Blockchainging the World

Blockchain​ ging the World An ‘Industry Analysis’ of one of the most interesting emerging technologies to have hit the Web, since, well, the Web itself.

OIDD 314: Professor Kartik Hosanagar Group:​ Peter Jeffrey, David Kanter, Griffin Owens, Laura Sachse, Gabby Zacarias

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Image: Berkeley, Jon. Featured in: “The Trust Machine: The Technology Behind Bitcoin Could Transform How the Economy Works.” ​ The Economist. ​ October 31, 2015. http://www.economist.com/news/leaders/21677198­technology­behind­bitcoin­could­transform­how­economy­works­trust­machine accessed April 10, 2016.

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Table of Contents Section

Name

Page

01

Executive Summary

3

02

Glossary

4

03

Introduction

6

04

Bitcoin

8

05

Ethereum

10

06

Financial Industry

13

07

Government

20

08

Internet of Things

25

09

Digital Rights Management

27

10

Conclusion

28

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01 Executive Summary “The economy that the blockchain enables is not merely the movement of money, however; it is the transfer of information and the effective allocation of resources that money has enabled in the human - and corporate-scale economy.”

- Melanie Swan, Institute for Blockchain Studies 2 The blockchain has been a venture capital buzzword, particularly in the last year. It resembles a black hole, where the implications are endless and barely understood by the masses, and perhaps even those developing its technology. After much confusion, conflicting opinions, and YouTube tutorials, we present the current state of blockchain affairs and the many applications being discussed.

Blockchain technology seeks to disrupt the current system of centralized institutions and offer a new infrastructure whereby the internet is run by individual computers all over the world. All transactions - monetary, asset-based, contract-based - would be put on a public ledger, consistently and constantly verified by nodes on the network. We believe this to have profound potential impacts.

Core innovations of blockchain technology: 1. Its decentralized nature enables a trustless mechanism for verifying transactions 2. The public ledger acts as a registry of all inventory for tracking, monitoring, and recording transactions 3. It eliminates the ability to defraud the network and worry of a “double-spend” 4. No single point of failure with no down-time 5. All of the decentralized nodes act as “miner-accountants,” constantly verifying new transactions on the network.

6. There is an incentive system in place for miners: in exchange for their computing power, they are given cryptoassets, usually in the form of cryptocurrency 7. Public/private key cryptography ensure that all transactions are encrypted We have outlined in the report below the history of how blockchain technology came about through the invention of bitcoin. We then move into what we believe to be the most promising infrastructure for the blockchain: a non-profit, open-source project called ethereum which has already gained substantial traction in the blocktech community. Next, we discuss 4 industries we expect to be disrupted by this new internet architecture: the financial industry, government, internet of things, and digital rights management.

We conclude with the positive and negative implications of adopting blockchain technology at scale, paying special attention to the major risks with regard to regulation, safety, and security. However, we believe the potential benefits of a technology that are worthy of further exploration, innovation, and experimentation.

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​ Swan, Melanie. ​ Blockchain: Blueprint for a New Economy.​ Sebastopol, CA: O'Rielly Media, 2015. Print.

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02 Glossary Simply put, the emerging industry that is utilizing blockchain technology is so new, there doesn’t exist a shared, agreed-upon dictionary of terms. We hope that you will first analyze this list of terms, understand them, and then utilize them to the best of your ability while reading this essay. Here are our list of terms: Bitcoin (BTC)

digital cash that is transacted via the internet in a ​ decentralized ​ trustless system using a ​ public ledger called the ​ b​ lockchain3. ​ There are approximately 15.5 million BTC in circulation, and a fixed supply of 21 million BTC (with the remaining 5.5 million to be mined from now until approximately 2140).

Blockchain

the public ledger of all bitcoin transactions that have ever been executed, which is constantly growing when new transactions are added 4

Blockchain 1.0

the original bitcoin based blockchain system launched in 2009, includes the currency and protocol.

Blockchain 2.0

the market and financial applications beyond currency, such as contracts5

Blockchain 3.0

applications of blockchain technology beyond currency, finance, and markets.

Blockchain Applications

any applications that could potentially be produced that use blockchain technology as the key innovation

Blockchain Technology (Blockech)

the technology that is being used by other companies and open-source projects attempting to recreate a “bitcoin” like platform

Client

each node on the network downloads a piece of software, which performs the task of validating and relaying transactions6

Cryptoasset

the virtual asset awarded to minors that can be traded publicly on the ledger and differs from cryptocurrency in that it is not pegged to a specific financial value

Cryptocurrency

the virtual money that is awarded to miners that can also be readily bought, sold, and tracked publicly on the ledger

Cryptography

computers on the network have to solving codes in order to verify transactions

Decentralized System

all of the nodes on the network have no single point, but instead, all (or most) nodes on the network talk to every other node on the network.

Double Spend

committing fraud by duplicating a transaction

Genesis Block

the very first transaction that occurred on the blockchain

Hash

the function by which the blockchain takes any size of data and turns it into an irreversible string (the 64 character code) that is publicly available on the blockchain

Mining

when currency is created or paid as a transaction fee for computational processing work in order to verify and record payments in the public ledger7

Swan, Melanie. ​ Blockchain: Blueprint for a New Economy.​ Sebastopol, CA: O'Rielly Media, 2015. Print.

Ibid 5 Ibid 6 Ibid 7 Ibid 3 4

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8 9

Node

every computer connected to the network is technically another piece of the network which provides compute power to validate transactions

Non-Bitcoin Asset

any cryptoassets on the blockchain that are not Bitcoin

Open Source

software that is managed, distributed and built by anyone, this is how the blockchain was created

Peer-to-Peer

the idea that in the blockchain, there is no centralized power that can be shut down, but there exists a network of only individual computers interacting with each other

Private Key

this is the secret key only known by the recipient of the message, the private key decrypts the message

Public Key

the key that is known to all members of the blockchain, it is used similar to an email address as it is the recipient's key; it is used to encrypt the message

Public Ledger

a linear, public, chronological account of all transactions verified on the blockchain since the genesis block until the most recent block

Smart Contracts

protocols that use the blockchain and public/private key cryptography to verify and validate that a contract or transaction was made

Smart Devices

physical devices that have sensors, are connected to the internet, are easily programmable, and can share information; the key component to IoT

Smart Property

property that can be encoded on the blockchain which has a unique key so it can be tracked, controlled, and exchanged on the blockchain8

Trustless

the protocol that blockchain technology is based on ensures that all transactions are validated, meaning you do not need to trust any centralized individual or organization to do this

Turing Complete

a machine that can solve any theoretical algorithm

Wallet Software

a place where people can send and receive cryptocurrencies electronically for an optional transaction fee on a personal computer, mobile device, or web application9

White Paper

the document produced by Satoshi Nakamoto in January 9, 2009, which explained the fundamentals of Bitcoin and the Blockchain.

​ Swan, Melanie. ​ Blockchain: Blueprint for a New Economy.​ Sebastopol, CA: O'Rielly Media, 2015. Print.

Ibid

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03 Introduction When the Chief Executive Officer of the United States’ largest bank makes an assertive comment on national television, it usually strikes a chord -- but perhaps not in the way we would all expect. At least that seems to be the case with bitcoin (BTC). On January 20, 2016, Jamie Dimon, the C.E.O. of J.P. Morgan Chase, was asked about bitcoin during an interview on CNBC, to which he responded “bitcoin the currency is going nowhere. There is nothing behind it, and if it was big the governments would stop it.” 10 Bitcoin opened at $377.24 on January 20th, and since stands at $428.05 as of April 17, 2016 representing a 13.3% increase in just three months11 . On the other hand, the value of J.P. Morgan’s stock, traded on the NYSE, has risen 12%, from $55.25 per share to $61.80 during the same exact time period.12 Luckily, and unlike most Wharton classes, we are not here to discuss the financial prospects of bitcoin, a technology that some claim has the potential to unravel the global financial system -- we just find it interesting that a currency “going nowhere” could slightly outperform America’s largest financial institution in a span of three months. To be fair, we of course recognize bitcoin’s market cap is much lower in volume than that of J.P. Morgan’s stock.

The truth is that not even the world’s foremost cryptocurrency expert has any legitimate idea as to what will be the value of bitcoin in the future. It has been extremely volatile as both a ‘store of value’ and as a usable alternative currency, and we believe only time will reveal whether Bitcoin holds a legitimate place in our society. Days before Dimon’s interview, one of bitcoin’s lead developers, Mike Hearn, stated that “(bitcoin) is an experiment, and like all experiments, it can fail” and proceeded to completely leave the community and pursue other ventures, some of which we will discuss in this paper.13 Though he claimed bitcoin dead, the value has only risen since.

The words of both Dimon and Hearn echo the sentiment, ​ bearish on bitcoin, bullish on the blockchain. Now what exactly does this mean? Most people do not understand the difference between the blockchain and bitcoin, or have never even heard of the blockchain. While the idea of virtual currencies has existed for decades (most famously E-gold), bitcoin’s underlying technology uses a peer-to-peer system that anyone could access via a computer.14 When people send each other bitcoin, the transactions are confirmed across the entire network and recorded in what is known as a public distributed ledger (accessible by anyone with a web-browser at blockchain.info).15 This is the origins of the ​ blockchain​ .

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Byrne, Brendan. “Jamie Dimon: Bitcoin ‘Worthless,’ Bullish on Blockchain.” ​ Value Walk.​ January 20, 2016. http://www.valuewalk.com/2016/01/jamie­dimon­bitcoin/ accessed April 11, 2016.

11 http://www.coindesk.com/price/ 12 https://www.google.com/finance?cid=665639 13 Hearn, Mike. “The Resolution of the Bitcoin Experiment.” ​ Medium. ​ January 14, 2016. https://medium.com/@octskyward/the­resolution­of­the­bitcoin­experiment­dabb30201f7#.tff6kklor accessed April 11, 2016.

14 https://en.wikipedia.org/wiki/Bitcoin 15 Ibid

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While Dimon discounts bitcoin’s value to society, he sees the blockchain as having an incredibly bright future. It is a technology which J.P. Morgan and other huge financial firms are studying as it could “reduce the cost” of many different functions of banks. This is only the start of the various applications that blockchain technology could bring that may fundamentally shape the next several decades. In the past three years, while bitcoin’s market cap has grown around 300%, “non-BTC blockchain assets [have] grown a whopping 1,600%,” with little signs of slowing down.16 Though the blockchain is gaining attention from venture and commercial sectors, the idea of distributed ledgers and how they can impact a variety of sectors is incredibly fascinating.

Blockchain technology uses an open system to verify all types of transactions. At first glance, the opportunities for this technology to uproot everything from how banks conduct business to how people vote in elections seems immense.17 While bitcoin has suffered from myriad problems and extreme volatility since its inception, people are claiming that the principles of the technology behind it can be separated and applied to address unique issues facing nearly every industry. By harnessing the power of the web in new and unprecedented ways, the blockchain seems to have the ability to simultaneously cut costs and increase security across a plethora of domains, as is evident by the image below.18

16

Sunnarborg, Alex. “The Rise of the Blockchain Asset Class.” ​ Venture Beat.​ April 3, 2016. http://venturebeat.com/2016/04/03/the­rise­of­the­blockchain­asset­class/ accessed April 12, 2016.

17 Plansky, John, O’Donnell, Tim, and Richards, Kimberly. “A Strategist’s Guide to Blockchain.” ​ Strategy + Business. ​ January 11, 2016 http://www.strategy­business.com/article/A­Strategists­Guide­to­Blockchain accessed April 14, 2016.

18 http://letstalkpayments.com/blockchain­use­cases­comprehensive­analysis­startups­invoved/

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04 Bitcoin “We have proposed a system for electronic transactions without relying on trust.”19 That ‘we’ refers to Satoshi Nakamoto - the creator of bitcoin whose identity is still unknown, aptly fitting for someone who created a system that fundamentally changes all notions of trust on the web as we know it. Most people understand bitcoin as “money, digital cash” that can be used for online transactions -- a ​ currency ​ of the web without borders and no jurisdiction, but with a loyal following of people - a group that many outsiders would label anarchists.20 They also know bitcoin for its volatile nature -- each coin was worth pennies for much of 2011 before shooting up to over $1,100 by the end of 2013 -- and then crashing back down.21

Bitcoin has an infamous reputation, and not just for the vast speculation surrounding its value. Bitcoin’s existence facilitated the ease through which “thousands of drug dealers and nearly 1 million eager worldwide customers” could find each other and do business, via an online platform known as the Silk Road.22 In addition, what was initially claimed as purported hackers stole $460 million worth of bitcoin in 2013 in an apparent heist on the world’s then largest bitcoin exchange, Mt. Gox.23 It is now claimed to have been an inside job by the company’s founder. Needless to say, these events caused great controversy and turmoil in the bitcoin community, and have contributed to the ensuing chaos surrounding the unregulated currency.

However, upon analyzing these occurrences, one can see that there is something quite significant about bitcoin. It is still here! In fact, as of April 19, 2016, bitcoin experienced a run 19

Nakamoto, Satoshi. “Bitcoin: A Peer­to­Peer Electronic Cash System.” ​ Bitcoin.org.​ November, 2008. https://bitcoin.org/bitcoin.pdf accessed April 16, 2016.

20 ​ Swan, Melanie. ​ Blockchain: Blueprint for a New Economy.​ Sebastopol, CA: O'Rielly Media, 2015. Print.

21 http://www.coindesk.com/price/ 22 Bearman, Joshua and Hanuka, Tomer. “The Rise and Fall of the Silk Road: Part I” ​ Wired.​ May 2015. Print.

23 McMillan, Robert. “Inside Story of Mt. Gox, Bitcoin’s $460 Million Disaster.” ​ Wired​ . March 3, 2014. http://www.wired.com/2014/03/bitcoin­exchange/ accessed April 17, 2016.

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of 24 days - the longest period since its inception - in which “bitcoin prices have been less volatile than gold prices.”24 Contrast this evidence with the fact that its foremost voice, Mike Hearn, recently left the community and called bitcoin dead, and you have a very interesting discussion beginning to emerge. Though all signs have pointed to the virtual currency being doomed, it has experienced its most stable period ever following these tumultuous events.

In every instance mentioned above, bitcoin as a project and an entity has never failed.

Satoshi’s code has held up. The blockchain has never been corrupted: proving how significant the underlying technology is. But in these extreme cases that give us all reason to fear the currency, one common theme unites them all: humans. People were at fault for the Mt. Gox disaster, and people have used bitcoin in nefarious ways to buy their drugs and even inflict acts of terror on others (some claim technology savvy militant group ISIS uses bitcoin as a sophisticated means of avoiding detection from governments).25 But not once has the technology, principles, and hard code behind bitcoin been at fault for these disasters; people manipulating its use has.

In fact, if anything, the events call attention for how the blockchain could be further innovated to address and solve such problems in the future. While the future of Satoshi’s bitcoin remains in question, the ideas he launched through creating bitcoin and namely the blockchain might enable us to create a much safer, more transparent world -- and save a ton of money.

24

Yang, Stephanie. “Is Bitcoin Becoming More Stable than Gold?” ​ Wall Street Journal. ​ April 19, 2016. http://blogs.wsj.com/moneybeat/2016/04/19/is­bitcoin­becoming­more­stable­than­gold/?shareToken=st3c4ea21b6d5c48b1853b8a1 dc2b96fd6&mod=e2tw accessed April 19, 2016.

25 Nauert, Heather. “ISIS Parks Its Cash in Bitcoin, Experts Say.” ​ Fox News. N ​ovember 25, 2015 http://www.foxnews.com/tech/2015/11/25/isis­parks­its­cash­in­bitcoin­experts­say.html accessed April 17, 2016.

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05 Ethereum Ethereum was created as a “​ single shared computer that is run by a network of users and on which resources are parceled out and paid for by ether.”26 The founder, Vitalik Buterin, started out with the goal to build a platform on which other companies could create and run decentralized applications through the use of blockchain technology, using a turing complete programming language.27 Additionally, it was created to be a better implementation of bitcoin, using the blockchain as the underlying key innovation. It was built to be more “secure, trustworthy, and globally accessible internet for [things like] agreements, finance, [and] auditing.”28 The vision here, quite simply, is to build a more coherent architecture for the internet, making it “how it should be.”29 Ethereum has matured nicely, and has grown rapidly in only a few years. In fact, it was only initially described by Vitalik Buterin in late 2013, when he published the ethereum white paper.

30 Over the next few years, ethereum published the ethereum Yellow Paper, which discussed the technical aspects of the virtual machine that would be developed by the network. Next, they built the ethereum client in seven programming languages (C++, Go, Python, Java, JavaScript, Haskell, and Rust), so miners could compute to earn bitcoin, and developers could create decentralized applications.31 In order to get the network of developers to build this open-source project they needed to start a crowdfunding campaign to get investors and developers on board. All donors to the project would be repaid in ether (their crypto-asset, the bitcoin equivalent for ethereum). This presale led to the creation of a legal organization, which was named the Ethereum Foundation, based in Switzerland.32 They hosted a 42-day pre-sale, which netted a total of 31,591 bitcoins. This was equivalent to $18,439,086 at the date of the sale, for which they gave back 60,102,216 ether to the donors. This cash was used to pay off debts to developers and investors. However, bitcoin plunged soon after by almost one-third, which put ethereum’s project in jeopardy.33 Since the pre-sale, however, ethereum has seen steady growth, and has been talked about in blocktech communities globally. They have gained a “fast-growing and devoted developer

26

Popper, Nathaniel. "Ethereum, a Virtual Currency, Enables Transactions That Rival Bitcoin’s." ​ The New York Times​ . The New York Times, 27 Mar. 2016. Web. 19 Apr. 2016. <http://www.nytimes.com/2016/03/28/business/dealbook/ethereum­a­virtual­currency­enables­transactions­that­rival­bitcoins.html?_ r=2>.

27 Finley, Klint. "Out in the Open: Teenage Hacker Transforms Web Into One Giant Bitcoin Network."​ Wired.com​ . Conde Nast Digital, 27 Jan. 2015. Web. 19 Apr. 2016. <http://www.wired.com/2014/01/ethereum/>.

28 Buterin, Vitalik. "The Evolution of Ethereum ­ Ethereum Blog." ​ Ethereum Blog.​ Ethereum Blog, 28 Sept. 2015. Web. 19 Apr. 2016. <https://blog.ethereum.org/2015/09/28/the­evolution­of­ethereum/>.

29 Ibid 30 "History of Ethereum." ​ History of Ethereum — Ethereum Homestead 0.1 Documentation.​ Ethereum Community, n.d. Web. 19 Apr. 2016. <http://ethereum­homestead.readthedocs.org/en/latest/introduction/history­of­ethereum.html>.

31 Ibid 32 Ibid 33 http://www.coindesk.com/price/

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community” by hosting conventions such as DevCon.34 The goal of these conferences, which have occurred every year since, is to gather developers to discuss ideas on how to make ethereum more “reliable, more secure, and more scalable.”35 Additionally, in order to encourage development of ethereum and applications on their platform they created the DEVgrants program in April of 2015. This increased the amount of developers working on the ethereum project, as well as facilitated constant feedback loops enhancing the quality of the platform.36 This allowed them to reach a “proof of concept.” The Ethereum Bounty Program has also been launched, which offers rewards for developers who find vulnerabilities in the ethereum program.37 The last initiative, and perhaps most successful, has been the launch of Ethereum Frontier. In July of 2015, the Frontier network was launched, which allowed developers to build apps that utilize smart contracts and decentralized applications on the live ethereum network.38 The ethereum team, more recently, has become extremely excited as results and tests have turned out to be far more “capable and reliable than anyone has expected.”39 This has caused many miners to join the network to mine ether, and developers to join in the process of building decentralized applications.

The keys to the ethereum framework are the smart contracts that are encrypted in the blockchain. These are essentially rules written out by developers, and the network is constantly checking and verifying if the rules are followed. The contracts are programmable, and follow a protocol just like the internet.40 These smart transactions have proven to decrease transaction costs, provide higher security, and are fully enforceable since the transcript of all transactions are public. When a smart contract is verified by a node on the network, the miner is awarded with ether, the crypto-asset that can be exchanged on the ethereum platform.

Ether is categorized as a crypto-asset instead of currency because it is not pegged to a specific monetary value. Instead, ether’s value is derived from computing power, as the miners are rewarded ethers in exchange for verifying the smart contracts on the ethereum network.41 By incentivizing the decentralized nodes to contribute the computing power necessary, ethereum is able to handle the transactions completed as well as the applications that are running.

34

"History of Ethereum." ​ History of Ethereum — Ethereum Homestead 0.1 Documentation.​ Ethereum Community, n.d. Web. 19 Apr. 2016. <http://ethereum­homestead.readthedocs.org/en/latest/introduction/history­of­ethereum.html>.

35 "History of Ethereum." ​ History of Ethereum — Ethereum Homestead 0.1 Documentation.​ Ethereum Community, n.d. Web. 19 Apr. 2016. <http://ethereum­homestead.readthedocs.org/en/latest/introduction/history­of­ethereum.html>.

36 Ibid 37 Ibid 38 Ibid 39 Ibid 40 Wallach, D. A. "Bitcoin for Rockstars ­ Backchannel." ​ Medium.​ BackChannel, 10 Dec. 2014. Web. 19 Apr. 2016. https://backchannel.com/bitcoin­for­rockstars­ca8366802f9#.96xbap4q6 41 Amirtha, Tina. "Meet Ether, The Bitcoin­Like Cryptocurrency That Could Power The Internet Of Things." ​ Fast Company.​ Fast Company & Inc., 21 May 2015. Web. 19 Apr. 2016. <http://www.fastcompany.com/3046385/meet­ether­the­bitcoin­like­cryptocurrency­that­could­power­the­internet­of­things>.

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There are currently 90 million ethers in circulation, with a cap of 18 million issued each year for miners and application developers. This creates a system of ​ deflation of the crypto-asset 42 since the supply is finite. New blocks of transactions are created about every 8 seconds and added to the blockchain. The computer that generates this block gets awarded 5 ethers.

Since there are thousands of nodes generating blocks, the award is randomly given “in proportion to the computational power of each machine.”43 Competitors of ethereum include MaidSafe and Nxt. Maidsafe directly asks consumers to download the application in order to access their SAFE (Secure Access for Everyone) network.

You tell the MaidSafe how much storage space you’re willing to give, and you become a node in the decentralized network on which blockchain applications can run. In exchange for offering this storage space, you are paid in safecoin automatically in a virtual wallet.44 Nxt is directed towards crypto-currencies to enable peer-to-peer trading of its cryptocurrency NXT, but also allows developers to build applications on top of the platform.45 As opposed to MaidSafe and NXT, we believe ethereum to be the platform with the most potential for adoption. It represents the proof of concept for Blockchain 2.0, and has several companies already using its platform to issue smart contracts and transactions through its blockchain. Yes, ethereum is just one of several projects that utilize blockchain technology, but it is the prime example how blockchain can be utilize by the public and developers in the new age of the internet. Below is a comparison of ethereum next to traditional players.46

42

https://www.ethereum.org/ether Ethereum.org 44 http://maidsafe.net/ 45 https://nxt.org/what­is­nxt/ 46 https://www.xnotes.com/technology 43

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06 Financial Industry The financial services industry is a trust-based industry comprised of central institutions such as banks, credit card companies, stock brokerages, accountancy companies, investment funds, etc. Since the financial crisis in 2008, Americans have lost some trust in these large financial institutions, which may have paved the way to the “disruption” of the financial services industry. Before the introduction of blockchain, FinTech has been creating cheaper and more efficient ways to operate within this industry. Banks have been attempting to replicate what FinTech has done by using their strategy and putting customer experience and data at the forefront, but has failed to do so because of outdated IT departments and the inability to adopt these technologies.47 Now entering this already disrupted industry is the blockchain, which is putting even more pressure on large financial institutions than anything introduced in FinTech thus far. Banks can respond in three different ways to this revolutionary technology. The first strategy has been the wait-and-see approach, where companies run the risk of being unprepared.

The second strategy has been to acquire or invest in startups operating in the space.

The third strategy has been for companies to internally invest time and money to create teams to innovate the existing IT landscape.48 In this section, we will explore what exactly the blockchain is disrupting in the financial space, and which strategies they are taking with the help of startups and the benefits they provide.

47

Davies, Steve, Manoj Kashnap, and Joerg Ruetschip. "Meeting the Fintech Challenge." ​ Strategy+business.​ PwC, 18 Apr. 2016.

Web. 20 Apr. 2016. <http://www.strategy­business.com/article/Meeting­the­Fintech­Challenge>.

48 Ibid

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The Blockchain and Financial Services “Decentralized systems, such as the blockchain protocol, threaten to disintermediate almost every process in financial services.”49 In the World Economic Forum (WEF) report, ​ The Future of Financial Industries, there are six main functions of the financial industry where innovation is changing traditional business models (Figure 6-A). While blockchain has the ability to infiltrate all of these bubbles, it will undoubtedly need to implement innovative payment schemes as the core enabling technology. In a survey conducted by Euromoney, 18% of businesses believe payments will be transformed by the blockchain (Figure 6-B).50 In a recent report published by Deloitte, the company predicts that block-chain based payment systems will take off in volume by 2020, creating a new world of payments that is both seamless and direct.51 So, what effects does this have on the current structure of the financial industry?

49

England. World Economic Forum. Financial Service Community. ​ World Economic Forum​ . By Jesse McWaters. London: DTI, 2000. Print.

50 Mani. "Banking Will Fundamentally Be Changed By Blockchain: Euromoney."​ ValueWalk.​ ValueWalk, 28 Dec. 2015. Web. 20 Apr. 2016. <http://www.valuewalk.com/2015/12/blockchain­banking/>.

51 "Banking Industry Outlook | Deloitte US | Center for Financial Services."​ Deloitte United States.​ Deloitte, 2016. Web. 20 Apr. 2016. <http://www2.deloitte.com/us/en/pages/financial­services/articles/banking­industry­outlook.html>.

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In a traditional payment scheme, the sender has to ask the financial institution to transfer an amount to a specific address. A secure message is sent out to the recipient bank that responds to this request via intermediaries (Figure 6-C). This process adds costs and delays, is vulnerable to fraud (including double-spend occurrences), and provides limited visibility into

value flow for both parties. In a decentralized scheme, users transmit value through a secured set of cryptographic processes (Figure 6-D)52 . While bitcoin has been the most common to use this decentralized payment system, many other startups are entering the space and using different encryption technology. This scheme is capable of real time settlement, low transaction costs, superior traceability and transparency, and is unalterable. The model does have shortcomings that are being addressed by blockchain startups.

These shortcomings include the issues of being very volatile, having irreversible transfers, and being vulnerable to large-scale hacking.

There are also questions around regulatory compliance and how it will apply to cryptocurrency.53 Despite these shortcomings, the WEF predicts that these systems will be more trusted in the future once implemented efficiently and accurately. Emerging markets hold huge opportunities for this system. About 2.5 billion adults (5 billion households) in the world do not have a bank account.54 Without access to credit cards and bank accounts, families in developing countries have a difficult time building wealth. These families, however, do own smart phones. Startups have been developing services that allows one to send money via SMS.55 This technology will create a virtual wallet for family members to send money to one another and can be used in day-to-day commerce. These startups include BitPesa in Kenya, BitPagos in South America, and Volabit in Mexico. Financial institutions simply do not have the capability to reach these “unbanked” customers due to regulatory complexity and poor economic infrastructure. This, in turn, opens up spaces for startups to use blockchain technology.

52

England. World Economic Forum. Financial Service Community. ​ World Economic Forum​ . By Jesse McWaters. London: DTI, 2000. Print.

53 Ibid 54 Vigna, Paul, and Michael Casey. ​ The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order​ . N.p.: n.p., n.d. Print.

55 Ibid

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Another area of opportunity for cryptocurrency and blockchain technology lies within cross-border payment. A company called Ripple has created a network to allow fast, low-cost international payments. The underlying blockchain technology allows banks all over the world to simply transact with each other without using third parties. Ripple uses a bridge currency dubbed XRP that has been proven to save respondent banks 42% in international payment infrastructure costs.56 XRP allows banks to consolidate their liquidity in one central account despite the local currency being transferred. In the future, as XRP gains usage, which will result in a decrease in volatility, that number is predicted to go up to 60% (Figure 6-E).57 Ripple’s solution for global settlement infrastructure is a prime example of how blockchain technology can capture an opportunity that has yet to be filled by big banks due to lack of innovation.

Lastly, the traditional payment system charges merchants a transaction cost when swiping a credit card.

Making small payments with this system is inefficient and not profitable for merchants that are selling low-cost products, especially digital assets. For example, if you are a publisher and you would like a customer to pay fractions of a dollar to read an article, it is impossible, and the traditional payment system is not ideal. Blockchain technology allows merchants on the Web to get instant value from creating content using this decentralized payment scheme, in addition to cryptocurrencies being divisible by millions. Micropayments can apply to TV subscriptions, WiFi hotspots, music, and any type of business that have subscription fees.58 Instead of subscription fees, a customer can pay for exactly what they are going to use.

56

Long, Monica. "Ripple and XRP Can Cut Banks' Global Settlement Costs Up to 60 Percent | Ripple." ​ Ripple.​ Ripple Labs, 23 Feb. 2016. Web. 20 Apr. 2016. <https://ripple.com/insights/ripple­and­xrp­can­cut­banks­global­settlement­costs­up­to­60­percent/>.

57 Ibid 58 Bheemaiah, Kariappa. "Block Chain 2.0: The Renaissance of Money." ​ Wired.com​ . Conde Nast Digital, n.d. Web. 20 Apr. 2016. <http://www.wired.com/insights/2015/01/block­chain­2­0/>.

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These areas of opportunities are just a few examples of what big banks have to compete with. If financial institutions choose not to compete, there are two other responses that seem the most logical next step. One strategy would be to facilitate these payment schemes as a complement by launching products that are connected to a cryptocurrency ecosystem.59 Another strategy would be for the bank to leverage its knowledge of decentralized payments and invest in creating new solutions. It is up for debate which strategy will win in the future, but there is no doubt that financial institutions must react in some way if they do not want to become obsolete.

Who is Being Proactive?

While some financial services companies are trying to defend their current products and services, many are being proactive with blockchain technology. As already mentioned, many financial institutions are investing and acquiring startups in order to integrate the technology into their current operations. NASDAQ and the NYSE have received media attention is the last year for their investment in blockchain technology. NASDAQ tested blockchain technology on issuing shares in the private market by partnering with the startup Chain.60 Chain helps facilitate the transfer of existing financial instruments, rather than creating a new financial instrument such as cryptocurrency. The traditional process for issuing shares has been proven to be expensive and labor intensive. Blockchain has been proven to be more secure and accurate since each computer in the system needs to verify the trade. The NYSE invested $75 million in CoinBase to shift public trading on a new platform dubbed Pillar.61 Like every other blockchain implementation, it’s designed to reduce the complexity by creating a “matching engine” to host trades.62 For both the NYSE and NASDAQ, blockchain improves the ability to verify historical transactions for long periods of time. Transfers cannot be duplicated, reversed, or deleted.

Banks and other financial service companies have also committed to taking a proactive approach. Goldman Sachs invested $50 million in Circle Inc, a P2P payment service using a text message-like platform. Citi and Capital One have also invested in Chain.com after NASDAQ. CBW Bank partnered with Ripple to, as discussed, use cryptocurrency for cross-border payments.63 Not only are financial institutions investing, but some are taking on the strategy to develop internally. Numerous banks have launched labs and initiative to create new products. CitiVentures (part of Citi) is testing three separate blockchains within labs and 59

England. World Economic Forum. Financial Service Community. ​ World Economic Forum​ . By Jesse McWaters. London: DTI, 2000. Print.

60 Shin, Laura. "Nasdaq Selects Bitcoin Startup Chain To Run Pilot In Private Market Arm." ​ Forbes​ . Forbes Magazine, 24 June 2015. Web. 20 Apr. 2016. <http://www.forbes.com/sites/laurashin/2015/06/24/nasdaq­selects­bitcoin­startup­chain­to­run­pilot­in­private­market­arm/#7c6baa1 652d7>.

61 Castillo, Michael Del. "NYSE Begins Shift to New Trading Platform." ​ New York Business Journal.​ American City Business Journal, 22 Feb. 2016. Web. 20 Apr. 2016. <http://www.bizjournals.com/newyork/news/2016/02/22/nyse­begins­shift­to­new­trading­platform.html>.

62 Ibid 63 Davies, Steve, Manoj Kashnap, and Joerg RuetschiP. "Meeting the Fintech Challenge." ​ Strategy+business.​ PwC, 18 Apr. 2016.

Web. 20 Apr. 2016. <http://www.strategy­business.com/article/Meeting­the­Fintech­Challenge>.

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a product called CitiCoin, which might be the first state-backed currency.64 UBS also opened its own technology lab to internally innovate and explore how to use the blockchain.65 One of the most impactful initiatives so far has been undertaken by a startup called R3CEV, a consortium that is attempting to develop a common crypto-technology-based platform.66 R3 has teamed up with forty banks and tested an online distributed ledger systems. Each bank acted as a separate node in the network. Each node had a user interface in order to issue, transfer, trade, and redeem commercial paper.67 These simulated transactions were conducted with the help of blockchain vendors and cloud providers and without human intervention. The point of the test was to run ledgers in parallel in a calculated way. Banks were also able to evaluate competing blockchain vendors and get familiar with these market players.68 ​ With the scalability that R3 is trying to accomplish, the security of the blockchain could be both solidified and trusted by the participation of huge banks such as Morgan Stanley and Bank of America. 69 Lastly, R3 is in a position of success not only for the massive tests they are currently conducting in an early adopters market, but because of their forward-looking vision. R3 is dedicated to continue prototyping in their collaborative labs in order to benchmark more use-cases in the future of blockchain.70 An Untapped Technology While these initiatives are exciting, many financial institutions and companies still do not understand exactly what the blockchain is and how it could apply to their operations.

According to a PWC report, 56% of financial services companies recognize the importance of blockchain, but 57% say they are unsure or unlikely to respond.71 While the wait-and-see approach seems less risky, this strategy seems to come from a lack of knowledge rather than a direct reflection of how disruptive this technology will be. In fact, 30% of funds and transfer payment institutions claim they are very familiar with blockchain, which is the sector where most disruption is occurring.72 It seems that there is a correlation between familiarity with the technology and where the technology is rolling out effectively. For this reason, it is important that financial service companies focus on being ahead of the curve rather than behind.

From all the use cases and endless advantages of blockchain, big banks can change the way they operate in a way that can benefit their own business and their customers. Besides the 64

Shin, Laura. "A Strategist’s Guide to Blockchain." ​ Strategy+business.​ Forbes.com LLC, 14 Sept. 2015. Web. 20 Apr. 2016. <http://www.strategy­business.com/article/A­Strategists­Guide­to­Blockchain>.

65 ​ Ibid 66 http://r3cev.com/ 67 ​ Higgins, Stan. "40 Banks Trial Commercial Paper Trading in Latest R3 Blockchain Test." ​ CoinDesk.​ CoinDesk2016, 3 Mar. 2016.

Web. 20 Apr. 2016. <http://www.coindesk.com/r3­consortium­banks­blockchain­solutions/>.

68 ​ Nash, Kim S. "Key Blockchain Vendors, Cloud Providers Square Off in Major Test." ​ The Wall Street Journal.​ Dow Jones & Company, 2 Mar. 2016. Web. 20 Apr. 2016. <http://blogs.wsj.com/cio/2016/03/02/key­blockchain­vendors­cloud­providers­square­off­in­major­test/>.

69 http://blogs.wsj.com/cio/2016/03/02/key­blockchain­vendors­cloud­providers­square­off­in­major­test/.

70 http://r3cev.com/about/ 71 http://www.pwc.com/gx/en/advisory­services/FinTech/PwC%20FinTech%20Global%20Report.pdf 72 http://www.pwc.com/gx/en/advisory­services/FinTech/PwC%20FinTech%20Global%20Report.pdf.

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fear of becoming obsolete, banks have a chance to improve their outdated systems and revolutionize the way they do business by working side by side blockchain startups rather than against them.73 Financial institutions can be of value to blockchain startups as well.

Large institutions are familiar with government regulation and have the capital to obtain licenses if necessary. And while blockchain is a trustless system, customers do feel more comfortable working with banks.74 Banks have an opportunity to digitize their assets creating efficiency for their customers. On the other hand, millennials and generations beyond may turn their trust to FinTech.75 The uncertainty that lies ahead is something that FinTech and blockchain have the upper hand in due to the quick innovation and the agility they inherently have.

In the near future, we expect to see financial service companies using blockchain technology to improve existing processes. In the long term, we expect to see specialized products coming from the blockchain that are beyond our comprehension at the moment.76

73

Shin, Laura. "A Strategist’s Guide to Blockchain." ​ Strategy+business.​ Forbes.com LLC, 14 Sept. 2015. Web. 20 Apr. 2016. <http://www.strategy­business.com/article/A­Strategists­Guide­to­Blockchain>.

74 Ibid 75 Ibid 76 Ibid

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07 Government Governments must maintain multiple ledgers that track information about citizen records, highly sensitive data related to national security, and voting records that significantly affect policy decisions. The massive amount of data controlled greatly affects the personal privacy of many citizens, the safety of these citizens, and the decision-making within society. The critical importance of this data makes it a prime target for hackers.

Adopting blockchain technology would be incredibly valuable for governments that are able to deploy it and better protect the data. The U.S. government has fallen victim to many hacks over the past few years including a data breach that compromised 22.1 million background checks for government employees and prospective employees, a breach against the IRS that allowed information from over 100,000 tax accounts to be leaked, and a breach against the White House that compromised records putting the Presidential security detail at risk.77 Understanding the great need to protect data, the United Kingdom has committed significant resources to analyze the potential of incorporating blockchain technology into its operations to create more advanced ledgers to store its data.78 It has also taken steps to understand how the blockchain economy will interact with government and public priorities.79 The government is hopeful that it can figure out the best way to deal with this disruptive technology by embracing it, instead of trying to shut it down or letting it go unregulated.

One government has already made notable strides in embracing blockchain technology: the government of Estonia. Estonia has launched e-Tax and e-Business registries that have allowed citizens of the country to constantly track the integrity of their own records to make sure no breaches occur.80 These records obviously contain significant amounts of personally identifiable information, which would be lucrative for someone from the outside or inside to hack into and remove from the system. The use of blockchain technology effectively limits the prospect and damage from a significant internal or external hack.81 Estonia’s financial systems have also began adopting blockchain technology; in February, the country’s stock market announced that it would facilitate shareholder voting over a Nasdaq blockchain technology.82

77

Mindock, Cindy. “US government cyber­attacks were biggest in history, follows several high­profile hacks; 22.1 million files compromised.” IB Times. 9 July 2015. Web. <http://www.ibtimes.com/us­government­cyber­attacks­were­biggest­history­follows­several­high­profile­hacks­2002565.> 78 Walport, Mark. “Distributed ledger technology: beyond blockchain." Government Office for Science. 2016. Web. <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs­16­1­distributed­ledger­technology.pdf​ .> 79 Ibid 80 Ibid 81 Ibid 82 Rizzo, Pete. “Nasdaq to Launch Blockchain Voting Trial for Estonian Stock Market.” Coin Desk. 12 Feb. 2016. Web. <http://www.coindesk.com/nasdaq­shareholder­voting­estonia­blockchain/​ .>

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Critical Infrastructure Protection Governments are in charge of protecting their citizens and fending off threats from nation states and terrorist organizations. In the digital age, the threat of a devastating cyber attack is ever increasing. Governments must guard themselves from attacks from cyber intruders who look to undermine the critical infrastructure of the country.

In the United States, the Department of Homeland Security outlined 16 critical infrastructure sectors that are vital to the operation of the country. These sectors are fundamental to protecting the country if it were to face a devastating attack.83 If an attacker were to disable one of these sectors, the country would be put in immediate danger and would face significant challenges defending itself.84 These sectors include transportation networks, nuclear reactors, the energy grid, and communications networks.85 In order to support these networks, the US and other governments with critical infrastructure, focus on protecting what is described as the CIA triad—confidentiality, integrity, and availability of information.86 The expansion of technology has allowed for the government to better protect two important functions; secure and protect secrets regarding the workings of their critical infrastructure sectors, and distribute the availability of the sectors.87 However, with tech enabled networks at the core of many of these sectors, it has become increasingly challenging to ensure the integrity and security of these systems.88 Much of the connectivity is centralized and prone to attack by malware.89 If an attacker is able to penetrate the central connectivity, they can significantly harm the entire network of the infrastructure sector.

Thus, blockchain technology could greatly help governments interested in securing their critical infrastructure. The technology would allow the many pieces of each sector to serve as nodes that would communicate via a ​ decentralized security system.90 Penetrators would not simply be able to attack one node of the system without their action being authenticated by the other nodes on the network.91 Simply put, utilizing the blockchain eliminates the single point of failure.

The Estonian startup Guardtime has started to make strides in the industry and offers a critical infrastructure product that allows governments to use its KSI Cybersecurity Platform that utilizes blockchain technology.92 This product is promising and has been utilized by the 83

“Critical Infrastructure Sectors.” ​ Department of Homeland Security. ​ 27 October 2015. Web. <https://www.dhs.gov/critical­infrastructure­sectors. > 84 Ibid 85 Ibid 86 “Critical Infrastructure Protection.” ​ Guardtime.​ 2016. Web. <https://guardtime.com/solutions/critical­infrastructure­protection.> 87 Ibid 88 Ibid 89 Ibid 90 Ibid 91 Ibid 92 Allison, Ian. “Guardtime secures over a million Estonian healthcare records on the blockchain.” ​ International Business Times. 3 ​ March 2016. Web. <http://www.ibtimes.co.uk/guardtime­secures­over­million­estonian­healthcare­records­blockchain­1547367>

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Estonian health system to secure over one million healthcare records.93 The KSI security system utilizes decentralized threat protection, while also maintaining patient privacy and record integrity. 94 Insider Threat Protection Governments increasingly face threats from insiders who wish to steal data or inflict harm on internal security systems. The United States was struck by a significant breach when intelligence contractor Edward Snowden stole a prodigious amount of files with sensitive and compromising material.95 The NSA was able to determine that Snowden was the culprit for the breach, but it has not been able to determine how many files were affected since Snowden was able to effectively alter the data files and erase his digital footprint. 96 Thus, the US government, after a lengthy investigation, was able to determine the origin of the breach, but was still unable to determine the totality of its impact given the inability for it to determine which files the insider was able to compromise.

Blockchain technology becomes useful when applied to internal data management as it creates a public ledger of access history that cannot be altered, even by insiders with the ability and approval to open, share, and delete information.97 An insider with the clearance to access secured data for the government, whether it be classified intelligence cables or the Social Security numbers of government employees, will still be able to access the data to do her job.98 However, all of her access history could be tracked via the public ledger, preventing any single individual from destroying the history of their access.99 This technology would not have prevented Snowden from accessing the documents, since he had the clearance and access approval, but it would have prevented him from deleting his digital footprint and would allow NSA investigators to quickly determine which documents were compromised.

Moreover, the technology allows for immediate security measures to determine who might be an insider.100 For example, if an individual begins to access millions of files and downloads them rapidly, the public ledgers would reflect this, allowing internal security authorities to act before the information goes far.101 Guardtime, is also a pioneer within this space. It’s Black Lantern Security Appliance has allowed it to launch an Insider Threat Mitigation product that utilizes the blockchain to prevent

93 94 95

Ibid Ibid

Finley, Klint. “How the tech behind Bitcoin could stop the next Snowden.” ​ Wired. 2 ​ June 2015. Web. <http://www.wired.com/2015/06/tech­behind­bitcoin­stop­next­snowden/.>

Ibid Ibid 98 Ibid 99 Ibid 100 “Black Lantern Security Appliance.” ​ Guardtime. ​ 2016. Web. <https://guardtime.com/cybersecurity­platform.> 101 Ibid 96 97

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insider threats and penetrations.102 It could be applicable to many other technologies, including those within the IoT industry. 103 Election Technology Voting is one of the most fundamental aspects of a well-working democracy as it allows citizens to express their views and voice directly to the government. However, voting is problematic because it requires that everyone trusts that the election system (1) properly aggregates the votes to determine the outcome of the election in a transparent fashion, (2) only allows eligible individuals to participate in the election, and (3) makes sure that each eligible individual only votes once.

Many countries around the world have trouble ensuring that these three conditions are met and often pay significant amount to ensure the integrity and transparency of the system.104 However, the blockchain technology could easily be utilized to ensure that only individuals who are allowed to enter the election system vote, to provide transparency regarding the outcome of the vote, and ensure that every individual only votes once.105 Startup Follow My Vote, Inc., a new entrant into the space, has developed a blockchain enabled application that allows users to do just that. The voting platform hopes to save governments the cost and waste of providing ballots and forcing individuals to take time to enter polling places.106 Thus, the technology could increase voter participation by allowing voters to vote from anywhere over the the internet. By utilizing blockchain technology, individuals can be prevented from only voting once and any attempt to vote by a non-authorized individuals or other attempts to stuff a ballot box can be thwarted.107 Voters would be able to monitor their votes in real time to ensure the integrity and transparency of the election.108 Instead of trusting the polling system to properly account for all the votes and declare the proper outcomes of the elections, citizens can be at ease with technology they can constantly track and know to report accurate election outcomes. This product could lead to advances in democratic participation and trust in society.

Land Ownership Ledger Well-functioning economies must properly define property, specifically land ownership. Land is key to production and development of an economy and defining land and property limits can often be challenging for developing countries.109 Governments issue land titles to “Black Lantern Security Appliance.” ​ Guardtime. ​ 2016. Web. <https://guardtime.com/cybersecurity­platform.> Ibid 104 “Why Online Voting?” ​ Follow My Vote. ​ 2016. Web. <https://followmyvote.com/.> 105 Ibid 106 Ibid 107 Ibid 108 Ibid 109 Madore, P.H. “Big New: Honduras Creating Land Title Block Chain Via Bitcoin.” ​ CryptoCoin News. 1 ​6 May 2015. Web. <https://www.cryptocoinsnews.com/big­news­honduras­creating­land­title­block­chain­via­bitcoin/.​ > 102 103

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individuals and businesses that serve as their proof of ownership of land.110 However, many developing countries often run into trouble in managing land titles and ensuring that they are not fabricated.111 If multiple land titles for a single piece of land are erroneously issued (or illegally duplicated) it will be difficult to build a well-functioning economy since every buyer will be wary of purchasing land. Without a stable land market, many will not be able to purchase the land needed to build their businesses and conduct their commerce.

However, one startup has created an innovative way to deal with this by using blockchain technology. Factom has created a blockchain enabled technology that allows countries to create land title ledgers.112 These public ledgers utilize blockchain technology preventing duplicated ledgers and ensuring that only one title is issued for each property and is verified by everyone.113 This technology has the potential to prevent property disputes and also strengthen the property markets as people can be more trusting in the ownership status they receive when they agree to purchases a property.

The government of Ecuador has realized this and is beginning to explore utilizing a public land title ledger powered by Factom to bring more certainty to its land marketplace in an effort to build its economy. 114 Overall, these applications can be very useful in enabling governments to better carry out their operations more efficiently and more transparently. While blockchain technology can be very disruptive, which many governments may be concerned with (as is the case with bitcoin and other crypto-currencies), governments should strongly consider utilizing the underlying blockchain technology to help meet many of their goals and objectives.

110

Madore, P.H. “Big New: Honduras Creating Land Title Block Chain Via Bitcoin.” ​ CryptoCoin News. 1 ​6 May 2015. Web. <https://www.cryptocoinsnews.com/big­news­honduras­creating­land­title­block­chain­via­bitcoin/.​ > 111 Ibid 112 “Use Cases.” ​ Factom. ​ Web. 2016. <http://factom.org/.> 113 Ibid 114 Madore, P.H. “Big New: Honduras Creating Land Title Block Chain Via Bitcoin.” ​ CryptoCoin News. 1 ​6 May 2015. Web. <https://www.cryptocoinsnews.com/big­news­honduras­creating­land­title­block­chain­via­bitcoin/.>

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08 Internet of Things Internet of Things (IoT) describes any item that is connected to the internet and remotely programmable. Alphabet’s Nest, which learns information about how your home functions and adjusts the temperature accordingly, is usually the salient example that comes to mind.

It’s crucial not to underestimate the rise in Industrial Internet of Things (IIoT), referring to the use of sensors to detect the condition of machinery and send information to managers about maintenance. This process subsequently increasing mechanical efficiency and decreases costs. Our research shows that all smart devices have the potential to become smart property, running and being run on the blockchain.

It’s important to distinguish between a device that’s connected to the internet, and a device that’s run on the blockchain. To paint a picture, we will use the example of household appliances. If you have a normal dishwasher with no sensor, you won’t know if it needs to be fixed until it breaks - this is the least efficient scenario. Same goes for your washing machine, shower head, garbage disposal, etc. Now, let’s say you add a sensor that detects the condition of the dishwasher, as well as other devices, and can tell if any parts are wearing down or need fixing well before the dishwasher stops working. This sensor is connected to the internet, and will send you a message offering information and preventative measures.

This cuts the cost of maintenance and takes out the guessing game of when your appliances are going to break. That’s IoT. ​ Now​ , let’s put all your sensors on the blockchain. The dishwasher has a unique code, and so does every other device in your house. Not only do these devices talk to each other, but according to smart contracts that dictate the rules, these devices are programmed to run as efficiently as possible. Maybe your dishwasher is programmed to run during the night when water is cheaper and not being used by showers or washing machines. Not only this, but when your dishwasher needs a new dryer, the sensor doesn’t send you a message telling you to get a new dryer. Instead, the dishwasher sends a request to the manufacturer, pays the manufacturer with cryptocurrency, and a new dryer shows up at your door before the dishwasher even breaks. And all of these small actions are recorded in a public ledger constantly verified and accessible.

Now take the implications of this fully “smart” home and apply it to a manufacturing plant.

Every single piece of machinery becomes autonomous, communicating on a network of all other devices to automatically function as efficiently as possible, optimizing themselves according to parameters you can dictate. The potential savings from maintenance and labor are impossible to ignore.

There are a couple startups that are making serious progress in this space. IBM and Samsung recently revealed their IoT-blockchain experiment ADEPT which stands for Autonomous Decentralized Peer-to-Peer Telemetry.115 They tested it on a washing machine, and showed 115

Higgins, Stan. "IBM Reveals Proof of Concept for Blockchain­Powered Internet of Things." ​ CoinDesk RSS.​ Coin Desk 2016, 17 Jan. 2015. Web. 19 Apr. 2016. <http://www.coindesk.com/ibm­reveals­proof­concept­blockchain­powered­internet­things/>.

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how that machine could become semi-autonomous. IBM recognizes the limitation of blockchain technology being able to handle the amount of transactions required to have billions of devices connected, but nonetheless sees this as an extremely promising step forward in leveraging blockchain technology in IoT. Filament is startup working specifically in IIoT that uses blockchain technology. They have developed The Tap, the center of the device network, and The Patch, the hardware to be attached to devices.116 This essentially creates a mini-blockchain for your devices, and is intended to be used for IIoT machinery over long ranges.117 IoT is just another example of an use case of blockchain technology. Past Blockchain 1.0 and Blockchain 2.0, blockchain technology can be used for myriad devices and transactions.

Beyond being the backbone for a cryptocurrency, we see the blockchain being used to manage our devices amongst many other things in our lives.

116 117

https://filament.com/ Ibid

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09 Digital Rights Management Most internet content is copyrighted and has limited distribution. This is run by digital rights management (DRM) systems that attempt to restrict use of privately-owned media.118 It is no secret that the current systems in place have been ineffective and make it easy for technological amateurs to circumvent digital rights and royalties. Downloading free movies, music, books, articles, etc., have severely cut into the revenues the creators and owners of content have received. Not only that, but the unorganized bureaucratic nature of the digital rights industry, from artists to agents to publishers, creates an incredibly complicated and cumbersome system through which to distribute revenue. Blockchain could completely restructure the digital rights industry. Media rights would be stored on blockchain, where purchased content would be available across all platforms through your identity. 119 The creators of content would publish onto the blockchain. For example, an artist records the song and publishes it onto the blockchain with its own address. Every time that song is played on a blockchain application, the smart contract underlying the song would recognize the application through which it is played, and send a payment to the owner of the song, or any others entitled to payment for the content. Since blockchain transaction ledgers are public, there is complete transparency and abundance120 of information; no artists, publishers, or agents are left in the dark.

There are a couple startups already disrupting the DRM space with blockchain-based technology. Cointemporary offers an online platform for artists to sell their work, and the only payment accepted is bitcoin.121 This allows the pieces of art purchased to be added to the blockchain through Ascribe, another startup that addresses copyright concerns by permanently attaching credit to a piece of artwork through smart contracts in order to ensure that any royalties are paid out correctly.122 Monegraph is another startup offering similar services as Ascribe, guaranteeing that artists get proper credit and compensation for their work.123

118

https://en.wikipedia.org/wiki/Digital_rights_management McGlauflin, David. "DRM And Blockchains: An Interview with Bryce Weiner ­ CCN: Financial Bitcoin & Cryptocurrency News."

CCN Financial Bitcoin Cryptocurrency News.​ N.p., 11 Jan. 2016. Web. 19 Apr. 2016. <https://www.cryptocoinsnews.com/drm­blockchains­interview­bryce­weiner/>.

120 Wallach, D. A. "Bitcoin for Rockstars ­ Backchannel." ​ Medium.​ BackChannel, 10 Dec. 2014. Web. 19 Apr. 2016. https://backchannel.com/bitcoin­for­rockstars­ca8366802f9#.96xbap4q6 121 https://cointemporary.com/ 122 Tomasicchio, Amelia. "Copyright Management: What If Instagram Used The Blockchain?" ​ CoinTelegraph.​ CoinTelegraph, 25 Jan. 2016. Web. 20 Apr. 2016. <http://cointelegraph.com/news/copyright­blockchain­instagram>.

123 https://monegraph.com/ 119

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10 Conclusion Negative Implications There is no doubt that this system of transactions could disrupt and upend industries at-scale. But there is a very slow adoption curve, one that deals with education as well as government regulation and intervention. Bitcoin is the first use case of how blockchain technology has the ability to threaten how government, and society as a whole, operates. With a system like bitcoin, we can easily see the government stepping in and cutting it off. The market value of a bitcoin is based on the perceived value and trust of that that currency is worth some tangible value. If governments step in and denounce bitcoin in a massive attack, we may see an instant crash in its value, and that is exactly what Jamie Dimon predicts.

Additionally, there are issues with the physical infrastructure on which blockchain’s technology runs. The way blockchain operates - miners earn cryptoassets for solving computational problems - we have already seen a rise in concentrations of computing power.

Theoretically, groups or companies with tons of computing power could team up and take over the system as a large percentage of nodes. This would result in a select amount of people or computers holding a majority of the network's computational power, causing the idea of “decentralization” to diminish. This would likely result if there was not full-wide adoption of the technology, which is why startups such as R3CEV are testing the technology in partnership with over 40 global banks.

Security is also always a concern. Blocktech companies preach about the “encryption” it provides and the unhackable network that it touts, but just last year, Interpol reported that hackers can export malware on the blockchain that could affect every single computer on the network.124 This means that all the attractive advantages of blockchain technology, like being decentralized and immutable, can be jeopardized by malware that would spread like wildfire instantly, with no viable way for it to be reversed.

Lastly, a huge concern is the “blockchain bloat debate.” This is the idea that, like email, many people looking to make a quick buck for cheap, may introduce spam into the blockchain, taking up a ton of its computing power. Dogecoin co-founder Jackson Palmer states, “I believe that it’s a big waste of resources to bloat a public ledger with information that’s irrelevent to that specific ledgers purpose. If the ledger’s purpose is to facilitate high-speed, transparent transactions online, then that should remain the sole purpose of that particular ledger.”125 For example, last year during Valentine’s day “someone made a cute site at thenoteblock.com. The idea is to embed messages into the blockchain, encoded in the 124

"Blockchain, Cybersecurity and Global Finance." ​ Hunton & Williams.​ Hunton & Williams LLP, 30 Sept. 2015. Web. 20 Apr. 2016. <https://www.huntonprivacyblog.com/2015/09/30/blockchain­cybersecurity­and­global­finance/>.

125 Cawrey, Daniel. "Why New Forms of Spam Could Bloat Bitcoin's Block Chain." ​ CoinDesk.​ CoinDesk2016, 3 Sept. 2014. Web. 20 Apr. 2016. <http://www.coindesk.com/new­forms­spam­bloat­bitcoins­block­chain/>.

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transaction and output addresses.”126 Projects like this do not warrant the use of such technical sophistication as the blockchain, and could spam and bloat the infrastructure.

The sophisticated math that needs to be done to verify bitcoins does in fact pose some issues. This refers to the 51% problem. Blockchain operates through miners earning coins for solving computational problems. We have already seen a rise in concentrations of computing power. What if 51% of the blockchain’s computing power was powered by the bad guys? They could theoretically have the power to validate every transaction they wanted to, with simply no way of stopping them.127 The only real way to stop this is to scale the network so vastly, so that it would be nearly impossible to obtain this type of computing power. We see this as the most glaring problem with blockchain technology.

Positive Implications It’s clear that the implications of blockchain technology are substantial, and could dramatically change our everyday lives. With every person connected on a decentralized, and public network, there is legitimate accountability on an individual level. With that accountability, we no longer have to trust central institutions to hold both ourselves and others accountable for actions. And without those central institutions, the economy as a whole becomes lean and efficient. Institutions such as banks or the IRS no longer have to waste resources on administrative tasks, identity verification, or creating transaction records.

This freed-up capital would be pushed directly into society, either in the form of government subsidies and programs or lower taxes.

The implications outlined in the previous paragraph mostly apply to developed countries where existing infrastructure would be rendered obsolete. But in the case of developing nations, blockchain technology could allow them to skip over the need to develop large central institutions. Mobile penetration in the developing world gives those people more access and the opportunity to transfer and receive value in countries that do not have the government and business infrastructure to give them this access. In summary, this is one of the only technologies we have seen to date that can span across all industries and fundamentally change society by implementing a somewhat “mundane” process.128 Something so simple as a decentralized ledger can change our world like the Internet and mobile have done at the turn of the 21st century.

126

​ Ibid Lanchester, John. "When Bitcoin Grows Up." ​ London Review of Books.​ LRB Limited 2016, 21 Apr. 2016. Web. 20 Apr. 2016. <http://www.lrb.co.uk/v38/n08/john­lanchester/when­bitcoin­grows­up>.

128 “The Trust Machine: The Technology Behind Bitcoin Could Transform How the Economy Works.” ​ The Economist. ​ October 31, 2015. http://www.economist.com/news/leaders/21677198­technology­behind­bitcoin­could­transform­how­economy­works­trust­machine accessed April 10, 2016.

127

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Closing Remarks Much of the conversation surrounding blockchain has revolved around the uncertainty and volatility of bitcoin, which has clouded the analysis and understanding of the blockchain technology. However, blockchain technology will be incredibly influential for society over the next decades as the technology is deployed to enable not just cryptocurrencies, but other products and services that facilitate transactions.

Society and mankind’s relationship and communication with each other rests on the foundation of trust. Members of society work together to create agreements—people form governments, economies, and social relationships out of shared understandings of trust.

Unfortunately, this trust is often broken, abused, or unenforceable, creating significant waste in society and preventing new relationships to form, markets to be established, and ideas to develop. Blockchain technology has the ability to create societal institutions where trust does not need to be assumed by two parties, but can be assured.

The ramifications of this are widespread and significant. Blockchain has already enabled aforementioned innovations that can potentially change how society works. Incumbent institutions—governments, banks, and individuals—should start seeing how they can adjust their practices and make use of the technology, or they may see their value in society quickly diminish.

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