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The Potential of Blockchain Technology

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What Blockchain technology is and how it's disrupting the financial services sector.

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The Potential of Blockchain Technology

  1. 1. TECHNOLOGIES DEMYSTIFIED: THE POTENTIAL OF BLOCKCHAIN TECHNOLOGY F O C U S : F I N A N C I A L S E R V I C E S
  2. 2. TABLE OF CONTENTS 2 1. Introduction to Blockchain 3 1.1 Problem and solution 1.2 Transactions today 1.3 The magic behind Blockchain 1.4 Shared ledger technology 1.5 Blockchain-related terms 1.6 Technical description 1.7 Blockchain explained in detail 1.8 Advantages of Blockchain 2. Timeline, Limitations & Application Fields 12 2.1 Timeline 2.2 Limitations 2.3 Application fields 3. Smart Contract Use Cases 16 3.1 Slock.it 3.2 Tallysticks 3.3 Everledger 4. Pioneers Discover Outlook 20 4.1 Future outlook 4.2 Pioneers 4.3 References
  3. 3. INTRODUCTION TO BLOCKCHAIN 3
  4. 4. 4 On the Internet, nobody knows you‘re a dog… An intermediary providing trust is required for every transaction. Souces: Steiner, 1993; mymerchandservicesblog, 2017; Today‘s problem The current solution PROVIDINGTRUSTWITHOUTANINTERMEDIARY
  5. 5. 5 IMAGINE YOU WANT TO TRANSFER € 1000 FROM VIENNA TO LOS ANGELES… With Blockchain‘s shared ledger technology, the same transaction will take eight seconds. It has all the advantages of a simple cash transaction. Without any intermediary parties, € 1000 will end up in L.A. quickly, securely and transparently. €1000 €950 Today this transaction would involve at least four intermediary parties and take at least three days. In the end, the recipient in L.A. receives only around € 950, because of costs associated with different intermediaries like brokers, foreign banks, issuing banks, confirming banks, correspondent banks, domestic sellers, clearing houses and custodians. Sources: Terribilini, 2015
  6. 6. 6 THE MAGIC BEHIND BLOCKCHAIN Imagine Leo is sitting in front of you and hands you $100. This transaction isn‘t just fast, secure and transparent. There‘s also no intermediary and no additional costs are attached. Blockchain technology offers the advantages of a simple cash transaction like this one, and makes it possible for all different kinds of transactions to occur online, with no limit to financial transactions! Imagine a world in which you can buy a book without a retailer, sign a contract without a notary and vote for your favorite political candidate - on your smartphone - with the assurance that your vote is immediately valid and secret. § Fast § Secure § Limited costs § Transparent § No intermediary
  7. 7. WHATISTHESHAREDLEDGER? Ledger is a record used to store any kind of transaction history, such as your bank account balance. Since ancient times ledgers have been used for trading and commerce, specifically to register, record, transfer and approve contracts, assets, property and money by intermediaries. In the past these ledgers were recorded manually on papyrus, clay tablets and vellum, and moved to paper, bytes and computers in the last century. Until now that has been the only improvement… With Blockchain technology, the first real transformation of ledgers is coming. For the first time, ledgers will be decentrally distributed online so everyone can collaboratively create ledgers and monitor transactions, instead of restricting the creators to intermediaries like established organizations and banks. This will make every transaction far more transparent, secure and free, as no third party has to be involved. Transactions are approved by the network, while remaining anonymous. Souces: Deloitte University Press, Accenture Research Currently third-party intermediaries are needed for transactions. The shared ledger could allow direct transactions between individuals and institutions, as well as micropayments. Ledger Custodian Custodian Clearing House Clearing House BrokerBroker FirmFirm Seller Buyer 7
  8. 8. 8 MOSTIMPORTANTBLOCKCHAIN-RELATEDTERMS Souces: Moody‘s Investors Service, 2016; WEF & Deloitte - The future of financial infrasctrucutre, 2016 Hashing Hyper-ledger Miners Cryptography Digital Currencies Distributed Ledger Cross-industry standard for distributed ledgers. Provides proof that records in the public ledger cannot be changed. Any attempt to tamper is apparent immediately. Internet-based form of money (in the form of an online code) that can be used like other currencies. Book containing records of all transactions by all users in a network. Validate and approve transactions, connecting the blocks to a Blockchain. Mathematical scrambling (digital fingerprint) used to boil down information, like a PDF or DOC, into a code known as a hash. Blockchain Technology terms
  9. 9. 9 AMORETECHNICALDESCRIPTIONOFBLOCKCHAIN Technically, Blockchain is a shared, trusted public ledger that anyone can inspect but which no single user can control. A Blockchain contains all parties needed for a transaction. All participants keep the ledger up to date, as it can be amended only by general agreement and certain rules. Blockchain Technology allows individuals to have trust and efficiency in the exchange of anything. “Blockchain technology will do for transactions what the internet did for information“ Ginni Rometty, CEO of IBM Blockchain is based on distributed ledger technology, which means the relevant data is distributed among multiple users. The blockchain is a book of records of all transactions that are grouped into blocks. After every transaction, another block, with information about the previous block, is added to the chain. The blockchain enables the exchange of information in a synchronous and even manner. Blockchain allows different parties in a network to complete transactions anonymously. Souces: Economist – the promise of blockchain, 2015; Rometty – Sibos 2016
  10. 10. 10 THETECHNOLOGYEXPLAINEDINDETAIL Each transaction (PDF or DOC) is fed through a program that creates an encrypted code known as the hash value (digital fingerprint). The transcribed transaction is placed in a queue of pending transactions. It must be verified that Alice really has the rights to fullfil the transaction. This check is a cryptographic puzzle derived from the block‘s header. The computational power for solving this puzzle is offered by so-called miners. In case a malicious miner tries to submit an incorrect block to the chain, the hash function of that block and all following blocks would change. All nodes in the chain would detect these changes immediately and reject the block from the majority chain with the most transactions. Miners compete among themselves to be the first to validate the transaction and put it into the ledger. The first miner that successfully validates the transaction gets a financial reward. At least a third of all the participants in a Blockchain network should be miners. Miners validate and connect the two blocks by making incremental changes to one variable until there is a correct fit to the previous block. The correct solution will then be published to the network so all the other miners can check if it is correct. Each node adds the block to the chain with the most blocks. Blockchain allows secure transactions without a governing central authority. This is done by advanced mathematics and computer science in the form of cryptographic hash functions. The transaction from Alice to Bob forms a block. Every block contains three elements: a 256-bit-number (created using an algorithm) called the hash, a hash of the previous block, and the actual transaction with a timestamp and nonce. 1 5 6 2 3 7 8 4 Alice wants to conduct a transaction with Bob (could be transfer of data, money, contract, deed, medical record, customer details, or any other asset). This transaction is often codified in a digital format (for example, PDF or DOC). Souces: Deloitte University Press, 2016
  11. 11. 11 ADVANTAGESOFBLOCKCHAIN Souces: DBS Group Insights - Understanding Blockchain Technology 2015 Efficiency Using the “if-this-then that” logic of smart contracts can reduce error reduction and increase speed. Transparency Get real-time insights into trades and transactions rather than just receiving reports in different formats at different times from different institutions. Trust The majority of participants in a blockchain system need to approve the transactions and agree upon which data is written, altered or removed. Resilience The larger the number of blockchain participants the more robust the data is, as it can be seen as a massively replicated database.
  12. 12. TIMELINE, LIMITATIONS & APPLICATION FIELDS 12
  13. 13. 13 BLOCKCHAINTIMELINE October 2008: Bitcoin whitepaper by the nom-de-plume Satoshi Nakamoto is published. May 2010: First Bitcoin purchase: BTC 10k for a $25 pizza. Today BTC 10k is worth $10m! Bitcoin is known as the first use case of Blockchain technology. July 2014: Ethereum Project – a Blockchain platform with the ability to build decentralized applications – is funded by a crowd sale. September 2015: Major financial companies form R3 – a consortium of over 40 institutions committed to exploring and implementing Blockchain technology. June 2014: LHVpank starts research on Blockchain and its digital security with their app “Cuber Wallet“. September 2016: Over 40 financial service institutions have invested in a Blockchain or Bitcoin startup since 2014. September 2015: Visa, Citi, Nasdaq, Capital One and Fiserv invest $30m in the Blockchain startup Chain.com. Souces: Oliver Wyman, 2016; MissQT Fintech, 2015; GEM Mann, 2016; CoinDesk – Blockchain Breakout? Will Keep Investors on the Brink, 2017; Deloitte – banking colloquium thought paper 2015 2018: WEC estimates that 80% of all banks will initiate projects concerning distributed ledger technology – the underlying technology supporting Blockchain.
  14. 14. 14 LIMITATIONS OF BLOCKCHAIN TECHNOLOGY Block size The limited block size of 1MB restricts the number of possible transactions per second. A larger block will, on the other hand, increase the time taken until each block is verified before it can be added to the Blockchain. Scalability More computational power and stronger hardware is needed to solve the complicated mathematical problems of every transaction. It is expensive to operate with larger blocks. Standards To use Blockchain on an industrial scale, there must be certain industry standards as well as legal and governance frameworks to improve robustness, overall performance and security of the technology. Diverging interest Replacing existing financial infrastructure will require time and investment. With competing interests between different parties, it will take time to find common ground for collective action. Souces: World Economic Forum- the future of financial infrastrucutre, 2016
  15. 15. 15 BLOCKCHAINAPPLICATIONFIELDSFINANCIALSERVICES SMART CONTRACTS: A protocol specially created to program agreements between different parties, granting autonomous and correct execution. Blockchain technology validates that the conditions in the contract are met and then executes automatically according to pre-defined criteria. KYC: Using Blockchain technology for KYC means helping institutions get to know their customers better with identity management, digital citizenship and IDs, assessing their financial counterparty risk without further due diligence. TRADE FINANCE & PAYMENTS: Blockchain acts as a ledger for payments between branches and cross-border payments. Trade Finance solution of Blockchain to automate and speed up the mandatory letter of credit process. CLEARING & SETTLEMENT: Ranging from micro transactions and insurance to cross-border payments, Blockchain helps financial institutions to transfer money with less costs. It will also simplify currency exchanges. AUTOMATED COMPLIANCE: Blockchain could improve compliance procedures, improve regulatory efficiency, and provide faster and more accurate reporting that draws on immutable data sources. DIGITAL ASSETS: Ownership of assets can be stored online and can transform businesses such as custody banking. PROGRAMMABLE MONEY: Blockchain can automate transactions and payments only after certain conditions are met. DATA STORAGE: Blockchain can be used as a decentralized database that is highly robust, since it is not dependent on any specific node. Souces: World Economic Forum- the future of financial infrastrucutre, 2016
  16. 16. USES CASES 16 Smart Contracts
  17. 17. IN BRIEF: Slock.it is a highly-innovative company producing and building distributed contracts and decentralized companies. Rent, sell or share anything without any middlemen involved. With Slock.it it is possible to connect the Blockchain to the physical world. PRODUCT/TECHNOLOGY: USE CASE: § Slock.it digital padlocks help to sell or rent anything secured by a lock. § Slock-powered doors can provide access to rental apartments. § Rent out bikes, issue insurance and receive payment in one single step while opening bike locks. § Any developer can build applications on Slock.it. KEY FACTS: § Slock.it received significant publicity in 2016 around their announcement to build the first fully-decentralized investment fund, raising interest of $150m in funding. § IoT Stars Finalist 2016 § FYFN IoT Awards Winner 2016 § Postcapes Editor’s Choice Award Winner 2016 § Partnership with Ubuntu, Samsung, Microsoft, Safeshare Global, RWE, IPFS Smart Contracts 17
  18. 18. IN BRIEF: Tallysticks is a Blockchain-based software solution that is private, cost-effective and secure. It facilitates invoice payments and automates invoice reconciliation in a timely manner to increase profitability. It is an immutable record-keeping framework that establishes a trusted practice amongst transaction participants and permissioned third parties. The goal is to record when, how and if payments, invoice issuances and reconciliations were performed. PRODUCT/TECHNOLOGY: USE CASE: § Helps to identify and avoid duplicate invoices and double payments, reducing error-related costs. § Automated invoice reconciliation software and immutable recordkeeping helps to meet regulatory guidelines and reduces operating costs. § Military-grade data encryption eliminates the incentive for hackers to steal sensitive invoice-related payment data. § Prevents employees from manipulating and stealing data. § Electronic invoice processing and reconciliation software platform reduces invoice costs. KEY FACTS: § Tallysticks was selected to participate in the Barclays Accelerator powered by Techstars in London, out of a pool of around 700 startups. § Voted a top 100 European FinTech startup § Part of the EY Startup Challenge 2016 § Won three Blockchain Hackathons Smart Contracts 18
  19. 19. IN BRIEF: Everledger is a fraud detection system based on Blockchain. Their product is a permanent ledger for any asset, which carries a unique identifier difficult to replicate or destroy. In other words, they offer transaction history verification of valuable items and make it harder to trade them illegally. PRODUCT/TECHNOLOGY: USE CASE: § Diamond certification and tracking of transaction history of the traded item. Where does the diamond come from, who bought it, where did the money go? § Once the items are registered into Blockchain, the entry can’t be changed, which provides the multiple stakeholders in the supply chain a clear history of the product, ensuring authentication and reducing the risk of fraud. § Verification for insurance companies, owners, claimants and law enforcement. § Verification for any valuable item, carrying a unique identifier difficult to destroy or replicate. KEY FACTS: § Originates from Barclays Accelerator § 2016 Fintech 50 list of businesses transforming financial services in Europe § FT ArcelorMittal Boldness in Business Awards 2016 § Best Blockchain Company: European Financial Technology Awards, 2016 § Winner of the BBVA Open Talent Competition, 2015 § Awarded Best in Show at the Fintech Finals, Hong Kong, 2015 § Meffy Award, 2016 Smart Contracts 19
  20. 20. PIONEERS DISCOVER OUTLOOK 20
  21. 21. PIONEERS DISCOVER FUTURE OUTLOOK Outlook 2020 In the year 2020 an estimated 2.87 billion people will be using a smartphone, and therefore have a supercomputer in their pocket. No bank account Around 2 billion people worldwide don‘t have a bank account. These could be brought into the financial system with the use of Blockchain technology. Property registry 70% of all people worldwide who own land have just a tenuous title to that land. With Blockchain this problem could be solved completely. Internet of trust Blockchain protects identities and offers a way to fulfil transactions without any intermediaries and therefore forms the foundation of a free society. Car ownership & insurance Fractional and part-time ownership of autonomous cars will become a future Blockchain use case. Car insurance premiums will be automatically adapted according to drivers‘ behavior.Government Blockchain code will be pressed into use for citizens to cast votes via smartphone, tablet or computer, in order to generate immediate verifiable results. Dubai has announced a strategic plan to see all government documents secured on a Blockchain by 2020. Souces: McKinsey – How blockchains could change the world 2016, Statista.com, PWC - Making sense of bitcoin, cryptocurrency and blockchain 2016 21
  22. 22. FROM IDEATION TO IMPLEMENTATION 1. Ideation Encourage an entrepreneurial mindset and define innovation opportunities. 2. Intelligence Discover startups, technologies and trends relevant to you. 3. Prototyping Collaborate with startups and create first product prototypes. 4. Pilot Develop a pilot and really kick-start your innovate project. 5. Implementation Launch the new product and start scaling up! 22 MAKING CORPORATIONS BLOCKCHAIN PIONEERS Startup-innovation blueprint & roadmap Potential startups and new tech Initial startup-collaboration & prototype Established startup-collaboration & pilot Established business case & roll-out Outcomes Pioneers Discover developed 5 phases of innovation to help you implement Blockchain technology into your corporation.
  23. 23. 23 PIONEERS DISCOVER: USP 4 reasons why we are the ideal partner 1. WE HAVE THE NETWORK Our brand and community of startups, investors and corporations are here at your advantage. 2. WE DELIVER TANGIBLE RESULTS Our personalized services are designed to turn ideas into real products. 3. WE PICK DIAMONDS We guarantee the best match through digital assessment and personal interviews. 4. WE ARE STARTUP & CORPORATE EXPERTS Our team of consultants offer unrivalled insights and expertise covering all industries.
  24. 24. We help corporations implement innovation through the potential of startups and their technology. A team of corporate innovation and startup specialists. 70+ collaboration projects on an international scale. A network of 13,000+ high- potential early-stage startups. Covering 7 major industries, grouping them into ecosystems. 24
  25. 25. 25 Happy to help! Feel free to contact us in case you have questions about Blockchain technology and how your company might benefit from it! Harald Federspiel Consultant harald.federspiel@pioneers.io www.pioneers.io/discover
  26. 26. Technology needs visionaries to make it fly. Be Bold. Be a Pioneer. pioneers.io/discover @pioneers @pioneersfestival pioneers.io

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