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Blockchain: building trust

Blockchain, whose origins are blended (and often blurred) with the cryptocurrency Bitcoin, is a disruptive technology with the potential to transform how goods and services are exchanged over the internet. Blockchain allows complex transactions to be carried out transparently and securely, on a distributed interaction model that ousts multiple established intermediaries, eradicating the control held by central authorities in traditional methods of digital transaction.

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Blockchain: building trust

  1. 1. Blockchain B u g l d i n s t t r u i
  2. 2. 2 Blockchain: building trust Blockchain building trust Executive summary 1. Disruption 2. Bitcoin: people at the origin 3. How will blockchain change the way we do business? How do you know if blockchain is useful for your organization? 5 examples of industries reformulated through blockchain 4. In search of standards Scalability: the great challenge 5. A question of time and agreements
  3. 3. 3 Blockchain: building trust When everyone from the World Bank, technological giants such as IBM, Cisco and Microsoft, to organizations of all kinds, both industrial and from the public sector, agree that blockchain is a revolutionary technology, something is clearly about to happen… if it isn’t happening already. Blockchain, whose origins are blended (and often blurred) with the cryptocurrency Bitcoin, is considered a disruptive technology. This means it has the potential to transform how goods and services are traditionally exchanged on the Internet. How? Blockchain is a suprastructure built on the Internet’s structure. It allows complex information systems and transactions to be executed transparently and securely, on a distributed interaction model that ousts multiple established intermediaries, eradicating the control held by a central authority. When talking about blockchain, we should distinguish between private and public: the former (also called authorized or consensus) are rolled out under the control of organizations and companies. They are simpler to implement and maintain. Thanks to their ability to handle sensitive data, they are already operating in sectors such as finance, insurance and healthcare. On the other hand, public blockchains are used to regulate the exchange of cryptocurrencies, or virtual public services that are transparent, anonymous and censure- resistant (for example, a vote). Why will blockchain be useful to companies? Its benefits can be summarized in three ways: it increases the efficiency of operations, it fosters transparency, and it cuts down on costs. However, we must not forget an important intangible: it creates trust, as it reduces the perception of uncertainty and risk, thanks to its contribution to security, redistribution of power and data visibility. As an emerging technology, blockchain must still overcome certain technical challenges, mainly regarding interoperability, standardization, and scalability (for public blockchains), as well as the need to regulate a legal framework for action. Yet once these obstacles are overcome, we can only expect better experiences from blockchain. These experiences will be faster, less uncertain, and citizens will have more control. Executive summary
  4. 4. 4 Blockchain: building trust 1. Disruption
  5. 5. 5 Blockchain: building trust For centuries, perhaps millennia, our economic, legal and social systems have been established on the foundation of exchanges regulated by contracts between authorized entities. The Internet has digitized many of these exchanges, exponentially multiplying the speed at which information travels. It has also reduced frictions and propitiated the emergence of a myriad of innovative services and business based on new value propositions. However, we must not forget that the Internet is a platform that transports (almost in real time) the commands, orders and instructions that make it possible to execute all kinds of exchanges. As a medium that fosters these kinds of transactions, the Internet has not completely resolved some of the aspects that prevent total efficacy for said transactions: irrefutable identity verification, secure payment, traceability of assets, etc. Here lies blockchain’s contribution. The technology underlying the cryptocurrency Bitcoin (for now, blockchain’s torchbearer and most well-known ambassador) arises with a totally new focus on how data and asset exchanges are designed and executed. Conceived as a suprastructure built on the Internet’s structure, Blockchain’s decisive contribution is the facilitation of the elements necessary to allow transactions in and of themselves to be executed. In the words of IBM CEO, Ginni Rometty, “Blockchain will do for trusted transactions what the Internet did for information — make it ubiquitous and standard.” This is its first and essential contribution. Blockchain is introducing new ways to cooperate and interact, allowing complex information systems and transactions to roll out transparently and securely, with a distributed network that bypasses traditional intermediaries and eliminates centralized control. Ultimately, it proposes new services and business models, all while expanding the scope of those already in existence. 1. Disruption
  6. 6. 6 Blockchain: building trust HBR has defined blockchain as a foundational technology, comparable to TCP/IP protocol, which laid the groundwork for the development of the Internet. This process took almost three decades to complete, and ended up turning TCP/IP into a universal, invisible technology through which digital communications travel. The most disruptive technologies do not change organizations’ modus operandi from one day to the next. They are not unanimously acknowledged as revolutionary, nor are they adopted en masse as an agent for change. However, they can be identified by one common trait: their potential for transformation is so great that they penetrate the very foundations that uphold complete industries, and even economic and social interactions. Blockchain is one such technology. 1. Disruption
  7. 7. 7 Blockchain: building trust 2. Bitcoin: powered by people
  8. 8. 8 Blockchain: building trust “Liberté, égalité, fraternité”. More than 200 years later, the popular cry born of the French Revolution underlies blockchain’s incubation. The Bitcoin protocol, described for the first time in 2008 by Satoshi Nakamoto, is upheld by this ideological tryptic that places people at the epicenter, as protagonists. The techno-anarchist utopia materializes in a movement where people take over the traditional role of national banks. Power dynamics are rewritten as soon as the central authority is ousted (along with its role as money issuer-controller), citizen empowerment taking its stead. Bitcoin creates a decentralized ecosystem where no intermediary holds the power to control the value transfer chain. A new, non-centralized social order based on cooperation and distributed power, with a procedure that may be accepted, but not controlled, by traditional authorities. As they are not supported by any traditional organization or authority, cryptocurrencies do not hold intrinsic value. Their exchange rate is set by the accepted premise of a finite number of Bitcoins in circulation, and pertinent fluctuations in demand. John Clippinger, professor at MIT and decades-long social activist, addresses the issue of companies and governments controlling the digital sphere in this interview with the Kellogg Innovation Network. Clippinger is a staunch defender of Open Sector, a new form of social order based on cooperation and distributed power. An order where people exercise sovereign control over their identities. We are generating increasingly more data, and there are only two options: we either control our data ourselves, or someone will do it for us. The 21st century’s new social order bears a loss of trust in traditional institutions. These institutions will not disappear, but they will yield space to redistribute power relations. By returning control to the people, blockchain displaces traditional intermediaries (central banks, patent registration offices, record labels, notaries and contract holders, electoral commissions, power companies, etc.) and opens the door to new forms of personal expression, social ecosystems and economic interactions. 2. Bitcoin: powered by people Cyber-punk (aka freedom) Equity (aka equality) Consensus (aka brotherhood)
  9. 9. 9 Blockchain: building trust Ultimately, Blockchain makes it possible to bring disintermediation to starkly direct levels: a solution such as Bluzelle would allow women who make saris in rural areas in India to send them to buyers all over the world, and to receive payment from them directly. By following the trail of the entire product manufacture and supply process, the business’s honesty is placed on display: without intermediaries, we can buy coffee from the producer directly, or we can accredit a brand’s reputation and only purchase clothing from those that treat their workers in a humane fashion. In short, transactions are humanized. Which countries are most interested in Bitcoin? According to data from the GlobalWebIndex, four Asian countries are at the top of this list, with over 43% of Internet users interested in using Bitcoin in the future. Of note is the inverse correlation between the GDP and interest in Bitcoin; in wealthier countries, the intent to use the cryptocurrency is clearly lower. Source: Global Web Index, Q2 2016. Base: internet users per country. 2. Bitcoin: powered by people
  10. 10. 10 Blockchain: building trust Anexo: 5 ejemplos de blockchain en funcionamiento Dubai: The Smart City In October 2016, the Smart Dubai Office (SDO) introduced Dubai Blockchain Strategy, an initiative whose aim is to turn the capital of the Emirate of Dubai into the first city in the world that is entirely driven by blockchain by 2020. Entrepreneurs and developers will be able to connect with investors and leading companies, within an ecosystem fostered by the government and supported by the incubator 1776. The objective is to implement blockchain-based initiatives that favor the development of all kinds of industries – beyond finance — to improve the wellbeing of its inhabitants and to turn Dubai into ‘the happiest city in the world.’ The project is based on three principles: Governmental efficiency: the goal is to turn Dubai into a paper-free city. As an international business hub, every year Dubai generates 100 million paper documents (visa applications, licenses, permits, etc.). Digitizing these processes will prevent the emission of 114 million tons of CO2, redistribute 25.1 million bureaucratic working hours, and save 1.21 trillion euros spent on document processing alone. Business opportunity: by fomenting blockchain-based businesses and startups, beyond finance, the project will drive development of all kinds of industries, such as healthcare, real estate, transportation, city planning, power, digital commerce and tourism. International leadership: Dubai wants to establish itself as the worldwide leader in innovation, at the forefront of technologies and projects around the globe. An open platform will provide a space to share success stories with cities all over the world. Real case
  11. 11. 11 Blockchain: building trust 3. How will blockchain change the way we do business?
  12. 12. 12 Blockchain: building trust Thanks to increased awareness amongst organizations and corporations, it is gradually becoming easier to assimilate blockchain. Its reputation, linked in the past to dubious ethical practices and incidents that occurred with the incipience of Bitcoin, is no longer questioned to the same extent. Blockchain-based projects stand out in investors’ and entrepreneurs’ agendas. Hundreds of concepts, prototypes and applications are being developed and rolled out in a myriad of industrial sectors, especially where security is a critical factor. In essence, blockchain is defined as a technology that, with P2P protocols and cryptographic techniques, provides for the creation of a ledger (database) that is shared (decentralized), and known as the DLT (Distributed Ledger Technology). Its data is unchangeable and always available, certified by miners, who receive a reward (in the form of cryptocurrency) when they guarantee registration of the data. By using cryptocurrencies, any participant (or several simultaneously) can carry out operations (transactions) in said ledger. These operations will be processed and stored (or rejected, if they do not meet the agreed-upon parameters) in the same way by all the machines in the network. Smart contracts are autonomously executed on this structure, according to deterministic parameters: the moment when a transaction is ordered, the amount sent, the agent who is interacting, etc. This frame provides a glimpse of the future emergence of an entire D-Apps ecosystem (Decentralized Applications), applications that run through blockchains, or that securely connect with one or several chains. The last frontier for blockchain to cross will be Decentralized Autonomous Organizations, or DAOs. These are algorithms that self-manage common interests through smart contracts that are potentially highly complex. 3. How will blockchain change the way we do business?
  13. 13. 13 Blockchain: building trust What advantages does this system provide? Basically, blockchain’s benefits can be summarized into three blocks: Resilience: blockchain’s distributed, and oftentimes replicated, architecture (such as with Bitcoin) means that the chain can still be operated by most nodes in the event of a massive attack against the system, or a large-scale catastrophe. Time reduction: validation of the order verification approval sequence that any transaction must go through is accelerated, as long as the verification (latency) frequency is sufficient. Reliability: blockchain certifies and verifies the interested parties’ digital identities. This eliminates double records, minimizes error rates and accelerates transactions. Openness: decentralization ensures that there is no central control, and no information will be hidden in ‘black boxes’. Unalterable transactions: by registering transactions in chronological order, blockchain certifies the unchangeability, and therefore the end purpose, of all operations. Once a block has been added to the chain of ledgers, it becomes tamper-proof: it cannot be removed or modified. Origin: all smart contracts indisputably and efficiently audit each step of the process. 1. Greater efficiency 2. Greater transparency 3. How will blockchain change the way we do business?
  14. 14. 14 Blockchain: building trust Fraud prevention: the concepts of shared information and consensus save on conflict resolution costs, and prevent possible losses due to fraud or embezzlement. In logistics-based industries, its features as a monitoring mechanism act to reduce costs. Volatility reduction: international payments are made in real time and at more competitive rates, since they need not incur currency exchange delays. In a distributed payment chain, transactions are processed at the same time as payment orders. This avoids pressure in managing balances and keeps accounts up-to-date. Security: attacking a traditional database is the bringing down of a specific target. With a DLT, each party holds a copy of the original chain, so the system remains operative, even if the majority of the other nodes fall. Moreover, falsification is highly improbable, given the prodigious cost that doing so would imply. Yet blockchain’s most important contribution cannot be measured in economic terms, or shown by KPIs, because it is intangible: it creates trust, as it reduces the perception of uncertainty and risk in transactions, thanks to its contribution to security, redistribution of power and data visibility. How do you know if blockchain is useful for your organization? One need not understand all the details of the technological foundation upholding blockchain to understand the promise of benefits is enough to start experimenting in order to familiarize oneself, both with the technology, and with the new form of organization that sustains it. To facilitate this transition technological giants such as IBM and Microsoft are beginning to offer BaaS (Blockchain as a Service) solutions, that package the services corporations need to develop their own private chains in an accessible way. Moreover, open-source platforms like MultiChain and Monax are providing all the resources needed to create blockchains. Even though blockchain is destined to transform data flows and processes, it should not be viewed as a panacea. This technology cannot be applied to all business processes; it is only worth considering the implementation of decentralized procedures if blockchain solves a significant number of inefficiencies, or increases profits for the majority of interested parties. 3. Cost saving 3. How will blockchain change the way we do business?
  15. 15. 15 Blockchain: building trust The consulting firm GFT summarizes the questions organizations should consider before deciding to embark on blockchain-based projects: Is tracking of physical or digital assets an essential element of the business? Would investment in authentication technologies be a valuable asset? Is there an intermediary or procedure that detracts from the efficiency of the entire business process? If there are inefficiencies, do they come from just one player, or are there a number of inherited bad practices? Is there a central authority that imbalances the distribution of power? Would all parties involved benefit from a readjustment in these powers? If there is some sort of entrenchment, does it lead to losses, fraud, high costs or any other sort of negative result? Would the implementation of blockchain lead to greater visibility and transparency? 5 examples of industries reformulated through blockchain 1. Finance The financial industry is leading experimentation and innovation with blockchain. From transfers between individuals to the worldwide financial system, the entire payment grid is undergoing a transformative phase, awaiting standards to provide definitive solutions within the context of internetwork communication. A financial transaction might be summarized as the exchange of data and orders between the players involved. Banks and financial institutions merely act as intermediaries, certifying the identity of the parties, ownership of the assets and the value of the transfers. However, despite great efforts to reduce the frictions and complexities of these exchange networks (organized linearly and hierarchically), many processes remain inefficient, costly and vulnerable. 3. How will blockchain change the way we do business?
  16. 16. 16 Blockchain: building trust Blockchain’s potential disruption lies in the ledger system, based on consensus origin, immutability and the end purpose of the assets. Blockchain enables new processes that optimize existing ones, inherited from a secular tradition, which are accelerated by digitizing communications. Accenture estimates blockchain will deliver a 30% reduction in structural costs (mainly in data reconciliation and trade confirmation efficiencies) for eight of the world’s ten largest banks. This translates to annual savings of between $8 and $12 billion. Inescapably, Open Banking is the future of the financial industry. Banks will horizontally collaborate with other kinds of entities, creating a neuronal network for the exchange of data and orders, to offer a new selection of products and services to the client, also central to the ecosystem. Blockchain is the ideal technological format to support this new infrastructure of connected organizations. 2. Property register A house is about to change owners. The purchase-sale transaction involves five parties: the buyer, the seller, the real estate agent, the bank and the property register. They are all connected through the same app on their phone. Seller and buyer log in with their digital password. After this, they invite the other three players (the bank employee, the real estate agent and the property registrar) to accept their invitation, and they join the process. A smart contract verifies all the operation’s data: property characteristics, the identity of the buyer and seller, price, date of sale and any other necessary information. At each step in the process, the smart contract regulates the order of the procedures, as well as authorizations and permits. Each one of the interested parties (and only the interested parties) has access to the same information, as well as the irrefutable ledger of operations. The entire purchase-sale sequence is registered on a public (Bitcoin, Ethereum) or private blockchain, where the smart contract certifies the entire process’s authenticity. The aforementioned operation is a pilot proposal, implemented in June 2016 by Lantmäteriet (Swedish Property Register Service) in collaboration with the technological company ChromaWay, consulting firm Kairos Future and telecommunications company Telia. The purpose is to redefine the sales process for a property using a more effective procedure. Digital signatures and blockchain’s certification create an impregnable chain of trust, with multiple copies distributed throughout decentralized databases, preventing any sort of fraud or error and accelerating the process. As a result, an operation that typically takes weeks or months can be completed in a matter of hours. 3. How will blockchain change the way we do business?
  17. 17. 17 Blockchain: building trust 3. Insurance The collaborative economy poses new dilemmas and challenges for the insurance industry; how does one insure an apartment that will only be occupied for a few days? What kind of insurance covers liability for a car rented for just a few hours? As such, insurance changes from a static to a liquid concept. Blockchain is the solution. The technology provides for unequivocal verification of the client’s identity, and the client’s risk profile can then be assessed. A smart contract adjusts rates, either periodically for long-term insurance, or on a case-by-case basis for temporary contracts. A procedure that was practically unfeasible before is now within reach, with the potential to greatly reduce administrative costs. In July of 2016, the startup LenderBot presented a solution (still in proof-of-concept) to create customized microinsurance for shared economy services. The bot acts as guarantor for the operation between the lender and the borrower. All the steps are cryptographically linked, notarized in blockchain, and can be verified by all parties involved in the exchange: lender, borrower, insurance company and payment method (LemonWay). The application operates through Facebook Messenger, and can be used to insure valuable objects that individuals exchange for short periods of time. The lender and the borrower agree upon the loan’s conditions, and sign the contract through the bot. This opens a world of possibilities to automate regulation of P2P loans. 3. How will blockchain change the way we do business?
  18. 18. 18 Blockchain: building trust Real case Incent: customer retention Incent proposes a blockchain-based CRaaS (Consumer Retention as a Service), which aspires to become a standardized, transversal system to retain customers and gain their loyalty. The loyalty program is based on generating tokens for business affiliated with its service network. Businesses offer these incentives to their customers as rewards. Since they are registered on a chain and encrypted, they cannot be deleted or manipulated. The tokens are exchanged instantaneously, and can be stored in digital portfolios on one’s phone, or accessed through a browser, creating a personalized, omnichannel experience. It is also possible to sell or exchange the tokens for other kinds of rewards on an open exchange network, and even turn them into money. Anexo: 5 ejemplos de blockchain en funcionamiento
  19. 19. 19 Blockchain: building trust 4. Entertainment The entertainment industry is a clear example of the potential for disintermediation, where blockchain technology would provide for legalizing ownership of an asset and direct commercialization, from the creator to the consumer. Music is the best example of a creative industry suffering from disputes over rights and royalty payments between artists and distributors, including traditional intermediaries (record labels) and digital platforms (Spotify, iTunes, etc.). Several initiatives are seeking a new balance for this industry. One example is Mycelia, founded by the artist Imogen Heap. Mycelia aims to set new ethical, commercial and technological standards in the music industry through songs that have smart contracts. UjoMusic also bases its proposition on smart contracts used to catalogue music and assign payments per download. A more ambitious project is the Open Music Initiative, a consortium of over 100 organizations including record labels, streaming services, publishers, and entertainment companies. In this case, the idea is to address the lack of communication between these organizations’ technology systems, which make innovation in the industry difficult, and ultimately jeopardize artists, who do not receive royalties when their works are played. The metadata that must correctly identify ownership of assets is an additional problem, increasing this industry’s complexity. Machine-learning techniques could solve the conflicts inherent to data, together with distributed databases, shared ledgers and cryptographic techniques. The coalition aspires to create a new model for the musical industry and ultimately, this new model fairly compensates artists and, if a consensus is reached, could spread to the publishing, film and television industries. 3. How will blockchain change the way we do business?
  20. 20. 20 Blockchain: building trust 5. Power The power industry is another traditional example of high centralization. Once again, blockchain has the potential to develop a new ecosystem where power is generated and distributed through decentralized networks. With these networks, anyone can produce, purchase or sell power to their neighbors or on a marketplace, using smart contracts to authenticate and manage conditions and payment. For example, Dutch startup Powerpeers is developing a digital marketplace for the purchase-sale of self-generated power. Similar models are beginning to spread to the United States, Japan, Australia and different European countries. These projects are still in embryonic stage, but they open the door to a future of profound transformation in the industry. Based on incipient P2P networks, blockchain can valuate assets in real time on networks that provide customized offers, regulated by smart contracts, or certify the emission of clean energies. Large power corporations are not untouched by blockchain’s disruption. At the end of 2016 in Spain, Endesa presented Energy Challenge, an open innovation platform that receives blockchain-based proposals to research and develop new distribution models. 3. How will blockchain change the way we do business?
  21. 21. 21 Blockchain: building trust Blockchain for humanitarian aid A quick response is essential for natural disasters or crises that require international humanitarian aid. Start Network is a pilot project that brings 42 non-governmental agencies from all over the world together. Its aim is to facilitate quick action to respond to humanitarian crises. The project uses Ethereum’s blockchain to expedite quick decision-making and efficient administration of aid funds. ConsenSys provides the technological development through BoardRoom, a decentralized governance platform to execute smart contracts in authorized blockchains. This system has clear benefits: more than anything else, rapid response. The destination of the aid funds is decided in under 72 hours. This process generally takes an average of 17 days during crisis situations, and 80 during a non-crisis. Projects on the ground can be kicked off a week after requesting the aid, while national emergency-response funds take between 45 and 70 days to begin to be distributed. Of equal importance, the process’s transparency means that it is possible to certify that all payments reach their proper destinations. Blockchain’s traceability means that all payments can be tracked from their starting point to their destination. This ensures that the aid is efficient, that it is not lost in a sea of red tape and that it does not fall into malicious or corrupt hands. Long-term, Start Network aspires to redefine the concept of international solidarity, building a new humanitarian economy based on decentralized power and distributed authority, where capital and control are administered under a system of democratic governance. Real case
  22. 22. 22 Blockchain: building trust Moreover, the United Nations World Food Program started up a pilot project christened Building Blocks in January of 2017. The project was developed in rural areas of the Sindh region in Pakistan, in order to test blockchain’s ability to authenticate, register and reconcile food and economic aid transactions. Beneficiaries received money and food, and all the transactions were registered on a blockchain to ensure security and transparency for the process. The program’s success encouraged WFP to promote new initiatives during the spring of 2017, searching for the real impact on people in need. Real case: Blockchain for humanitarian aid
  23. 23. 23 Blockchain: building trust 4. In search of standards
  24. 24. 24 Blockchain: building trust Public blockchains (based on Ethereum, Bitcoin), private blockchains and hybrid blockchains share certain technological standards, although they are not fully compatible. Some are in experimentation phase, and do not even use the same criteria to reach consensus. This lack of unified standards plays against interoperability, which is essential for certain chains to ‘speak’ to others. To this end, technological compatibility is not as necessary as the ability to establish links between platforms. If blockchain aspires to become the technological support behind hundreds of thousands of digital interactions, the barriers standing in the way of widespread adoption cannot be ignored. Efforts to reach standardization must be made, where the private interests of conflicting interests (institutions, banks, business and payment methods) yield to awareness of the common good. Some company and institutional consortiums are seeking out this common good. For example, Enterprise Ethereum Alliance includes over 30 members, from banks such as JP Morgan, Santander, Credit Suisse, BBVA and ING, to technological companies Intel and Microsoft and startups ConsenSys and BlockApps. Its work is focused on improving privacy, security and scalability for Ethereum blockchains, optimizing them for company applications. Interoperability is not the only large challenge looming ahead. Even transparency can cease to be a virtue and become a problem; to what extent does open access to data for all parties entail conflict? Could competitors or parties with conflicting interests share the same blockchain? Under its current state of development, blockchain does not allow one to manage huge volumes of data. For this reason, although data-based industries (for example, healthcare or finance) believe they will be benefited by features such as identity verification or the redistribution, immutability and transparency of records, blockchain’s efficiency may be called into question when used as a platform to process enormous amounts of data. 4. In search of standards
  25. 25. 25 Blockchain: building trust Scalability: the great challenge Blockchain protocols are still an open field of research, in a race to reach the most efficient, and at the same time accessible, process. In October of 2016, Ethereum’s founder Vitalik Buterin referred to the “dream of reaching a scalable blockchain, that can run on nothing but consumer laptops.” In this regard, his team is working to replicate, at minimum, the computational power of the VISA network by using only light clients. What does this mean? A public, totally scalable blockchain (consensus blockchains do not need to be scalable, because they operate with a reduced number of nodes, like strictly private blockchains hosted at just one company) would reshape the Internet. It would break into a new age of secure communications, in a disintermediated setting, where no one would have to trust anyone (although they would have to trust mathematics) to exchange values and messages in a reliable fashion. For example, this structure would support instantaneous micropayments, as well as the Internet of Things. For such a system to be possible, the technology resources required to participate in a chain of blocks need to remain low. In other words, requirements (computation power, broadband and storage capacity) need to be reduced, so that anyone with a computer and standard connection can join the network as a full node (or miner). To this end, a virtually infinite volume of transactions must be reached, with very low confirmation times, and always under a protocol that cannot be controlled (so that anyone can begin securing the network). With Bitcoin’s current protocol, the demand for broadband, computation power and storage is growing with the passage of time, given that all the nodes must be able to process all the data in real time, and store said data forever. Otherwise, these nodes will be expelled from the network. In 2016 alone, Bitcoin’s blockchain increased its size from 54 to 96 GBs, which requires an average of 4 days to download and process the chain. If Bitcoin’s current protocol had to support operations similar to VISA’s network (thousands of times greater than Bitcoin’s current transaction load), the chain’s volume would grow by several petabytes per year. For widespread adoption, generating even more transactions than the VISA network, Bitcoin’s blockchain could shoot up to several hundred petabytes per year. This means joining or continuing as a full node would be increasingly restricted, due to the aforementioned storage and broadband limitations. 4. In search of standards
  26. 26. 26 Blockchain: building trust This system bears a sort of inefficiency that leads to centralization, since increasingly fewer entities are capable of ‘mining’ the network, ultimately impeding scalability. Moreover, with the growing number of transactions, as Bitcoin’s protocol is conceived, it would generate increasingly high transaction costs and waiting times. The good news is that blockchain is quickly evolving toward total scalability, and it should not take long to reach. Different technologies already provide for complete scalability in private blockchains, executed with very short waiting times while certifying data on a chain. Yet in many cases, nodes that vote are predefined and must reveal their identity, which means that they are not an alternative in settings where censure or distrust are key factors. 4. In search of standards
  27. 27. 27 Blockchain: building trust Real case Estonia: the digitized society The small Baltic country is one of the most advanced in the world as far as the digitization of public services is concerned. This is thanks to blockchain-based projects, driven by the government and public administrations. Estonia is the only country in the world whose inhabitants have a PKI (Public Key Infrastructure) card, which provides access to over 1,000 electronic governmental services with their digital IDs: voting, medical coverage, tax payment, bank procedures, company registration, social welfare, etc. All Estonian digital public services operate on the platform X-Road. This was originally a system to consult different databases, and it has evolved into an open-source decentralized platform to exchange signed, encrypted data between different systems and databases. Daily, the system is used by over 900 organizations and 2,000 national services. Estonia was also the first country to offer e-Residency, a digital, supranational identity to access verified and secure electronic services. Based on the concept of a ‘country without borders’, e-Residency allows any citizen in the world to run a digital business, regardless of their physical location. On December 1st, 2016, the virtual nation Bitnation allied itself with the Estonian initiative. Through the public registration service Bitnation, all e-residents (Estonians, and of any other nationality) can notarize marriages, birth certificates and business contracts, in addition to other services (more info).
  28. 28. 28 Blockchain: building trust Seeking solutions to the scalability issue Blockchain protocol design is a constantly evolving area. With different focuses, Ethereum and Bitcoin’s teams are competing to reach the most efficient protocol that will also preserve privacy. Sidechains (separate chains certified by a public blockchain) and certain cryptocurrencies already provide for payment with short waiting times, but they compromise the security of their data. Lateral chains must be secured independently from the public chain, although efforts may be shared between chains (‘Merged Mining’). Moreover, to maintain optimum security, more transactions should be generated in the main chain, which means that the scalability issue is not solved long-term. Additionally, CoinJoin is a method that already anonymously combines many transactions for the same amount, validating them together in a blockchain for the cost of just one transaction. Although achieving scalability for a public blockchain is a tremendously complex task, the most talented developers are already implementing possible solutions to reach total scalability. Of improvements to be made to public chains, the following are of note: Blockchain Sharding, to securely divide the database among several unknown nodes, similar to many distributed databases, thereby resolving issues stemming from computation power, broadband and storage. 4. In search of standards
  29. 29. 29 Blockchain: building trust Segregated Witness (or “SegWit”), Bitcoin’s last protocol layer, was rolled out in 2016 and its activation is planned for 2017. It will displace all signature data to another part of the transaction, allowing strangers to securely exchange money outside the blockchain, with no time, amount or frequency limits, as long as only a few transactions are carried out. Lightning Network, which plans to launch in 2017, is an additional layer to the Bitcoin protocol. It could allow 7 billion people to have unlimited payment channels, with waiting times under a millisecond. The (shortened) blockchain would have a reasonable size, under 2 TB. Ethereum is developing a similar technology, called Raiden. (Proof-of-Stake) consensus, which the Ethereum team is attempting to implement as an alternative to the current proof- of-work consensus mechanism. Proof-of-state works in such a way that miners must spend cryptocurrency (Ethers) to validate transactions. Essentially, miners invest their money in the blockchain, not in its computation power. This system provides for sustainable mining, from any device. The Ethereum team is planning to implement its proof-of-stake algorithm, Casper, in its Serenity release, scheduled between 2017 and 2018. 4. In search of standards
  30. 30. 30 Blockchain: building trust 5. A question of time and agreements
  31. 31. 31 Blockchain: building trust The consulting firm Grand View Research estimates the global blockchain market (including private, public and hybrid) will be valued at 7.7 billion dollars by 2024. As the technology spreads, blockchain will open the door not only to the development of new methodologies and modes of organization, but also to business models we have yet to imagine, that are more direct and simplified. They will cut down on friction and costs, and intermediaries will grow obsolete. Three ways for blockchain to grow Social impact beyond the business sphere Need to regulate action frameworks Efficiency replaces the original ideological burden Blockchain’s impact will not only be visible in the business world. Its waves will be felt in different social spheres, seeping into routine, everyday processes, from smart-contract regulation for salaries to blockchain-based voting projects. In fact, several well-known public figures, including the British former British Prime Minister David Cameron, support using blockchain to control corruption in politics. One of the essential requirements for this growth is to a regulatory framework for action. A European Parliament motion dated May 3rd, 2016, acknowledges the potential of cryptocurrencies and DLTs to contribute to citizens’ wellbeing and economic development, mainly by decreasing operational costs for transactions and by cutting costs to access the financial system. However, it warns of the risks and uncertainty inherent to these applications, which require a legal framework in step with innovation. 5. A question of time and agreements
  32. 32. 32 Blockchain: building trust The spread of blockchain also carries an ideological paradox. Despite the idealized values of decentralization and disintermediation, many projects, especially in civil society (e.g. the aforementioned votes) will not be able to move forward if a ‘traditional institution’ does not make the decision to implement the technology and take responsibility for its maintenance and correct operation. In a certain way, this reaffirms that institution’s authoritarian role, although it may evolve into the softer role of a mediator. Parallel reasoning is applicable to the private sector. Implementing blockchain protocols in different economic sectors is justified by its measurable benefits and improvements, disregarding the underlying ideological baggage or values. Of course, all this without sacrificing, to a greater or lesser extent, transparency, power distribution, reliability and agility. Blockchain will not make us better people, nor will it improve our ethical standards; whoever wants to cheat will keep trying to do so, with or without blockchain. However, it will redesign experiences, eliminating some of the worries or concerns that assail our everyday life by reducing stress factors such as uncertainty or distrust. Ultimately, any physical or digital element that holds value can be registered on blockchain, and the client/citizen will hold the key to control what belongs to him or her. 5. A question of time and agreements
  33. 33. 33 Blockchain: building trust Real case I created it is an anonymous, free service to certify that a certain document was created on a specific day. For example, this can be useful to prove that a contract was signed at a certain time, or that an idea for a patent is owned by an individual. Its operation is simple: the user uploads the document to the website (in PDF, audio, image or video format) and its encrypted stamp is automatically uploaded to Bitcoin and Ethereum’s blockchain by transferring the minimum amount of cryptocurrency in each network (0.00000001 Bitcoins), making it permanent and unalterable. After this, anyone can verify the document’s ownership and date of registry, accessing the public chain through websites such as
  34. 34. 34 Blockchain: building trust #REBELTHINKING We are Good Rebels We create experiences at the intersection of people, brands and technology. Our purpose is to improve the companies relationships with their clients, their employees and society as a whole. We inspire organizations to focus on people, boosting the short- term results, while we enable them for tomorrow’s disruptive scenarios. We believe the most solid organisations are those focused on people. Those who work their human relationships as an intrinsic part of the business. Those which respond to the demands of different social actors so as to generate value and transcendence. We are powered by 130 Rebels working from 6 offices in the UK, Europe and Latin America. Our work currently spans over 30 clients, across 9 countries and in 15 languages. REBEL THINKERS Iñaki Bagazgoitia Carlos Corredor Carlota García-Abril Pedro Jesús González David Lastra Gonzalo Martín Alexandre Sonderer CONTRIBUTORS Kristian Gjerding CellPoint Mobile Victoria Lemieux University of British Columbia CONTACT