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Blockchains and Global Value Chains

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This is a presentation I gave as a guest lecturer for Law, Markets & Globalization at IIT Chicago-Kent College of Law. The presentation covers what is blockchain and how the technology may be used in supply chains.

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Blockchains and Global Value Chains

  1. 1. Blockchains and GVCs Prepared for LAW, MARKETS & GLOBALIZATION March 20, 2018 Nelson M. Rosario
  2. 2. Presentation Roadmap 1. Why should you care? 2. Introduction to blockchain technology concepts 3. Application to GVCs 4. Legal considerations 2
  3. 3. Why should you care? 3
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  9. 9. Blockchain is about Trust and Consensus, and impacts the way we exchange things of value 9
  10. 10. Introduction to Blockchain Technology Concepts 10
  11. 11. What is a blockchain? 11
  12. 12. Blockchain •No agreed upon definition •Here’s a wordy definition: –“A blockchain is a tamper-evident append-only distributed ledger of peer-peer transactions maintained by a decentralized network of participants.” –Put another way, blockchains are cryptographically linked blocks of transactions •Blockchains utilize public-key cryptography, and consensus mechanisms to establish the veracity of information stored in the blockchains •Fundamentally, blockchains are about two key concepts: trust and consensus 12
  13. 13. Blockchain •Middlemen? •Individuals? •Math? •Blockchains are “trustless” 13 •How do you prove veracity of data? •How do you get people to agree on that proof? •Blockchains allow for emergent consensus
  14. 14. Blockchains provide a new way to manage trust without middlemen 14
  15. 15. Blockchain •Blockchains are tamper-evident •Saying blockchains are immutable is imprecise •As time goes by, previously entered transactions trend towards being immutable –Always the possibility of a 50%+1 attack •The use of Merkle tree’s and cryptography make changes very difficult 15
  16. 16. Blockchain •Blockchains are append-only •You can’t go back and edit previous transactions •Information communicated on a blockchain is not reversible –Once information is sent out there is not getting it back 16
  17. 17. Blockchain •Blockchains utilize a distributed ledger of peer-peer transactions •Every node in the network may have a copy of the “ledger,” or blockchain 17
  18. 18. Blockchain •Blockchains use peer-peer transactions •These transactions are broadcast to the entire blockchain network 18
  19. 19. Blockchain •Blockchains are decentralized •Robust blockchains are run by a plurality of nodes where no one party controls over 50% of the computing power necessary to sustain the network 19
  20. 20. Blockchain •Consensus is achieved over time, accordingly, consensus on the information in the network emerges as more and more nodes confirm the data •Main two approaches to incentivize nodes to maintain the network –Proof of work •Nodes solve a cryptographic puzzle to prove they expended a certain amount of computational power during the process of building a block of transactions to be added to the blockchain •As a reward miners receive a token for the network, usually a cryptocurrency, when their block is accepted and added to the blockchain –Proof of stake •Blocks are added to the blockchain in a deterministic fashion •The chance that a block built by a node is added to the blockchain depends on the amount of cryptocurrency “staked” by that node 20
  21. 21. Blockchain Flavors 21
  22. 22. What can we do with a blockchain? 22
  23. 23. Any relationship that uses a middleman might be a candidate for a blockchain 23
  24. 24. Blockchain Use Cases 24
  25. 25. Cryptocurrency •The first cryptocurrency was Bitcoin •Bitcoin introduced the first blockchain protocol •Solved the “double-spend” problem •Addresses in the network keep track of unspent transaction outputs • 25
  26. 26. Smart Contracts •Smart contracts were first introduced by Nick Szabo in 1994 •Scripts that automatically execute •Essentially, they are distributed and decentralized public agreements •Ethereum was the first public blockchain built specifically for smart contracts –Two accounts in Ethereum •One account that holds a balance of ether •Contract account that has –An ether balance –Functions –Data, which is the state of the Contract 26
  27. 27. Decentralized Autonomous Organizations •Extension of the idea of smart contracts •Organizations that live solely in code on a blockchain •Program in all of the functionality of your “organization” using smart contracts •Most famous example is the “DAO” •The DAO was hacked as a result of a bug in its smart contract 27
  28. 28. Initial Coin Offerings •Initial Coin Offerings, or ICOs, are overwhelmingly conducted on the Ethereum blockchain •Type of crowd-funding, looks like an IPO without all the required disclosure •Can be deemed a security by the SEC •$1.3 billion has been raised through ICOs in the form of cryptocurrency contributed to projects 28
  29. 29. Application to GVCs 29
  30. 30. 30 What is a GVC?
  31. 31. GVCs ● A collection of entities ● That communicate information ● Where the information must be validated ● And the provenance of that information is paramount 31
  32. 32. Sound familiar? 32
  33. 33. GVCs ● GVCs are global in nature ● They involve multiple parties that may be adverse to each other ● There are economic incentives for participants to cheat 33
  34. 34. Sound familiar? 34
  35. 35. GVCs + Blockchain 35 ● Tokenless blockchains ● Smart contracts ○ Lots of smart contracts ● Oracles
  36. 36. IBM - Global Trade Digitization 36
  37. 37. Maersk IBM Pilot → Now joint venture ● A shipping information pipeline will provide end-to-end supply chain visibility to enable all actors involved in managing a supply chain to securely and seamlessly exchange information about shipment events in real time. ● Paperless Trade will digitize and automate paperwork filings by enabling end-users to securely submit, validate and approve documents across organizational boundaries, ultimately helping to reduce the time and cost for clearance and cargo movement. Blockchain-based smart contracts ensure all required approvals are in place, helping speed up approvals and reducing mistakes. 37
  38. 38. Blockchain Oracles 38
  39. 39. GVCs + Blockchain ● About managing information flow ● Secure trust in information ● Reducing costs ● Managing relationships 39
  40. 40. Legal Considerations 40
  41. 41. Blockchain Legal ● Contracts ● Negotiating ● Smart Contracts ● Liability 41
  42. 42. Blockchain Legal ● Jurisdiction issues ● Technology issues ● Automation issues ● Regulatory issues 42
  43. 43. New technology does not necessarily mean new law 43
  44. 44. Recommended Readings 44

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