishes to participate in the organization generally has the same status and authority; everyone is simply a member. There are no directors, CEOs, or VPs. Since all members are generally at the same level of authority, communication and dissemination of ideas and innovation can permeate through the organization at increased rates compared to traditional organizations. Also, as a DAO essentially exists on the Internet and blockchain, its members transcend geographical and international boundaries. All the members in a particular DAO join together due to a common interest and work together towards a unified goal.

DAOs are at the forefront of blockchain applications. As an abstract concept, it is pushing against the boundaries of common norms and practices. That said, there are many examples on the Ethereum blockchain that possess high degrees of automation.


Examples - The DAO (TD)

The DAO Tedtalk

The DAO (TD) is the first decentralized autonomous organization created on the Ethereum platform [1]. TD’s purpose was to act as an autonomous venture capital firm that utilizes smart contracts to gather funds and select projects to undertake. The process in a nutshell is outlined as follows:

  • Investors invest money into the smart contract to become a TD member
  • The pooled money is stored on the blockchain in the smart contract, where no members nor the creators of TD can freely utilize the money
  • Project proposals are drafted and voted by members for execution
  • If a majority is reached, the proceeds and returns from the project are shared among members

While the concept of an autonomous venture capital firm may sound interesting, this first iteration was not without its flaws. Since the smart contracts and lines of code in the foundation of a TD were written by human, any flaws in the code could be taken advantage of by people with nefarious intentions; which is precisely what happened in 2016. Using an exploit found in the foundation of TD’s code, a lone hacker was able to siphon out over $50 million dollars worth of Ether. While the incident is not directly related to the reliability and security of a blockchain given that the flaw was in the smart contract not the blockchain itself, it serves as a prime example of how we are still in the early stages of blockchain applications.

That said, the solution to the incident is also surrounded by controversy[1]. One of the key pillars of a blockchain is the concept of immutability; meaning past events and transactions, once recorded cannot be changed. Subjected to a vote by all Ethereum participants, the decision was made to roll back the Ethereum blockchain to the state before the hack was conducted. In doing so, all of the wealth siphoned out of TD was successfully returned; but this brought up a new issue: will there be a similar rollback every single time someone suffers a loss due to illegitimate activities conducted on the blockchain? While it is ethical to return what was stolen, such method for compensation would be in violation of a key pillar in blockchain technology, setting a dangerous precedent for future security breaches.

Example - DigixDAO (DD)

DigixDAO Explained

DigixDAO (DD) is another decentralized autonomous organization created on the Ethereum platform. Using the Ethereum blockchain, DD has developed a gold backed token called the DGX, where 1 DGX represents 1 gram of physical gold. The value proposition here is that the token’s value is grounded in something physical and intrinsically valuable. In the context of gold-backed tokens, its financial value would be less volatile compared to market prices of other tokens and cryptocurrencies. In the end, it would allow users to transact with the token reliably without the fear of constant price fluctuations[1].

Upon purchasing DGX, the tokens can be treated as a digital representation of the physical gold they now own. Holders have the choice of spending the DGX at participating vendors or treating them like financial assets. The value of a DGX token will always be equal to a single gram of gold, and in turn, is simply derived from the price of gold in the market. DD also sells another token besides the DGX, called the DGD. Owners of the DGD token will be entitled to vote on project proposals similar to how members in TD could vote on projects. Furthermore, DGD owners will be able to claim quarterly dividends that result from transaction fees of DGX spent per quarter. The transaction fee is accrued automatically at 0.13% of the balance for each transaction involving DGX. In essence, the DGD token functions similarly to a share in current organizations.

Decentralized Applications - Dapps

A Dapp refers to any application written and deployed on the Ethereum blockchain. Unlike a DAO, there is generally no membership status for Dapps; one does not join a Dapp but uses it. Dapps on Ethereum use the local fuel, called Ether, to facilitate operations and exchanges. Dapps can also create their own tokens to be used in conjunction with Ether [2]. While Dapps are also highly experimental, there are many that already exist today. As both DAOs and Dapps live on the Ethereum blockchain, they share many of the security features and benefits, such as immutability, decentralization, and incorruptibility.

Example - Slock.it

Slock.it Explained

Slock.it is a decentralized smart lock application built on the Ethereum blockchain. The app allows users to find and claim temporary ownership, in other words, rent locks, which are usually attached to some type of door, allowing the user to access the contents behind the door. For example, while a person uses Slock.it to find a room for rent, the person can send a deposit to the owner of the room. This in turn gives the person access to the room for the duration of the stay. At the end of the vacation, the person convey to the owner that they will no longer need the room. Subsequently, the person gets the deposit back minus the rate per day of rent. All the while, this process is executed entirely on the Ethereum blockchain through various smart contracts. Furthermore, Slock.it is also developing something called the Universal Sharing Network (USN) to aid the deployment of blockchain applications and advance the sharing economy. Given the example above, Slock.it is poised to become a platform that competes with the likes of AirBNB, but requires no middle man. Since the process is fully automated, there is no intermediary taking a cut of the payment. Also, a smart lock existing on the Ethereum platform will benefit from the immutability and robustness of the blockchain.


Slock.it Example

Example - Augur

Augur Explained

Augur is a decentralized predictions market application built on the Ethereum platform.[1] Augur allows users to freely create predictions or cast a vote in existing predictions, by purchasing virtual shares for either outcome of any particular event. This enables forecasting of real world events through mass data collection. Those who vote correctly are rewarded as per the odds of the event. In essence, Augur is really a decentralized betting platform. However, by asking users to make predictions and to vote on existing predictions using their own money, Augur can potentially become a sophisticated forecasting entity that capitalizes on the principles of self maximization and the wisdom of crowds.

To verify the outcomes of each event, Auger uses a system called $REP. The way $REP functions is similar to a token and those who hold it are called ‘reporters’. Groups of reporters will be randomly selected to report on the outcome of each event in order to verify which outcome actually happened. Reporters who report dishonestly are penalized by having their $REP taken away and those who fail to report when asked to also lose all their $REP tokens. Conversely, those who report accurately are rewarded with a percentage of the transaction fees accrued.

Example - Lunyr

Lunyr Alpha Version

Imagine getting paid to write accurate wiki articles, or getting paid to check wiki articles written by other people for accuracy and credibility. This is what Lunyr is aiming to do, and more. Lunyr is a decentralized knowledge application built on the Ethereum platform. Similar to existing knowledge databases, such as Wikipedia, anyone can create and edit articles on Lunyr and the information is also free. However, to prevent spam and fake information from spreading across Lunyr, all information submissions must undergo a mandatory peer review. Furthermore, those who make submissions are also required to take on the responsibility of reviewing information submitted by others. Those who make submissions that successfully clear the peer review stage will be rewarded with tokens; likewise with people who successfully conduct a peer review.[1]


Lunyr uses three different tokens in its system: Contribution (CBN), Honour (HNR), and Lunyr (LUN). When submissions for information or edits successfully pass the peer review system, the contributor will be rewarded CBN and HNR. CBN is used to calculate how much LUN the contributor will be rewarded at the end of each reward period. HNR is used to propose and vote on issues that arise during disputes and resolutions; HNR will be consumed upon use. Unlike tokens found in many other Dapps, CBN and HNR are not transferable to other people. This ensures that holders of these tokens have the best interest of the platform in mind.

Current knowledge bases are stored in centralized locations, such as a server. This creates a single point of failure making modern knowledge bases vulnerable; if the server goes down, no one can access the information. By existing on the blockchain, Lunyr decentralizes the knowledge base, effectively making it resistant to server crashes and other accidents that could threaten to bring down the service. Second, traditional knowledge bases are not resistant to censorship, partly due to their centralized nature. In countries with strict censorship policies, the government has the power and resources to manipulate information to sway public opinions. However, with Lunyr, each data entry is protected by the immutable nature of the blockchain. Third, there is little to no peer review and fact checking done on traditional knowledge bases. Compared to Lunyr, which enforces mandatory peer review for all information submitted.

Innovations in Information Systems

An effective information system can be broken down into a system that maintains information confidentially with integrity while being available to the permitted users. And as blockchain is proven to be very effective in this regards, as well as reducing time, cost, and risk. It is argued that blockchain technology will innovate information systems due to it's strengths and versatility in serving in many different business areas.[2]

Changes in Supply Chain

Blockchains revolutionize supply chains by providing a platform for manufacturers, suppliers, distributors, etc. to collaborate effectively, allowing companies at different steps of a supply chain to share vast amounts of information in a secure, and scalable manner. From this, companies will have access to relevant, accurate, and timely information and make informed decisions at a rapid rate. Especially when there is a lack of communication between non-direct third parties.[3]


How the Blockchain is changing money and business

In October 2016, Walmart partnered with IBM to collaborate on a blockchain to track shipments of pork originating from China to detect tainted meat.[1] Every time a shipment of food crossed a checkpoint, it was logged onto the distributed ledger; a record of transit for every shipment within the supply chain was logged and accessible within seconds. This changed the supply chain landscape because traditionally, shared databases only existed between parties that trusted each another. For example, a beef producing farm would only have contact with the slaughterhouse and the shipping company; and not with the distributor or retailer. [2]

Future

With blockchain casting transparency onto supply chains, a wealth of information is available to be used to optimize the supply chain. Companies can experience tighter quality control practices, place trust in partners, and realize cost reduction (transportation, errors, etc.).[3] By optimizing the supply chain at this level, there is less motivation for companies in vertical integration for their supply chain.[4]

Inventory Management

Inventory management greatly benefits from blockchain. Consider the diamond industry; plagued by diamond theft, insurance fraud, and unethically sourced diamonds. Ownership of diamonds rely on paper records. As every diamond is unique, Everledger logged over 40 different characteristics of a diamond onto a blockchain with machine vision, essentially creating a digital copy of the diamond. When these attributes are logged onto an immutable and shared database, combined with the contact information of owners; stolen diamonds can be quickly returned to their rightful owners since each stone can be individually logged. Knowing where diamonds are sourced can halt the sales of stolen diamonds, insurance fraud, and hamper the conflict diamond business. By sharing this information with law enforcement, diamond certifiers, and insurance companies, transparency can be gained. [5]

Marine Shipping

Maersk partnered with Ernst & Young, Guardtime, and Microsoft, to improve the marine insurance industry. The marine insurance industry is largely driven by paper. In fact, one fifth of transportation cost is related to paper documents. Insurance papers are required to be signed in paper; and because there are so many third parties involved in one insurance policy, this opens up the possibility of human error, fraud, and reduced transparency. Furthermore, the absence of a single piece of paper could stall a container for days[6]. With marine insurance policies powered by blockchain, companies will be sharing their information onto an immutable ledger. Currently, data is extremely opaque due to data asymmetry because of information silos maintained across different stakeholders. Also, as insurance policies are very precise, every party must make changes in their own records in the event of a change. For example, if a new captain was appointed multiple brokers, owners and insurers would need to make changes in their own records. The change in the information structure will establish trust between the shipping and insurance companies. First, by standardizing and sharing information, blockchain will bring transparency to the operations of shipping companies. Next, with up to date information, insurance companies can offer accurate premiums and break down risk in shipping routes. For example, when a freighter enters a war zone, the risk of the freighter will undoubtedly increase. Companies could enter into a smart contract, in which the premium would rise when a freighter entered a war zone. By standardizing information flow onto a blockchain, companies can also enable automated payments carried out in the form of smart contracts.[7]

Accounting for Transactions

Blockchains are inherently resistant against unauthorised adjustments. When one company sells to another, both companies will record the transaction in their books. Traditionally, both companies would record a debit and a credit; but when powered by triple entry accounting, an additional cryptographic signature will be logged.[8] The blockchain will be a trusted third party logging the cryptographic signature referencing the transaction to the other two parties. [9] This way, fraud is harder to commit and easier to track when committed. Smart contracts can also influence the way companies pay their debts. For example, in the case of recurring monthly expenses, the payment can be automatically fulfilled through smart contracts.[9] For example, a coffee shop that orders the same volume of cups every month can have an active smart contract, in which whenever cups are delivered, it will prompt the coffee shop to pay the vendor. On the other side, financial statement auditors can look up transactions on the blockchain, rather than in separate documents from third parties. When this process is fleshed out, auditing transactions on a blockchain can be a completely automated process. This will vastly eliminate the heavy labour cost of substantive testing; furthermore, auditing firms can generate a higher level of assurance when their time is freed from substantive testing and focus their efforts on accounts that require more judgement.

Blockchain Audits

Using blockchain to process transactions is a tamper-proof solution. Though these transactions will be secure, companies will still require financial statement audits. Like financial statement audits, blockchain audits will become a regular occurrence for the public to have confidence in this technology. But, public companies required audits for the public to maintain trust in the financial statements. The audit profession may focus on other areas to provide a higher level of assurance, such as scrutinizing the effectiveness of IT controls, and more importantly, the controls on the blockchain.[9] Deloitte recently completed a blockchain audit of an internally developed loyalty points blockchain with a mix of current standards and procedures tailored to the nuances of the blockchain.[10] Therefore, as businesses start to integrate blockchains into their operations, there will be a rise in demand for blockchain audits.

Public and Private Blockchain

Types of Blockchain

When describing blockchain as “a public ledger”, the word “public” refers to the notion that every member of the network can gain access to the ledger. However, there is more than one type of blockchain. Blockchains can be categorized as:

  • Public Blockchain
  • Private Blockchain
  • Consortium Blockchain

The type of blockchain is determined by the following criteria:

  • Who develops and maintains the blockchain
  • Who can act as transaction verifiers
  • Who can write information to the blockchain
  • Who can acquire a copy of the ledger


Public Blockchain

A public blockchain, such as the network type used by Bitcoin, allows anyone to join the network, view the ledger, and make transactions. The nodes, which are the computers that can be operated by anyone in the world, act as verifiers of transactions as they are broadcasted by the transaction senders. The copies of ledger owned by the nodes have to be consistent to a certain percentage with other nodes (e.g. 51% of the nodes agree), as defined by the blockchain’s protocol, before it can be deemed valid throughout the whole network. The miners, on the other hand, are computers that can also be operated by anyone in the world to determine the orders in which the transactions should be processed and written to the blockchain. Lastly, anyone can write to the blockchain and read the information on it. In sum, users, nodes and miners in this type of blockchain can be anyone in the world.

In a way, each person in the blockchain is similar to the buyers and sellers in a perfectly competitive market, where power over the blockchain is decentralized, just like the distributed influence of buyers and sellers over the market price. Each individual involved in the network, including the developer or operator of the blockchain, has little to no power in manipulating the blockchain with illegitimate methods. Therefore, the core idea of decentralization is the essential motivation for the public to trust the network for the exchange of information, wealth, or assets without the existence of a traditional intermediary.

Private/Consortium Blockchain

In contrast, a private blockchain is where entities’ involvement in the blockchain is strictly determined by the owner(s) of the blockchain. Unlike the anonymity of users, nodes, and miners on a public blockchain, participants in a private blockchain are chosen by the blockchain owner as trusted and known entities to uphold their roles. The number of users, nodes, and miners in a private blockchain is far less than those in a public blockchain. The permission to write to the blockchain or read the information on it depends on the owner’s use-case. In sum, the blockchain’s protocols, modifications, and permissions, are solely at the discretion of the owner of the blockchain.

With an isolated and a more centralized nature, it is more suitable and advantageous for organizations’ internal uses that require a certain level of control over the exchange of asset or information through the blockchain. Firstly, the participants in the blockchains are chosen and approved by the centralized operator to ensure that everyone in the network can be trusted, which protects the network from manipulative users. Secondly, due to the limited nodes and miners, far less computing power is needed to verify transactions before being added to the blockchain, hence faster transaction times and reduced cost for users. In the end, the nature of a private blockchain allows operators or developers to exercise greater control and influence over the blockchain for their use-cases.

Blockchain Application in Public Sector

Countries around the world are beginning to explore and integrate blockchain in the public sector. Some of the use-cases involve:

  • Land registry
  • Banking systems
  • Internal government operations

Ukraine's Land Registry

Blockchain Example for Ghana Land Registry

The Ukraine government is planning to use blockchain to increase transparency and efficiency of record-keeping for farmland ownership. [1] Ukraine’s First Deputy Agriculture Minister announced that Ukraine will soon collaborate with BitFury Group Ltd., a tech company working with organizations and governments in blockchain implementation. [1] Just like what Bitland has described in their video about the importance of secured land registries [2] , legal and legitimate claims and titles of land ownership are some of the essential foundations in facilitating a country’s economic growth. Secured land ownership provides farmers and manufacturers the opportunity to produce commodities and goods without the concern of corruption or illegal interferences from powerful corporations. Furthermore, the trust and security of land ownership open doors to the capital inflow from foreign investors. As a result, Ukraine’s blockchain initiative is considered as part of the effort in facilitating its country’s economic reforms and battling corruptions. It is also speculated that Ukraine’s openness to blockchain is a result from its initiative in securing the 17.5-billion-dollar loan from the International Monetary Fund (IMF) [1]. IMF is an international organization, formed by 189 countries around the world to maintain economic stability around the world. Countries are assigned specific amounts to contribute to the fund that can be used for loan disbursement in the future [3]. Despite speculations on Ukraine’s motives in adopting the technology, blockchain will contribute to the reforms of Ukraine’s economy.

Banking in Canada

In 2016, the Central Bank of Canada collaborated with Payments Canada, R3 Consortium, and other major Canadian banks to explore the application of blockchain technology in supporting its interbank payment system. [4] After a series of experiments to integrate Distributed Ledger Technology (DLT) into the core financial infrastructure of Canadian banks, the collaborators decided that the technology still faces many obstacles to meet the core principles for international financial market infrastructures. Carolyn Wilkins, the Senior Deputy Governor of the Bank of Canada, and Gerry Gaetz, the president of Payments Canada, suggested that an interbank system must be “safe, secure, efficient and resilient” [4]. They also concluded that current blockchain platforms could not meet the requirements that the current banking system can offer. Although participants in this project had a pessimistic view of blockchain technology in replacing the current financial and banking systems, they gained a deeper understanding in blockchain’s potentials and the implications behind its implementations. Wilkins concluded her lessons in this project on Coindesk [5]. In sum, she stated that the blockchain can make some of the banking processes more cost-efficient by replacing bank reconciliation processes with its record-keeping capabilities. That said, the blockchain’s current capability alone cannot replace the interbank system. Lastly, she believes that the degree of decentralization needs to be controlled in terms of the transaction verifiers and access to information on blockchain.

United States Government

The US General Service Administration (GSA), an independent government agency responsible for logistics, facilities, and technology, is looking to explore and implement blockchain technology in its daily operations. [6] GSA held the “US Federal Blockchain Forum” on July 2017 for federal managers to present their ideas in potential integration of blockchain in their respective federal agencies.[6] Some of the submitted ideas include financial management, intellectual property registries, and government-issued identifications. US government is also looking into collaboration with tech companies to explore blockchain’s potential in government use-cases. The US Department of Homeland Security (DHS) has recently awarded approximately $750K to Digital Bazaar Inc., a private IT company that aims to develop solutions for payment and credentials. [7] The funding was granted through DHS’ Small Business Innovation Research program to explore practical integration of blockchain technology for identity and access management.

Digital Identity Network

Accenture Digital Identity Network

Providing support to refugees is currently among the top priorities in Canada and many European countries. However, identity verification can be challenging and time-consuming. Refugees without official proof of identity documents would have difficulties receiving social services, education, or financial aids from governments or humanitarian agencies. Microsoft, Accenture, and Avanade, are teaming up to develop an identification network that combines Accenture’s biometric management system, Microsoft’s Azure cloud platform, and blockchain technology [1].


This network would allow refugees to keep track and prove their identity through an online application that is accessible through computers and mobile devices. Following is the general process that refugees would go through.[2]

  1. Refugees arrive at the refugee camp and have their biometric data scanned and stored (face, irises, fingerprints) on the servers of a humanitarian-aid agency.
  2. The Digital ID Network then creates a unique identifier, such as a string of letters and numbers, or QR Code, for each individual.
  3. Every time, a refugee receives services or verification from another government agency or aid agency that is a service provider participant (“node”) of the blockchain network, the refugees receive a digital stamp as a proof.
  4. As stamps accumulates, refugees can use them to prove their identity digitally to any other government agencies and service providers.


The digital identity network will help refugees with their transition into the new country. It will also grant them easier access to financial services, such as loans, stocks, and insurance. This also benefits the governments. Having refugees transitioning more efficiently would allow them to develop their skills and contribute to the country’s economic growth.

Authors

Taylor Nguyen Mitchell Steinke Gordon Lu Michael Lam Tony Yip
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
Beedie School of Business
Simon Fraser University
Burnaby, BC, Canada
tnn3@sfu.ca mitchellsteinke.com sla243@sfu.ca mml30@sfu.ca lfyip@sfu.ca

References

  1. Accenture.(2017, June 19). Accenture, Microsoft Create Blockchain Solution to Support ID2020. Accessed from https://newsroom.accenture.com/news/accenture-microsoft-create-blockchain-solution-to-support-id2020.htm on Oct 5, 2017
  2. BBC.(2017, June 20). Accenture and Microsoft plan digital IDs for millions of refugees. Accessed from http://www.bbc.com/news/technology-40341511 on Oct 8, 2017
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