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John.Quality
week-1.zipBlockchain Presentation.ppt
Impact of Blockchain on IT Audit
Blockchain Technology Overview
Three Levels of Blockchain, Tokens
Alliances and Industry Adoption
Smart Contracts
Identity Management
Criticism and Challenges
Impact on the IT Audit Function
Learning and Engagement
Agenda
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Blockchain technology is a digital innovation that is poised to significantly alter financial markets within the next few years, within a cryptographic ecosystem that has the potential to also significantly impact trusted computing activities and therefore cybersecurity concerns as a whole.
Blockchain Overview
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How many of you:
Have heard of bitcoins?
Own cryptocurrency?
Feel you understand the underlying blockchain technology?
Feel you can summarize for us the benefits of the “trust economy”?
Are involved in projects that involve blockchain technology implementation or related activities?
Student Exposure
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Where It All Started
Blockchain technology was first introduced in a whitepaper entitled: “Bitcoin: A Peer-to-Peer Electronic Cash System,” by Satoshi Nakamoto in 2008.
No reliance on trust
Digital signatures
Peer-to-peer network
Proof-of-work
Public history of transactions
Honest, independent nodes control majority of CPU computing power
Nodes vote with CPU computing power
Rules and incentives enforced through consensus mechanism
https://bitcoin.org/bitcoin.pdf
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Cryptocurrency Summarized
Bitcoin was the first digital, i.e., cryptocurrency
A maximum of 21 million Bitcoins can be generated
Just as with real world mining, energy must be invested to solve complex mathematical problems by which systems earn Bitcoins
https://www.cryptocoincharts.info/coins/info claims to be indexing 4,220 cryptocurrencies
Most circulated: Bitcoin, Ethereum, Litecoin
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The Technology Behind Bitcoin
Think of Bitcoin as an electronic asset (as well as a digital currency)
A network of computers keeps track of Bitcoin payments, and adds them to an ever-growing list of all the Bitcoin payments that have been made, called “The Bitcoin Blockchain”
The file that contains data about all the Bitcoin transactions is often called a “ledger”
Bitcoin value is created through transaction processing, referred to as “mining,” which is performed by distributed processors called “nodes” of the peer-to-peer network
A Gentle Introduction to Bitcoin by Antony Lewis, https://bravenewcoin.com/assets/Reference-Papers/A-Gentle-Introduction/A-Gentle-Introduction-To-Bitcoin-WEB.pdf
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Mining Evolution
Mining is the process whereby value is created through transaction processing that occurs on nodes of the network.
In 2009, one could mine 200 Bitcoins with a personal, home computer. In 2015, it would take about 98 years to mine just 1 Bitcoin.
Today there is almost no money to be made through traditional home mining.
ASIC (Application Specific Integrated Circuit) has been designed strictly for mining Bitcoins.
Groups of miners have formed mining pools, with each being paid their relative share for their contribution to the work performed.
My Dirty Little Bitcoin Secrets by Ofir Beigel, www.99bitcoins.com
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Storage for digital records
Exchanging digital assets (called tokens)
Executing smart contracts
Ground rules – Terms & conditions recorded in code
Distributed network executes contract & monitors compliance
Outcomes are automatically validated without third party
Tech Trends 2017, The Kenetic Enterprise, “Blockchain: Trust economy”, Deloitte University Press, 2017
Three “Levels” of Blockchain
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A broader use is supported by the digital infrastructure introduced through Bitcoin, as represented by “tokens”.
A “token” can be defined as a “scarce digital asset based on underlying technology inspired by Bitcoin.”
Tokens may use similar codebases but different blockchain databases.
Ethereum was Bitcoin-inspired but has its own blockchain and is engineered to be more programmable. Tokens can be issued on top of the Ethereum blockchain.
Token buyers are buying private keys, which are similar to API keys, but can be transferred to other parties without consent.
“Thoughts on Tokens”, Balaji S. Srinivasan and Naval Ravikant
A General Discussion about Tokens
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Tokens have a value and therefore a price.
Tokens are a new model for technology and can be an alternative to equity-based financing.
Tokens do not dilute capital. They introduce a huge increase to buyer base and time-to-liquidity.
Token launches differ from equity sales; however, they can be issued as a way to share profits.
Tokens can be sold internationally over the internet and are always open for business.
Tokens decentralize the process of funding technology.
Thoughts on Tokens, Balaji S. Srinivasan and Naval Ravikant
Tokens, continued
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Tokens enable a better-than-free new business model.
Tokens will introduce the rise of the “tech savvy senior executive.”
Tokens accommodate immediate custody without an intermediary.
Tokens can be extended to hardware, as part of the internet of things.
Thoughts on Tokens, Balaji S. Srinivasan and Naval Ravikant
Tokens, continued
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Smart Contracts
Consensus protocols are key to determining the sequence of actions resulting from the contract’s code. This enables
peer-to-peer trading of everything from renewable energy to automated hotel room bookings.
“Contracts Get Smarter with Blockchain”, CIO Journal, The Wall Street Journal, World Trade Organization, International Trade Statistics 2015, 2015, p. 41.
Current paper-based systems drive $18 trillion in transactions per year.
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Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies. It is a global collaboration, hosted by The Linux Foundation, including leaders in finance, banking, IoT, supply chain, manufacturing, and technology.
Business Blockchain Frameworks are hosted with Hyperledger.
Hyperledger addresses important features for a cross-industry open standard for distributed ledgers. The Linux Foundation hosts Hyperledger as a Collaborative Project under the foundation.
To learn more, visit: https://www.hyperledger.org /.
www.hyperledger.org
Hyperledger
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Hyperledger Projects
A few of the Hyperledger Projects include:
Hyperledger Burrow – Permissible smart contract machine with a modular blockchain client, built in part to the specification of the Ethereum Virtual Machine (EVM)
Hyperledger Fabric – Foundation for developing plug-n-play solutions within a modular architecture
Hyperledger Iroha – Simple and easy blockchain framework designed to be incorporated into infrastructure projects requiring distributed ledger technology
Hyperledger Sawtooth – A modular platform for building, deploying, and running distributed ledgers
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Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud, or third party interference.
The Ethereum project was bootstrapped via an ether pre-sale during August 2014 by fans all around the world. It is developed by the Ethereum Foundation, a Swiss nonprofit, with contributions from individuals and organizations across the globe.
www.ethereum.org
Ethereum Alliance
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Several Ethereum offerings include:
The Ethereum Wallet, which is a gateway to decentralized applications on the Ethereum blockchain, allowing users to hold and secure ether and other crypto-assets built on Ethereum, as well as write, deploy and use smart contracts
Design and issue your own cryptocurrency/traceable token
Kickstart a project with Crowdsale
www.ethereum.org
Ethereum Tools
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Ether is the crypto-fuel for the Ethereum network.
Ether is a necessary element – a fuel – for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations, functioning as the incentive that ensures that developers will write quality applications, and that the network remains healthy.
The total supply of ether and its rate of issuance was decided by the donations gathered on the 2014 presale.
Developers who intend to build apps that will use the Ethereum blockchain need ether.
Users who want to access and interact with smart contracts on the Ethereum blockchain also need ether.
www.ethereum.org
What is Ether?
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Cross-Industry Adoption
Sectors leading the way in blockchain implementation:
Consumer products
Manufacturing
Technology
Media
Telecommunications
Health care
Life sciences
Thirty-nine percent of the senior executives at large U.S. companies initially surveyed indicate they have little or no knowledge about blockchain technology. Many deemed it to be crucial for their companies and industries. Forty-two percent believe it will disrupt their industries.
“Blockchain Adoption Varies by Industry”, CIO Journal, The Wall Street Journal
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Financial Services Industry
As noted by A. Michael Smith in “Creating Assurance in Blockchain,” trust and efficiency are the main value drivers for any use case. The finance world is driven by technology.
Tracking risk and monitoring compliance with laws and regulations within an increasingly complex cybersecurity environment requires considerable time and resources.
The financial services industry immediately saw opportunities in blockchain and has been investing heavily in its usage, primarily as a part of private implementations.
Creating Assurance in Blockchain, Volume 2, 2017, by A. Michael Smith
Banking on change: How to respond to new expectations for audit committees by PWC Internal Audit Foundation, Douglas Anderson, CIA, CRMA, Cassian Joe, and Klaas J. Westerling
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Identity Management
The IT audit is broadly concerned with identity management concerns.
Protecting access to data, and the systems that are in place to process, store, and report on that data, requires ongoing resource dedication.
Multiple solutions are available, all of which require configuring and managing multiple identifiers for an individual’s various identities.
Identity management is an area that will certainly be impacted by widespread use of private keys to secure transactions.
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Distributed Access Management
Creating an identity on blockchain can give individuals greater control over who has their personal information and how they access it
Areas impacted include passports, e-residency, birth certificates, wedding certificates, IDs, online account logins, etc
Digital ID’s can provide digital watermarks that can be assigned to every online transaction of any asset
“21 Companies Leveraging Blockchain for Identity Management and Authentication” by Elena Mesropyan, https://letstalkpayments.com/22-companies-leveraging-blockchain-for-identity-management-and-authentication/
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Protecting Private Keys
Within the blockchain, trust relies on the safekeeping of private keys, in support of a truly distributed identity management
Ultimately, that safekeeping resides with the actions taken by individuals to secure their private key
For cryptocurrency traders, one frequently sees the recommendation to write one’s private key down on a piece of paper and put it up for safekeeping in, for example, a safe deposit box
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Digital ID Solutions
May 24, 2017, saw the release of a Digitial ID solution by Netki, a California blockchain startup
Released at Consensus 2017, this is a highly-anticipated Digital ID smartphone app that uses Hyperledger blockchain to provide decentralized, open-source identity management
Approved by governments, fully Anti-Money Laundering (AML) and Know Your Customer (KYC) inclusive
https ://bravenewcoin.com/news/netki-launches-digital-id-solution-which-bitt-is-using-with-central-banks-in-the-caribbean/
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Criticism and Challenges
Critics have cited the following blockchain challenges:
Nascent technology
Uncertain regulatory status
Large energy consumption
Control, security and privacy
Integration concerns
Cultural adoption
Cost
Challenges associated with audit, taxes, and compliance
Creating Assurance in Blockchain, Volume 2, 2017, by A. Michael Smith
Deloitte’s Blockchain technology: 9 benefits & 7 challenges,
https://www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-technology-9-benefits-and-7-challenges.html
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An area of heavy criticism has to do with the vast amounts of energy necessary to process and store transactions, especially as the use of blockchain technology increases
The Bitcoin blockchain network’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power
Note that there are also opportunities to decentralize the energy grid
Wasted resources: Mining Bitcoin wastes huge amounts of energy ($15million/day)
Deloitte’s Blockchain technology: 9 benefits & 7 challenges,
https:// www2.deloitte.com/nl/nl/pages/innovatie/artikelen/blockchain-technology-9-benefits-and-7-challenges.html
Blockchain in the Energy Sector: Institutional Disruption? By Marius Buchmann
http://www.theenergycollective.com/enerquire/2402120/blockchain-energy-sector-institutional-disruption
Energy Consumption
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Summary
Although the technology is still in its infancy, boundless usage opportunities exist
The identity management landscape is likely to shift dramatically
There is sure to be evolution within IT audit as various use cases unfold
Features that create trust could drive unachievable overhead costs
Compliance burden should eventually be eased as the technology is adopted, but this requires regulatory updates, which could take a while
Tech Trends 2017, The Kenetic Enterprise, “Blockchain: Trust economy”, Deloitte University Press, 2017
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block-chain-pdf.pdf
A BRIEF INTRODUCTION TO BLOCKCHAIN
“BLOCKCHAIN” HAS MANY MEANINGS
“To understand the power of blockchain systems, and the things they can do, it is important to distinguish between three things that are commonly muddled up, namely the bitcoin currency, the specific blockchain that underpins it and the idea of blockchains in general.”
The Trust Machine, THE ECONOMIST, Oct. 31, 2015
“BLOCKCHAIN” HAS MANY MEANINGS
Phone
• The idea of a phone network
• A specific phone network (e.g., AT&T)
• A specific use of the phone network (e.g., fax)
Blockchain
• The idea of blockchain
• The specific blockchain that underlies Bitcoin or another coin offering
• Bitcoin or another cryptocurrency
WHAT IS BLOCKCHAIN?
A technology that:
permits transactions to be gathered into blocks and recorded;
allows the resulting ledger to be accessed by different servers.
cryptographically chains blocks in chronological order; and
WHAT IS A DISTRIBUTED LEDGER?
Centralized Ledger
Bank
Client A
Client C
Client D
Client B
Distributed Ledger
Node A
Node B
Node CNode D
Node E
• There are multiple ledgers, but Bank holds the “golden record” • Client B must reconcile its own ledger against that of Bank, and
must convince Bank of the “true state” of the Bank ledger if discrepancies arise
• There is one ledger. All Nodes have some level of access to that ledger.
• All Nodes agree to a protocol that determines the “true state” of the ledger at any point in time. The application of this protocol is sometimes called “achieving consensus.”
WHAT IS A DISTRIBUTED LEDGER?
Single Entity Multiple Entities
HOW MIGHT A DISTRIBUTED LEDGER WORK?
Users initiate transactions
using their Digital Signatures
Users Broadcast their
transactions to Nodes
One or more Nodes begin
validating each transaction
Nodes aggregate validated
transactions into Blocks
Nodes Broadcast Blocks to each
other
Consensus protocol used
Block reflecting “true state” is
chained to prior Block
WHERE MIGHT BLOCKCHAIN USE CRYPTOGRAPHY?
• Digital Signatures • Private/Public Keys
Initiation and Broadcasting of Transaction
• Proof of Work and certain alternativesValidation of Transaction
• Hash FunctionChaining Blocks
THE POWER OF DISTRIBUTED LEDGERS
BLOCKCHAIN
It can be used to allow owners of assets to exercise certain rights associated with ownership, and to record the exercise of those rights. •Proxy Voting
It can be used to record those transfers of value or ownership of assets •These records may be very difficult to alter, such that they are sometimes called effectively immutable
It can be used to transfer value or the ownership of assets •A human being or a Smart Contract can initiate the transfer
It can be used to create value or issue
assets
It can be used without a central authority by individuals or
entities with no basis to trust each other
The degree of trust between users determines the technological configuration of a distributed ledger.
HOW MIGHT DISTRIBUTED LEDGER PROPOSALS DIFFER?
Participation Open Closed
Permission Permissionless Permissioned
Ledger Design One ledger One ledger or Segregated ledgers
Validation Methodology depends on degree of trust between nodes. Where there is no basis for trust, may be achieved through proof of work, which requires the algorithmic solving of a cryptographic hash.
Consensus Mechanism Mechanism depends on degree of trust between nodes. Where there is no centralized authority, consensus may be determined algorithmically.
References
• Stoyanovich, M., & Tanz, F. E. (2019). Coming to Grips with Blockchain. Benefits Magazine, 56(5), 20-25. Retrieved from http://search.ebscohost.com/login.aspx? direct=true&AuthType=shib&db=f5h&AN=135900272&site=eds-live • Waldo, J. (2019). A Hitchhiker’s Guide to the Blockchain Universe. Communications of the ACM, 62(3), 38–42. Retrieved from https://doi.org/10.1145/3303868 • Burns, S. (2019). Blockchain: Hype Vs Reality. Computer Weekly, 21-24. Retrieved from http://search.ebscohost.com/login.aspx? direct=true&AuthType=shib&db=f5h&AN=138564674&site=eds-live • Tarzey, B. (2019). Inside Blockchain and Its Various Applications. Computer Weekly, 16-20. Retrieved from http://search.ebscohost.com/login.aspx? direct=true&AuthType=shib&db=f5h&AN=138681123&site=eds-live • Carson, B., Romanelli, G., Walsh, P., & Zhumaev, A. (2018). Blockchain beyond the hype: What is the strategic business value? McKinsey Quarterly, (4), 118–127. Retrieved from http:// search.ebscohost.com/login.aspx? direct=true&AuthType=shib&db=buh&AN=133693412&site=eds-live
- A Brief Introduction to Blockchain
- “blockchain” Has many meanings
- “Blockchain” has many meanings
- What is Blockchain?
- What is a Distributed Ledger?
- What is a distributed ledger?
- How might a distributed ledger Work?
- Where might Blockchain use cryptography?
- The power of Distributed ledgers
- How might distributed ledger proposals differ?
- Questions?
Computer Weekly 2019.pdf
computerweekly.com 10-16 September 2019 21
Industry experts believe blockchain is a technology that has the potential to affect the business of most IT profession-als in the next five years. Analyst Gartner has forecast that by 2023, blockchain will support the global movement and tracking of $2tn of goods and services.
It is regarded by many industry watchers as a disrupting force in the financial world. A PwC global financial technology (fintech) survey found that 56% of respondents recognise the importance of blockchain. At the same time, however, 57% admit to being unsure about or unlikely to respond to this trend.
Start witH tHe HaSH Blockchain is effectively a shared ledger between a group of people – for example, a group of companies that work together to produce a service or product. What makes blockchain differ- ent is the fact that the history of the changes – past transactions, for example – are immutable.
Essentially, the historical entries become read-only and unchangeable. This is due to the fact that each blockchain entry relies on the hash – a computed value including part of a previous block as part of its hashing calculation for the current block. This means that if a previous block is somehow modi- fied or corrupted, its hash value will change and therefore the values after that point become broken, making the tampering evident for all to see.
One example where blockchain technology can be used is where several companies come together to provide or consume
Blockchain: hype vs reality Regarded by many as a disruptive force in finance and beyond, blockchain technology presents a number of complex challenges that must be overcome before it can truly deliver on its promises. Stuart Burns reports
BUYER’S GUIDE TO BLOCKCHAIN TECHNOLOGY | PART 1 OF 3
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services, usually under long-term contracts. It can be complex and cumbersome to manage contracts involving several individu- als, when multiple documents are involved and everyone needs to agree on the same contract versions and details. Over time, changes will occur that also need to be managed and agreed on.
Managing contracts in blockchain, however, means that rather than physical bits of paper being passed around, it becomes possi- ble to mathematically guarantee the contract documents are as intended and the appropriate (digital) sign- off is a part of the chain. That chain can be verified by any of the parties as required. This is a key part of the whole blockchain concept.
an early trial In 2016, Barclays and Wave com- pleted what they described as a “world first” by using blockchain technology to handle the docu- mentation to approve a fund trans- action, which was made through the Society for Worldwide Interbank Financial Telecommunication (Swift). The letter of credit transaction between Ornua (formerly the Irish Dairy Board) and Seychelles Trading Company used distributed ledger technology via the Wave platform to enable all parties involved to see the documents they needed and transmit them where required on a decentralised network. This removed some of
the inefficiencies of traditional international trade and brought completion timescales down from weeks to a few hours. It is not hard to see how the use of blockchain could be extended to include many different types of information, eventually encom- passing the general public.
For instance, an article by McKinsey estimates that using block- chain to sign up new retail banking customers has the potential to
create up to $1bn of savings in oper- ating costs globally and reduce reg- ulatory fines by between $2bn and $3bn. “In addition, we expect block- chain solutions to reduce annual losses from fraud by $7bn to $9bn,” McKinsey stated.
management cHallengeS However, setting up and managing blockchain is a complex process that requires skilled design. As Gartner notes, a distributed ledger requires the recording and replicat-
ing of data in a secure manner. This is a complex mechanism with significant computational load (called mining). As such, blockchain has rather large scalability issues. Verification of blocks can take several minutes, which makes blockchain inap- propriate for real-time transactions.
Each blockchain consumer may need to verify an entire trans- action history, which is very inefficient and requires a high
A distributed ledger requires the recording And replicAting
of dAtA in A secure mAnner. this is A complex mechAnism with
significAnt computAtionAl loAd. As such, blockchAin hAs rAther
lArge scAlAbility issues
BUYER’S GUIDE
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Ransomware has evolved into a serious enterprise threat
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Buyer’s guide to blockchain
Chasing down hackers through security analytics
How councils are using technology to support adult social care
Downtime
computational workload. New platforms are being developed that explore alternative approaches to verifying the integrity of blockchain transactions. These include massively diverse public ledgers for verifying historic transactions.
Other ideas include having a random pool of machines that vali- date the blockchain and publicly announce the results of the vali- dation, saving everyone repeating the same compute-intensive functions. The very nature of these random machines and
frequency with which they are rotated means that discovering and trying to attack verification hosts should be extremely difficult.
All current blockchain systems have some limitations in terms of scaling. So, such techniques may not scale to the level needed for blockchain to be a viable replacement to existing payment processing networks. However, there is now growing interest in new distributed processor workload platforms, such as Golam, and the use of hardware-based acceleration, application-specific
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All current blockchAin systems hAve some limitAtions in terms of scAling
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Ransomware has evolved into a serious enterprise threat
How Defra has been preparing its IT systems for any Brexit eventuality
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Chasing down hackers through security analytics
How councils are using technology to support adult social care
Downtime
integrated circuits (Asics) and graphics processing units (GPUs), all of which aim to accelerate processing for blockchain.
Beyond BuSineSS contractS There are many uses for blockchain technology in finance and beyond, but currently most of these technologies, with the exception of cryptocurrencies, are aimed squarely at the busi- ness to business market (B2B).
For blockchain to move beyond small-scale trials and experimenta- tion, the whole software and hard- ware infrastructure stack needs to scale to support larger and larger volumes of transactions.
In 2018, a KPMG paper looking at uses for blockchain described the challenges of integrating blockchain into existing, legacy processes. The paper warned that organisations need to be aware that their legacy systems may not be designed to interact with block- chain systems or capitalise on the advantages they offer.
“Comprehensive examination of interoperability and integra- tion is essential,” the KPMG paper stated. “Given the immuta- bility of transactions, it is essential that the proper mechanisms are in place to prevent incorrect data from being written onto the blockchain.”
Another area of concern is the privacy of financial transactions. According to PwC, the business benefits for many players, or even the industry, will not materialise if the “trust issue” is not addressed effectively. For PwC, the hurdles that lie ahead include understanding whether or not the public ledger can be hacked.
From a privacy perspective, if several different organisations are involved in a transaction that uses blockchain, not all group
members should have access to the data held within the blockchain. However, they still need to verify the blockchain’s integrity. Such secrecy flies in the face of the classic block- chain ethos.
Any transactions that go through Bitcoin or other cryptocurrencies are recorded as part of the block- chain process. Information such as wallet transactions, IP address and other details are collected. Being able to trace all wallet transactions could allow any interested parties to infer not only spending patterns,
but also socio-economic status and similar. It may not give away exactly what is being purchased, but this information can help build an overall picture of someone’s online spending habits.
Today, it is very much an exploration of what is possible. As with any technology, over time blockchain will become more refined and mature, and no doubt privacy capable and expandable as needed. n
BUYER’S GUIDE
the business benefits of blockchAin will not
mAteriAlise if the trust issue is not Addressed effectively.
hurdles include understAnding whether or not the public
ledger cAn be hAcked
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essay-question.txt
Industry experts believe blockchain is a technology that has the potential to affect the business of most IT professionals in the next five years. Pick an industry you feel will be most affected by blockchain and how blockchain may be used in that industry. As an IT manager, how would you embrace blockchain? For instance, how would training occur for your team, what strategies might you use, what security methods may you recommend be used? Your paper should meet the following requirements: • Be approximately five (5) in length, not including the required cover page and reference page. • Follow APA6 guidelines. Your paper should include an introduction, a body with fully developed content, and a conclusion. • Support your answers with the readings from the course and at least two scholarly journal articles to support your positions, claims, and observations, in addition to your textbook. The University Library is a great place to find resources. • Be clearly and well-written, concise, and logical, using excellent grammar and style techniques. You are being graded in part on the quality of your writing. Regards,
professor-suggested-reading.txt
Stoyanovich, M., & Tanz, F. E. (2019). Coming to Grips with Blockchain. Benefits Magazine, 56(5), 20-25. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=f5h&AN=135900272&site=eds-live Waldo, J. (2019). A Hitchhiker’s Guide to the Blockchain Universe. Communications of the ACM, 62(3), 38–42. Retrieved from https://doi.org/10.1145/3303868 Burns, S. (2019). Blockchain: Hype Vs Reality. Computer Weekly, 21-24. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=f5h&AN=138564674&site=eds-live Tarzey, B. (2019). Inside Blockchain and Its Various Applications. Computer Weekly, 16-20. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=f5h&AN=138681123&site=eds-live http://search.ebscohost.com/login.aspx?direct=true&AuthType=shib&db=buh&AN=133693412&site=eds-liveCarson, B., Romanelli, G., Walsh, P., & Zhumaev, A. (2018). Blockchain beyond the hype: What is the strategic business value? McKinsey Quarterly, (4), 118–127. Retrieved from
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Blockchain beyond the hype: What is the strategic business value?
Carson, Brant Romanelli, Giulio Walsh, Patricia Zhumaev, Askhat
McKinsey Quarterly. 2018, Issue 4, p118-127. 10p. 1 Color Photograph, 1 Diagram.
Article
*BLOCKCHAINS *DECENTRALIZATION in management *TRANSPARENCY in organizations *BUSINESS models *COST control *STRATEGIC planning
The authors discuss their study on the strategic business value of blockchain to major industries. They described a structured approach that companies can follow to examine blockchain strategies. The core advantages of blockchain are decentralization, cryptographic security, transparency, and immutability. It is said that the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams.
Partner, McKinsey's Sydney office Associate partner, Melbourne office Consultant, Melbourne office.
2881
0047-5394
133693412
Business Source Premier
Blockchain beyond the hype: What is the strategic business value?
Blockchain can generate meaningful value for many companies. The key is figuring out what strategy makes sense, given your customers' pain points and your company's market position Blockchain is all the rage. Bitcoin-the first and most infamous application of the technology-has grabbed headlines for its rocketing price and volatility. Predictions such as the World Economic
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Forum survey suggesting that 10 percent of global GDP will be stored on blockchain by 2027 have inspired government task forces, breathless press reports, and a multitude of conversations at Davos and in corporate conference rooms.[ 1]
Tellingly, large investments are being made. Last year, venture capitalists put more than $1 billion into blockchain start-ups.[ 2] Initial coin offerings (ICOs), the blockchain-backed sale of cryptocurrency tokens in a new venture, raised $5 billion in 2017. Leading technology players are putting money and people into blockchain: IBM has invested $200 million and more than 1,000 employees in the blockchain-powered Internet of Things (IoT).[ 3]
Yet the fact remains that blockchain is an immature technology with a nascent market and no clear recipe for success. No wonder many corporate leaders are asking themselves a lot of questions. Is blockchain a disruptive threat? Is it a fad? Most importantly, can blockchain have strategic value for my company?
To help answer these questions, we embarked on an industry-by-industry analysis of existing blockchain strategies, interviewing a range of experts including the executives overseeing these efforts at a number of companies. We evaluated the strategic importance of blockchain to major industries and identified who can capture what type of value through what type of approach. Our research led us to three key insights on the strategic value of blockchain:
• Blockchain does not have to be a disintermediator to generate value.
• Blockchain's short-term value will be predominantly in reducing cost.
• Commercially viable blockchain solutions deployed at scale are three to five years away for most companies.
In this article, we'll explain how we arrived at these insights and we'll describe a structured approach companies can follow to evaluate blockchain strategies. Some organizations may discover ways to extract value from blockchain in the short term. Dominant companies may discover even more: if they are willing to invest now to establish their blockchains as market solutions, they can cement their leadership and forestall the incursion of disruptive digital natives.
WHAT IS BLOCKCHAIN? Blockchain is not synonymous with Bitcoin, which is just one cryptocurrency application that uses it. Blockchain is a distributed ledger, or database, shared across a public or private computing network. Each computer node in the network holds a copy of the ledger, so there is no single point of failure. Every piece of information is mathematically encrypted and added as a new "block" to the chain of historical records. Various consensus protocols are used to validate a new block with other participants before it can be added to the chain. This prevents fraud or double spending without requiring a central authority. The ledger can also be programmed with "smart contracts," a set of
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conditions recorded on the blockchain, so that transactions automatically trigger when the conditions are met. For example, smart contracts could be used to automate insurance-claim payouts.
Blockchain's core advantages are decentralization, cryptographic security, transparency, and immutability. It allows information to be verified and value to be exchanged without having to rely on a third-party authority. Rather than there being a singular form of blockchain, the technology can be configured in multiple ways to meet the objectives and commercial requirements of a particular use case. Indeed, our research focused on more than 90 discrete use cases of varying maturity for blockchain across industries. To clarify this variety of applications, we structured use cases into six categories across blockchain's two fundamental functions: record keeping and transacting. Some industries have applications across multiple categories, while others concentrate on one or two.
Blockchain's disruptive potential lies partly in its technology, which eliminates the need for an entity to be in charge of managing, storing, and funding a database. A public blockchain, such as Bitcoin, has no central authority. This peer-to-peer model can become commercially viable due to blockchain's ability to compensate participants' contributions with "tokens" (application-specific cryptoassets), as well as with a stake in any future increases in the value. As a result, public blockchains can foster total disruptive disintermediation. However, as we explain in the following section, smart incumbent companies willing to engage with blockchain now can use the technology to prevent disintermediation.
THREE BLOCKCHAIN TRUTHS TO HELP SHAPE YOUR STRATEGY Incumbents looking to defend against disintermediation-or to go on the offensive themselves-should start by understanding three key insights.
'Permissioned' blockchains generate value and ward off disintermediation The commercial model that is most likely to succeed in the short term is a different kind of blockchain, a "permissioned" one, with controlled access and editing rights (exhibit). In this model, participants can benefit from securely sharing data while automating control of what is shared, with whom, and when. Equipped with meaningful transparency and fraud controls, these permissioned blockchains help existing companies reduce the complexity and cost of multiparty transactions. It's a way for incumbents to harness blockchain rather than be overtaken by it. Dominant players can maintain their positions as central authorities or join forces with other industry players to capture and share value.
Permissioned blockchains allow companies to develop distinctive value propositions in commercial confidence, with small-scale experimentation preceding scaled executions. At the Australian Securities Exchange, for example, a blockchain system is being deployed for equities clearing to reduce back-office reconciliation work for its member brokers.[ 4] IBM and Maersk Line, the world's largest shipping company, are working together to create a blockchain platform that would provide traders with a secure, real-time exchange of supply-chain data and paperwork.[ 5]
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The potential for blockchain to become a new open-standard protocol for use cases such as trusted records, identity, and transactions offers incumbents a powerful safeguard against disintermediation. Industry players greatly reduce the aperture for radical new entrants by learning to extract value from blockchain, especially if that value benefits customers. The degree to which incumbents adapt and integrate blockchain technology will determine its disruptive force in their industry.
In the short term, blockchain's strategic value is mainly in cost reduction Initially, blockchain will drive operational efficiencies. It takes cost out of existing processes by removing intermediaries and rationalizing administrative processes such as record keeping and transaction reconciliation. In the cases we analyzed, approximately 70 percent of the value at stake in the short term was in cost reduction.
Certain industries' fundamental functions are inherently more suited to blockchain solutions. The core functions of financial-services firms, for example, such as verifying and transferring financial information and assets, align closely with blockchain's core transformative impact. This explains why approximately 90 percent of major Australian, European, and North American banks are already experimenting or investing in blockchain. Governments, too, can reap considerable savings by putting key record-keeping and verifying functions onto blockchain infrastructure. From birth certificates to taxes, blockchain-based records and smart contracts can simplify interactions with citizens and increase data security. More than 25 governments are actively running blockchain pilots supported by start-ups. In healthcare, blockchain applications could unlock the value of data availability and exchange for providers, patients, insurers, and researchers. Blockchain-based healthcare records can improve administrative efficiency and give researchers access to the historical, patient-identity-protected data sets crucial for advancements in medical research.
Significant, scaled commercial applications are likely three to five years away Over time, the value of blockchain will shift from driving cost reduction to enabling entirely new business models and revenue streams. One promising use case is the creation of a distributed, secure digital identity. This could be helpful for individuals and lucrative for companies, which could customize services to people who grant them access in ways we can't imagine now. But these kinds of new businesses are more of a long-term possibility than a nearterm reality. Why? Because time is needed for four key factors to mature: standards and regulations, technology, asset digitization, and ecosystem.
Common standards must be developed. The lack of common standards and clear regulations can be a major limitation on the scalability of blockchain applications. When cooperation between multiple players is necessary, establishing such standards is as complex as it is critical. Industry consortia, such as the 70-bank group that collaborated to develop the financial-grade open-source Corda blockchain platform, will be needed to establish common standards. That kind of work is time- consuming.
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Thankfully, regulators are generally engaged rather than opposed or unaware. The US Securities and Exchange Commission, for example, is bringing ICOs under the agency's regulation and into the mainstream.[ 6]
Technology must advance. The immaturity of blockchain technology is a major concern for companies today. Organizations need a trusted enterprise solution, particularly because they may not realize the cost benefits of blockchain until their old systems are decommissioned. Currently, few startups have sufficient credibility, technology stability, or industry expertise for government or industry deployment at scale. Major technology players are positioning themselves to address this gap with blockchain-as-a-service (BaaS) offerings in a model similar to cloud-based storage.
Assets must be digitally connected. Assets such as equities, which are digitally recorded and transacted, can be simply managed end to end on a blockchain system or integrated through application programming interfaces (APIs) with existing systems. However, connecting and securing physical goods to a blockchain requires enabling technologies like IoT and biometrics. This connection can be a vulnerability in the security of a blockchain ledger.[ 7] While the blockchain record might be immutable, the physical item or IoT sensor can be tampered with. Certifying the chain of custody of commodities such as grain or milk, for example, would require a tagging system like radio-frequency identification, which could increase assurance even if it couldn't deliver absolute provenance.
The coopetition paradox must be resolved. Blockchains become more valuable with more participants, but they also become more complex to coordinate. For example, a blockchain solution for digital media, licenses, and royalty payments requires massive coordination among producers and consumers of digital content. Resolving this paradox of natural competitors having to cooperate is the toughest of these four factors. The issue is not identifying the network-or even getting initial buy-in-but agreeing on the governance decisions around how the system, data, and investment will be led and managed. The strategic incentives of the players must be aligned, a task that can be particularly difficult in highly fragmented markets. Overcoming this issue often requires a sponsor, such as a regulator or industry body, to take the lead.
A STRUCTURED WAY TO DEVELOP BLOCKCHAIN STRATEGY Fear of missing out on a new technology sometimes leads companies to develop solutions to problems that don't exist. We believe companies can avoid this trap through a structured approach to blockchain.
First, identify and skeptically assess a specific use case that can create value. Most companies can find use cases by taking a close look at the pain points affecting their industry and their customers. Companies can decide whether these cases are feasible by considering a variety of factors, such as its capability to design a blockchain solution, technology and asset constraints, and the potential for passing on benefits and savings to customers. If a use case does not meet a minimum level of
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feasibility and potential return, then companies should avoid launching a project just to "be in the game."
Companies that have identified a promising use case, however, will move on to the second part of our structured approach: understanding how their market position will impact that target use case.
Part of blockchain's value comes from its network effects and interoperability, and all parties need to agree on a common standard to realize this value- multiple siloed blockchains provide little advantage over multiple siloed databases. As the technology develops, a market standard will emerge and investments into the nondominant standard will be wasted. Coordination with other industry players is critical. That's why a company's market dominance, or lack thereof, affects its ability to influence other key players in the industry and to help shape standardization and regulatory barriers. Here's how market position shapes blockchain strategy.
Leaders: Build on existing strengths Leaders are dominant players in industries with few requirements for coordination and regulatory approval. These companies should pursue use cases now. They have the potential to create solutions that can solidify their market position and set industry standards. The greatest risk for these companies is inaction, which could open a competitive window for disruptors.
Change Healthcare is an example of a company taking advantage of its market leadership. One of the largest independent healthcare IT companies in the United States, it launched an enterprise- scale healthcare blockchain for claims processing and payment.[ 8]
Conveners: Shape standards to gain an edge Conveners are dominant players who cannot single-handedly direct blockchain adoption, since they operate in industries with considerable regulatory and standardization barriers. Conveners need to drive the conversations and consortia that will shape the new standards poised to disrupt their current businesses. Then they can position themselves to shape and capture the value of new blockchain standards.
Convening tactics should be deployed for high-value use cases, such as trade finance, that cannot be realized without a broadly shared set of standards. An example of a convener following this strategy is Toyota, whose Research Institute set up the Blockchain Mobility Consortium with four global partners to focus on blockchain solutions for critical accelerators of autonomous vehicles: data sharing, peer-to-peer transaction, and usagebased insurance.[ 9]
Followers: Stay informed and be ready to move fast Most companies are followers, in the sense that they lack the power to influence all necessary parties, especially when applications of blockchain require high standardization or regulatory approval. But followers cannot afford to ignore blockchain. They must be informed about market innovations, keeping a close watch on blockchain developments. They should also be prepared to move fast to adopt emerging standards. Just as businesses have developed risk and legal
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frameworks for adopting cloudbased services, companies should focus on developing a strategy for how they will implement and deploy blockchain technology.
Followership is risky, given the ability of dominant players to establish private-permissioned networks. A follower, no matter how fast, may find itself locked out of the exclusive club that establishes the initial proof of concept. Companies can mitigate this risk by joining select existing and emerging consortia early. The short-term investment costs of membership are often outweighed by the long-term costs of getting left behind.
Attackers: Leverage their market leadership Attackers are often new market entrants without an existing market share to protect, armed with disruptive or transformative business models and blockchain solutions. Attackers offer a service intended to disintermediate existing players. Most peer-to-peer applications, from finance to insurance to property, fall into this category. A good example of an attacker is Australian start-up Power Ledger, a peer-to-peer marketplace for renewable energy that raised 34 million Australian dollars through its ICO.[10] Sometimes, companies pursuing an attacker strategy will try to partner with a dominant company in the market to leverage their leadership influence.
Incumbents can deploy an attacker's blockchain strategy in a separate, noncore digital business. Blockchain-as-a-service (BaaS) providers, for example, often adopt an attack strategy when they try to sell services into industries where they currently do not participate.
Blockchain has strategic value for many companies. In the short term, the technology can reduce costs without disintermediation, and in the long run it can create new business models. Existing digital infrastructure and the growth of BaaS offerings have lowered the costs of experimentation. However, a variety of fundamental factors limit the scalability of many use cases and extend the amount of time needed for return on investment on proof of concepts.
Assessing these factors with pragmatic skepticism about the scale of impact and speed to market will help reveal the correct strategic approach on where and how companies can extract value in the short term. Dominant players, however, have an enormous opportunity to establish their blockchain as the market solution. They should be making those moves now.
1 Deep shift: Technology tipping points and societal impact, World Economic Forum, September 2015, weforum.org.
2" Blockchain startups absorbed 5X more capital via ICOs than equity financings in 2017," CB Insights, January 2018, cbinsights.com.
3 " IBM invests to lead global Internet of Things market-shows accelerated client adoption," IBM, October 2016, ibm.com.
4"ASX selects distributed ledger technology to replace CHESS," ASX, December 2017.
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5" Maersk and IBM to form joint venture applying blockchain to improve global trade and digitize supply chains," IBM, January 2018, ibm.com.
6 Jay Clayton, "Statement on cryptocurrencies and initial coin offerings," U.S. Securities and Exchange Commission, December 2017, sec.gov.
7 To be sure, blockchain does not eliminate the possibility of fraudulent data being written to the database, which could in turn be used to substantiate the existence of fraudulent assets.
8 "Change Healthcare announces general availability of first enterprise-scale blockchain solution for healthcare," Change Healthcare, January 2018, changehealthcare.com.
9 "Toyota Research Institute explores blockchain technology for development of new mobility ecosystem," Toyota, May 2017, toyota.com.
"Power Ledger token generation event closes with A$34million raised," Power Ledger, October 2017, web.powerledger.io.
DIAGRAM: Exhibit. Private, permissioned blockchain architecture offers a way to optimize network openness and scalability. Blockchain-architecture options
PHOTO (COLOR)
~~~~~~~~ By Brant Carson; Giulio Romanelli; Patricia Walsh and Askhat Zhumaev
Copyright of McKinsey Quarterly is the property of McKinsey & Company, Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.
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computerweekly.com 10-16 September 2019 21
Industry experts believe blockchain is a technology that has the potential to affect the business of most IT profession-als in the next five years. Analyst Gartner has forecast that by 2023, blockchain will support the global movement and tracking of $2tn of goods and services.
It is regarded by many industry watchers as a disrupting force in the financial world. A PwC global financial technology (fintech) survey found that 56% of respondents recognise the importance of blockchain. At the same time, however, 57% admit to being unsure about or unlikely to respond to this trend.
Start witH tHe HaSH Blockchain is effectively a shared ledger between a group of people – for example, a group of companies that work together to produce a service or product. What makes blockchain differ- ent is the fact that the history of the changes – past transactions, for example – are immutable.
Essentially, the historical entries become read-only and unchangeable. This is due to the fact that each blockchain entry relies on the hash – a computed value including part of a previous block as part of its hashing calculation for the current block. This means that if a previous block is somehow modi- fied or corrupted, its hash value will change and therefore the values after that point become broken, making the tampering evident for all to see.
One example where blockchain technology can be used is where several companies come together to provide or consume
Blockchain: hype vs reality Regarded by many as a disruptive force in finance and beyond, blockchain technology presents a number of complex challenges that must be overcome before it can truly deliver on its promises. Stuart Burns reports
BUYER’S GUIDE TO BLOCKCHAIN TECHNOLOGY | PART 1 OF 3
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services, usually under long-term contracts. It can be complex and cumbersome to manage contracts involving several individu- als, when multiple documents are involved and everyone needs to agree on the same contract versions and details. Over time, changes will occur that also need to be managed and agreed on.
Managing contracts in blockchain, however, means that rather than physical bits of paper being passed around, it becomes possi- ble to mathematically guarantee the contract documents are as intended and the appropriate (digital) sign- off is a part of the chain. That chain can be verified by any of the parties as required. This is a key part of the whole blockchain concept.
an early trial In 2016, Barclays and Wave com- pleted what they described as a “world first” by using blockchain technology to handle the docu- mentation to approve a fund trans- action, which was made through the Society for Worldwide Interbank Financial Telecommunication (Swift). The letter of credit transaction between Ornua (formerly the Irish Dairy Board) and Seychelles Trading Company used distributed ledger technology via the Wave platform to enable all parties involved to see the documents they needed and transmit them where required on a decentralised network. This removed some of
the inefficiencies of traditional international trade and brought completion timescales down from weeks to a few hours. It is not hard to see how the use of blockchain could be extended to include many different types of information, eventually encom- passing the general public.
For instance, an article by McKinsey estimates that using block- chain to sign up new retail banking customers has the potential to
create up to $1bn of savings in oper- ating costs globally and reduce reg- ulatory fines by between $2bn and $3bn. “In addition, we expect block- chain solutions to reduce annual losses from fraud by $7bn to $9bn,” McKinsey stated.
management cHallengeS However, setting up and managing blockchain is a complex process that requires skilled design. As Gartner notes, a distributed ledger requires the recording and replicat-
ing of data in a secure manner. This is a complex mechanism with significant computational load (called mining). As such, blockchain has rather large scalability issues. Verification of blocks can take several minutes, which makes blockchain inap- propriate for real-time transactions.
Each blockchain consumer may need to verify an entire trans- action history, which is very inefficient and requires a high
A distributed ledger requires the recording And replicAting
of dAtA in A secure mAnner. this is A complex mechAnism with
significAnt computAtionAl loAd. As such, blockchAin hAs rAther
lArge scAlAbility issues
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computational workload. New platforms are being developed that explore alternative approaches to verifying the integrity of blockchain transactions. These include massively diverse public ledgers for verifying historic transactions.
Other ideas include having a random pool of machines that vali- date the blockchain and publicly announce the results of the vali- dation, saving everyone repeating the same compute-intensive functions. The very nature of these random machines and
frequency with which they are rotated means that discovering and trying to attack verification hosts should be extremely difficult.
All current blockchain systems have some limitations in terms of scaling. So, such techniques may not scale to the level needed for blockchain to be a viable replacement to existing payment processing networks. However, there is now growing interest in new distributed processor workload platforms, such as Golam, and the use of hardware-based acceleration, application-specific
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All current blockchAin systems hAve some limitAtions in terms of scAling
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integrated circuits (Asics) and graphics processing units (GPUs), all of which aim to accelerate processing for blockchain.
Beyond BuSineSS contractS There are many uses for blockchain technology in finance and beyond, but currently most of these technologies, with the exception of cryptocurrencies, are aimed squarely at the busi- ness to business market (B2B).
For blockchain to move beyond small-scale trials and experimenta- tion, the whole software and hard- ware infrastructure stack needs to scale to support larger and larger volumes of transactions.
In 2018, a KPMG paper looking at uses for blockchain described the challenges of integrating blockchain into existing, legacy processes. The paper warned that organisations need to be aware that their legacy systems may not be designed to interact with block- chain systems or capitalise on the advantages they offer.
“Comprehensive examination of interoperability and integra- tion is essential,” the KPMG paper stated. “Given the immuta- bility of transactions, it is essential that the proper mechanisms are in place to prevent incorrect data from being written onto the blockchain.”
Another area of concern is the privacy of financial transactions. According to PwC, the business benefits for many players, or even the industry, will not materialise if the “trust issue” is not addressed effectively. For PwC, the hurdles that lie ahead include understanding whether or not the public ledger can be hacked.
From a privacy perspective, if several different organisations are involved in a transaction that uses blockchain, not all group
members should have access to the data held within the blockchain. However, they still need to verify the blockchain’s integrity. Such secrecy flies in the face of the classic block- chain ethos.
Any transactions that go through Bitcoin or other cryptocurrencies are recorded as part of the block- chain process. Information such as wallet transactions, IP address and other details are collected. Being able to trace all wallet transactions could allow any interested parties to infer not only spending patterns,
but also socio-economic status and similar. It may not give away exactly what is being purchased, but this information can help build an overall picture of someone’s online spending habits.
Today, it is very much an exploration of what is possible. As with any technology, over time blockchain will become more refined and mature, and no doubt privacy capable and expandable as needed. n
BUYER’S GUIDE
the business benefits of blockchAin will not
mAteriAlise if the trust issue is not Addressed effectively.
hurdles include understAnding whether or not the public
ledger cAn be hAcked
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prof-reading-3.pdf
benefits magazine may 201920
C OM ING T O GR IP S W I T H
BLOCKCHAIN by | Michael Stoyanovich and Frank E. Tanz
may 2019 benefits magazine 21
Blockchain is more than just a buzzword, and benefits organizations should begin familiarizing themselves with the concept. The authors explain the basics of this much-hyped technology and describe its potential applications.
benefits magazine may 201922
N o doubt you’ve heard or read about blockchain technol- ogy.1 There’s certainly been a lot of hype. But you’re prob-
ably more than a little fuzzy on what blockchain is and what, if anything, it can do for your organization now. You have a lot of questions, which we will try to answer.
While it’s still too early for you to worry about adopting blockchain in your benefits-centric organization, it’s not too soon to start learning what it is, to educate yourself and to be prepared. Remember where cloud computing stood six or seven years ago? Everyone was talking about it, but relatively few organizations used it, let alone under- stood it. That’s where blockchain is to- day. Like the cloud, blockchain is more
than just a buzzword. It may have great potential to transform your organiza- tion. Just not yet.
What Is Blockchain? Simply put, blockchain is a new
form of ledger. Remember that led- gers are a collection of accounts, a list of events and transactions. They used to be books. Today they’re databases. In the future, in many cases, they’ll be blockchain.
A defining characteristic of block- chain is that instead of storing and pro- cessing data in a centralized database (with a backup, of course), as we do to- day, it uses distributed ledger technology. This means that data is shared member to member (more properly described as peer to peer), across all the members of
a network (also known as nodes). See Figure 1.
Any approved user can add or change data in the blockchain and instantly view transactions made by other users. The data is replicated and synchronized, all greatly minimizing any chance of discrepancy or manipu- lation.
Every piece of information a user adds is mathematically encrypted. Moreover, every time a user changes a unit of data (a block) it automatically re-encrypts all of the previous trans- actions (the chain). As a result, the blockchain data gets more secure every time a user makes a change to the led- ger. This significantly reduces the risk of privacy breaches and unauthorized data manipulation.
blockchain
FIGURE 1
This is how data is processed and stored today.
This is how data is processed and stored using blockchain.
Backup
Database
Node
Node
Node
Node
Node
Node
Node
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Data cannot be manipulated without network consensus2 from most contributors to the blockchain. This ensures the blockchain is transparent, consistent and almost completely immutable3 without going through a centralized authority, like a bank. See Figure 2.
What Are the Advantages of Blockchain? In addition to giving users access to up-to-date informa-
tion, blockchain creates trust by providing a verifiable, de- centralized record of transactions. The four key benefits are:
1. Transparency. Any user can examine the entire trans- action history of the blockchain.
2. Integrity. Users are required to rely on the network’s shared protocol.
3. Efficiency. Eliminating third parties minimizes settle- ment times and reduces payment and processing fees.
4. Security. Verified transactions can’t be modified. Blockchain is particularly valuable in low-trust envi-
ronments where participants can’t transact business di- rectly or lack a trusted intermediary. For example, the United Nations Development Program (UNDP) used it in Serbia alongside several nongovernmental organizations. People were allowed to receive remittances from their families through a UNDP portal. The funds were sent di- rectly to individuals’ digital identity cards, which could be used to buy groceries and electricity and pay bills. Block-
chain was used to keep record of how the funds were al- located, and it enabled everyone to trade where money was spent.
Can Anyone Join a Blockchain? That all depends on whether the blockchain is public or
private. A public blockchain (like the cryptocurrency Bitcoin) is
open to all participants, and network expansion is encour- aged. Anyone can run a node on the network. The complete transaction history is visible to all. Consensus is achieved through decentralized methods, such as proof of work, which requires some type of work from the participants or proof of stake, in which the creator of a new block is chosen in a predetermined method, based on the existing wealth of the participant.
On the other hand, a private blockchain is open only to allowed participants. These are typically business partners
learn more Education 65th Annual Employee Benefits Conference October 20-23, San Diego, California Visit www.ifebp.org/usannual for more information.
blockchain
FIGURE 2
A Digital Ledger It maintains a record of all the transactions
on a peer-to-peer network.
Immutable All the data on a blockchain is
encrypted, and every change is recorded
so it can’t be changed.
Decentralized There’s no need for a
principal authority.
Versatile Much more than the platform for
cryptocurrencies, blockchain can be used to share
contracts, records and other data.
Safe Information is
encrypted so it can be shared among
numerous members in complete privacy.
benefits magazine may 201924
whose integrity is assumed. In a private blockchain, nodes can have different levels of privileges and permissions. Consensus can be achieved through a wider variety of methods (not nec- essarily decentralized or computer-intensive methods).
Who Uses Blockchain? Today, blockchain is being used most widely and aggres-
sively by many cryptocurrencies. However, it is being studied for use in:
• Supply-chain management—to validate the sources and quality of goods as they move from suppliers to end users
• Financial services—to reduce the cost of real-time transfers between bank accounts while mitigating transactional risks
• Property rights—to register ownership by verifying identity and preventing fraud and error
• Retail—to protect consumers who will not need to provide personal information to make purchases.
Common examples of potential applications include: • Smart contracts.4 Blockchain could expedite bicycle-
sharing systems 5 and automatically unlock the door to rented lodgings.
• Cloud storage. Users could earn tokens (cryptocur- rency) for storing other people’s data on their unused hard drive space.
• Payroll. Cryptocurrencies make it easy to pay interna- tional workers.
• Voting. Blockchain elections would be virtually un- hackable.
• Business process management. Processes such as claims adjustments could stretch across multiple orga- nizations more fluidly and easily than today.
That said, aside from the cryptocurrencies, no major block- chain initiatives have advanced beyond the research or beta (limited testing) phase. There is no widespread market adop- tion. Although there have been a slew of business press articles purporting to describe how companies “use” blockchain, they all describe planned initiatives, prototypes or limited imple- mentations, not robust functioning environments.
Some of the possibilities for the use of blockchain in health care, highlighted in a 2018 CB Insights6 report, include:
• Managed-provider information management • Drug supply-chain application • Claims-management payments and prior authorization • Patient health records and other patient-specific
applications. While some of these initiatives may be available in the
near term, most are targeted as future endeavors.
Then Why All the Hype? Blame it on the cryptocurrencies, which use blockchain,
especially bitcoin. In fact, blockchain and bitcoin are often confused (See the sidebar “What’s the Difference Between Blockchain and Bitcoin?”).
As of this writing, there were approximately 2,520 crypto- currencies with market capitalization of $114.4 billion,7 but the number and value of these cryptocurrences can fluctuate drastically. The mostly positive coverage cryptocurrencies have received has facilitated their rapid growth. This has led to vast investments for blockchain startups, rising consumer awareness and government support.
According to Bain & Company research, 80% of financial executives think this new technology will be transformative.8 Moreover, 41% of respondents to a Deloitte global survey say they expect their organizations will bring blockchain into production within the next year, although 39% think the technology is overhyped.9
Are There Any Drawbacks to Using Blockchain? That depends on how you use it. When it comes to da-
tabases, blockchain’s advantages come with significant
takeaways • Blockchain is a new form of ledger that shares mathematically
encrypted data across all members of a network. Data in the ledger cannot be manipulated without network consensus from most contributors to the blockchain.
• Key advantages of blockchain are transparency, integrity, efficiency and security.
• Blockchain is used most widely by cryptocurrencies but is being studied for business uses including supply-chain management, financial services, property rights and retail.
• Traditional databases may perform better than blockchain in some instances because they have faster processing times.
• Because the market for blockchain is not mature outside of cryptocurrency, the technology will not make its way into benefits for some time.
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trade-offs. In some instances, traditional databases may perform better than blockchain. This is because traditional databases are usually centralized, which makes processing time exponentially faster. This is an extremely important consideration, especially if a transaction has to be com- pleted quickly. For example, blockchain is not well-suited for booking reservations or purchasing goods and servic- es that are needed right away since the amount of time it would take for consensus to be realized may be unaccept- able.
In addition, like any database model, blockchain is not 100% immutable. System security depends on the adjacent applications, which can be attacked and breached.
So What’s the Bottom Line About Blockchain? While blockchain has real promise, much of its value has
yet to be realized. Pure potential is great for discussion but poor for production.
To unlock the value of blockchain, you will need to un- derstand how and if it aligns with your organization. For example, blockchain works to solve trust problems by pro- viding a verifiable, decentralized record of transactions and allowing network members to post transactions directly to other peers without having to go through an intermediary. If you don’t require that kind of functionality, you may not need blockchain.
When organizations determine they can benefit from blockchain, it is important to beware of blockchain vapor- ware (products that are marketed and either not delivered or fail to even minimally meet expectations). As always, buy only from vendors that present real solutions to real
problems rather than offering the latest “blockchain secret sauce.”
For now, however, it is enough to know the technology. Don’t feel pressured to adopt it yet. The market is not mature outside of cryptocurrency, and it will take a while for viable blockchain solutions to make their way into employee ben- efits design and administration.
Endnotes 1. Blockchain technology will be referred to as blockchain throughout the article. 2. Consensus is a mechanism in which participants on the blockchain reach agreement on the validity of the ledger. It is a critical feature of a blockchain. 3. Immutable means not capable or susceptible to change. 4. Smart contracts are self-executed protocols that are activated when predetermined conditions are met. They add significant value to blockchain by allowing transactions to take place automatically without human inter- ference. 5. A bicycle-sharing system is a service in which bicycles are made avail- able for shared use to individuals on a short-term basis. They are in use in many major metropolitan areas. 6. “How Blockchain Technology Could Disrupt Healthcare,” CB insights, Research Report, accessed March 4, 2019. Available at www.cbinsights.com /research/report/blockchain-technology-healthcare-disruption/. 7. Investing.com, accessed Februar y 1, 2019, www.investing.com /crypto/currencies. 8. Thomas Olsen, Frank Ford, John Ott and Jennifer Zeng, “Blockchain in Financial Markets: How to Gain an Edge,” Bain & Company Brief, Febru- ary 9, 2017. 9. Linda Pawczuk, Rob Massey, David Schatsky, Breaking blockchain open—Deloitte’s 2018 global blockchain survey, January 2018.
Michael Stoyanovich is a vice president and senior consultant with the administrative and technology consulting practice at Segal Consult- ing. He has more than 20 years of
experience in the technology and benefits indus- try, including extensive expertise in technology and working with multiemployer plans. He can be reached at [email protected].
Frank E. Tanz is a vice president and senior consultant with Segal Consulting. He has more than 20 years of experience in the Taft- Hartley multiemployer industry
and is an expert in multiple disciplines, including software engineering, database administration, networking and system administration. He can be reached at [email protected].
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What’s the Difference Between Blockchain and Bitcoin? Blockchain is best known as the driving force behind the dominant cryptocurrency Bitcoin. But it’s not the same thing.
The confusion began in 2008 when a single white paper introduced both Bitcoin and blockchain. The first Bitcoin transaction took place the next year.
The proliferation of Bitcoin and the resulting media attention led to the incorrect assumption that Bitcoin and blockchain are synony- mous. Although blockchain powers Bitcoin, cryptocurrency is but one application of the technology. It has many other applications.
blockchain
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W hen people interact with each other, for example via financial transactions, sharing legal docu-ments or trading through supply chains, they need a high level of confidence that the data recording their interaction is accurate and true.
A distributed ledger makes it possible to build applications where multiple parties can execute transactions online without the need to trust a central authority or indeed each other.
Over the past few years, the number of use cases for distributed ledgers, and their more specialised form, blockchains, has been increasing, as has the technology to support the underlying infra- structure and build applications on top of it.
With a distributed ledger, every user has their own full, or in some cases partial, copy of the database, referred to as a node, which can be a physical device, a virtual machine or a software container.
Each node runs the relevant software to provide the infrastruc- ture management and the relevant application, including the ability to complete “smart contracts” that negotiate the direct exchange of assets between participating nodes.
consensus For a transaction to proceed, all nodes must verify a transaction and agree its order on the ledger.
Doing so is termed “consensus”, which is necessary, for exam- ple, to avoid double counting or overspending when it comes to financial assets.
Consensus involves four steps, from the transaction being initiated to it being committed on all nodes with a timestamp
InsIde blockchaIn and Its varIous applIcatIons
Bob Tarzey explores the technology around blockchain shaping how businesses use data
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providing a unique cryptographic signature. These steps can be completed in seconds or minutes, depending on the technology.
Blockchains are distinguished from other distributed ledgers in being updated by adding blocks of new transactions to create an immutable tamper-proof log of sensitive activity.
The right to write blocks may require proof-of-work – which can be time and resource intensive – the aim being to prevent, for example, mass updates by bots.
Nomenclature has become confusing as the two terms, dis- tributed ledger and blockchain, have been used interchangeably, with the latter prevailing, being punchier and, perhaps, sounding more contemporary.
public or private Blockchains can either be public or private and require permis- sion to update or not. Use cases range from international money transfers, managing shareholder records and legal contracts to recording the provenance of gemstones and the condition of goods in transport.
To date, the most high-profile use of blockchain has been to oper- ate cryptocurrencies, a way of exchanging and storing value online independent of central banks. From this has involved initial coin offerings (ICO), a way of using cryptocurrencies as an alternative to initial public offerings (IPO) for companies to raise capital.
With the oldest and highest profile blockchain application, bitcoin, it can take many minutes for consensus to be reached, which is why the cryptocurrency has a reputation for poor perfor- mance and scalability. It is also criticised for the datacentre power
it consumes in a process called mining, the form of proof-of-work, rewarded with bitcoins, used to add new blocks of transactions to the bitcoin blockchain.
As the use of blockchains has extended to other use cases, the aim has been to overcome these deficiencies.
Different approaches are enabled through frameworks which provide the basic architecture, protocol and network support.
Frameworks simplify the development, deployment and sup- port of applications that access a given blockchain. There are several blockchain frameworks which compete and/or address different requirements.
Frameworks The most widely used is Ethereum, an open source public block- chain framework. The first implementations were in 2015, but it is already thought to account for 80% of blockchain-based projects.
Ethereum suits highly distributed requirements where the transparency of data to all users is important – for example, a customer loyalty network where retailers need to independently verify a user’s activity to provide benefits.
Ethereum was the first platform to enable full-fledged smart contracts, which, for example, makes it quick and easy to launch ICOs. Ethereum is also the name of a cryptocurrency based on the platform.
The Linux Foundation’s Hyperledger Fabric is an open source enterprise private blockchain framework suited to applications that require privacy and permission controls with a known set of members – for example, a financial application where certain
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trade-related data is only shared with select banks. In effect, it is a hub for the open development of blockchains for solving cor- porate tasks.
The project started in 2015 and has more than 100 participating companies which pay a membership fee, starting at $50,000 per annum, enabling them to contribute software code to the project.
Waves is an open source blockchain platform created by a Russian company specifically for launching ICOs; a distant sec- ond to Ethereum for doing this. It includes a decentralised trading exchange. Ripple is an open source platform used as an international currency exchange for both cryptocurrencies and fiat currencies. It is designed to allow fast and cheap international transactions.
The NEM Foundation’s platform claims the scalability and per- formance to suit a range of use cases, including financial pay- ments, cryptocurrencies, equity markets and escrow services, using a consensus algorithm called proof-of-importance that provides privileges to participants with the best reputations.
smart contract platForm EOS is a smart contract platform and decentralised operating system intended for the deployment of industrial-scale appli- cations. It aims to eliminate transaction fees and be highly scalable. R3’s Corda operates smart contracts, within the Java Virtual Machine, and is aimed at financial institutions. Iota is
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an open source distributed ledger, customised to work with internet of things (IoT) applications providing feeless micro- transactions. JP Morgan’s Quorum is Ethereum-based, claiming enterprise scalability and the ability to limit access to transac- tion history, while providing maximum transparency.
blockcHain as a service Quorum has recently been selected by Microsoft as the first supported framework for its managed Azure Blockchain Service.
The aim of such managed, blockchain-as-a-service offerings is to avoid self-hosting of blockchain infrastructure, eliminating the need to provision hardware, configure software and set up net- working and security components, as well as ease the develop- ment of applications on top of one or more frameworks.
The Microsoft Azure Blockchain Service was launched earlier in 2019, on top of earlier releases of a blockchain development kit and workbench. It integrates with Microsoft’s Active Directory and Visual Studio, as well as a range of open source tools.
The Amazon Managed Blockchain was launched in December 2018 and supports both Hyperledger Fabric and Ethereum. Amazon Web Services (AWS) claims it enables the rapid creation of new blockchain networks that can span multiple AWS accounts, that can automatically scale to meet the demands of thousands of applications. It monitors the network and automatically replaces poorly performing nodes assigning processing power and mem- ory flexibly, as would be expected on a managed platform.
The launch of the service means AWS now competes with some of its platform partners, such as ConsenSys’s Kaleido.
The IBM Blockchain Platform, launched in 2017, is based on Hyper Ledger. It can be run on-premise or as a cloud service on a customer-chosen platform and includes a set of security services suited to the requirements of enterprise customers. Oracle also released a blockchain platform based on Hyperledger Fabric in February 2019.
specialist requirements Alongside some of the IT industry’s biggest names, many smaller, niche players are coming to market to serve specialist requirements and applications relating to blockchain.
Gospel Technology is a private permissioned blockchain aimed at safe data sharing. Use cases include human resources systems and pharmaceutical testing. To this end, it provides consensus on reads, as well as writes, ensuring that it is opaque about data, but open about who has accessed it.
Because Gospel is focusing on content as much as transactions, the data volumes involved can be high, so network nodes can store a subset of the data relevant to their needs. This also means it can make use of Byzantine fault tolerance, meaning it can continue to operate even if the status of certain nodes is unknown.
Gospel has just launched a version on the Google Cloud Platform, however, customers can use other platforms such as AWS or Azure.
Modum is a Switzerland-based company currently operating mainly in Germany – with global plans. It partners with AWS and SAP. Its offering aims to automate, integrate and digitise supply chains, the initial focus market being pharmaceuticals.
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Modum provides an IoT-type device with a data logger to be included with transported goods to monitor environmental con- ditions, such as temperature and humidity to prove compliance with good distribution practices.
The data collected can be immutably secured in a blockchain and shared with stakeholders to add a layer of trust.
Fraud prevention Tomia specialises in fraud prevention, traffic optimisation and roaming insights for mobile carriers. It provides real-time analyt- ics and recently announced a partnership with Microsoft, KPMG and R3 to provide a blockchain-based system to optimise dispute management and help resolve billing and settlement disputes.
Quant Network’s Overledger is a blockchain operating sys- tem providing the ability for applications to interact with mul- tiple blockchains.
The need for many-to-many relationships between applications and databases is not new: it was one that had to be addressed in the 1980s and 1990s with the rising use of relational databases. Standards were introduced and the market consolidated. This is what will happen in the world of blockchains. Furthermore, blockchain is not a panacea: it will never suit many applications where central control, extremely high speed or the mass storage of unstructured data are required.
Blockchain merely provides another choice in the range of database options available. n
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