Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review

AIRIssue No. 2 June 2016

1 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review

BlockChain Technology: Beyond

Authors: Michael Crosby (Google) Nachiappan (Yahoo) Pradan Pattanayak (Yahoo) Sanjeev Verma (Samsung Research America) Vignesh Kalyanaraman (Fairchild Semiconductor)

6 Applied Innovation Review Issue No. 2 June 2016

Abstract

A is essentially a distributed database of records, or public of all transactions or digital events that have been executed and shared among participating parties. Each transaction in the public ledger is verified by consensus of a majority of the participants in the system. Once entered, information can never be erased. The blockchain contains a certain and verifiable record of every single transaction ever made. Bitcoin, the decen- tralized peer-to-peer digital currency, is the most popular example that uses blockchain technology. The digital currency bitcoin itself is highly controversial but the underlying blockchain technology has worked flawlessly and found wide range of applications in both financial and non-financial world.

The main hypothesis is that the blockchain establishes a system of creating a distributed consensus in the digital online world. This allows participating entities to know for certain that a digital event happened by creating an irrefutable record in a public ledger. It opens the door for developing a democratic open and scalable digital econ- omy from a centralized one. There are tremendous opportunities in this disruptive technology, and the revolution in this space has just begun.

This white paper describes blockchain technology and some compelling specific applications in both financial and non-financial sector. We then look at the challenges ahead and business opportunities in this fundamental tech- nology that is all set to revolutionize our digital world.

7 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review Introduction combustion engine that has smart contract among participating the potential to transform the entities is met then the parties involved A blockchain is essentially a distrib- world of finance and beyond1. in a contractual agreement can be uted database of records, or public automatically made payments as per ledger of all transactions or digital Current digital economy is based on the contract in a transparent manner. events that have been executed and the reliance on a certain trusted au- shared among participating par- thority. All online transactions rely on Smart Property is another related con- ties. Each transaction in the public trusting someone to tell us the truth— cept which is regarding controlling ledger is verified by consensus of a it can be an email service provider the ownership of a property or as- majority of the participants in the telling us that our email has been set via blockchain using Smart Con- system. Once entered, information delivered; it can be a certification au- tracts. The property can be physical can never be erased. The blockchain thority telling us that a certain digital such as car, house or smartphone, contains a certain and verifiable re- certificate is trustworthy; or it can be or it can be non-physical such as cord of every single transaction ever a social network such as Facebook shares of a company. It should be made. To use a basic analogy, it is telling us that our posts regarding noted here that even Bitcoin is not easier to steal a cookie from a cook- our life events have been shared only really a currency: Bitcoin is all about ie jar, kept in a secluded place, than with our friends or it can be a bank controlling the ownership of money. stealing the cookie from a cook- telling us that our money has been ie jar kept in a market place, being delivered reliably to our dear ones in Blockchain technology is finding observed by thousands of people. a remote country. The fact is that we applications in wide range of ar- live our life precariously in the digital eas; both financial and non-financial. Bitcoin is the most popular example world by relying on a third entity for that is intrinsically tied to blockchain the security and privacy of our digital Financial institutions and banks no technology. It is also the most con- assets. The fact remains that these longer see blockchain technology troversial one since it helps to enable third party sources can be hacked, as a threat to traditional business a multibillion-dollar global market manipulated or compromised. models. The world’s biggest banks of anonymous transactions without are in fact looking for opportunities any governmental control. Hence it This is where the blockchain tech- in this area by doing research on in- has to deal with a number of regu- nology comes handy. It has the po- novative blockchain applications. In latory issues involving national gov- tential to revolutionize the digital a recent interview Rain Lohmus of ernments and financial institutions. world by enabling a distributed con- Estonia’s LHV bank told that they sensus where each and every online found Blockchain to be the most However, Blockchain technology transaction involving digital assets, tested and secure for some bank- itself is non-controversial and has past and present, can be verified at ing and finance related applications. worked flawlessly over the years and any time in the future. It does this is being successfully applied to both without compromising the privacy Non-Financial applications opportu- financial and non-financial world ap- of the digital assets and parties in- nities are also endless. We can en- plications. Last year, Marc Andrees- volved. The distributed consensus and vision putting proof of existence of sen, the doyen of Silicon Valley’s anonymity are two important charac- all legal documents, health records, capitalists, listed the blockchain dis- teristics of blockchain technology. and loyalty payments in the music tributed consensus model as the most im- industry, notary, private securities portant invention since the Internet The advantages of Blockchain tech- and marriage licenses in the block- itself. Johann Palychata from BNP nology outweigh the regulatory is- chain. By storing the fingerprint of Paribas wrote in the Quintessence sues and technical challenges. One the digital asset instead of storing the magazine that bitcoin’s blockchain, key emerging use case of blockchain digital asset itself, the anonymity or the software that allows the digital cur- technology involves “smart contracts”. privacy objective can be achieved. rency to function should be consid- Smart contracts are basically com- ered as an invention like the or puter programs that can automati- In this report, we focus on the cally execute the terms of a contract. disruption that every industry in When a preconfigured condition in a today’s digital economy is facing due 8 Applied Innovation Review Issue No. 2 June 2016 to the emergence of blockchain tech- nology. Blockchain technology has potential to become the new engine August 18 October 31 November 9 of growth in digital economy where Domain name Bitcoin design Bitcoin project “bitcoin.org” paper published registered at 2009 we are increasingly using Internet to registered SourceForge.net conduct digital commerce and share our personal data and life events.

There are tremendous opportuni- ties in this space and the revolution 2008 January 3 January 9 January 12 Genesis block Bitcoin v 0.1 released First Bitcoin trans- in this space has just begun. In this established at and announced on action, in block 170 the from Satoshi to Hal 18:15:05 GMT mailing list report we focus on few key appli- Finney cations of Blockchain technology in the area of Notary, Insurance, Figure 1: The History of Bitcoin private securities and few other in- teresting non-financial applications. 50 coins. Anyone can install this open Internet commerce is exclusively We begin by first describing some source program and become part of tied to the financial institutions serv- history and the technology itself. the bitcoin peer-to-peer network. It ing as the trusted third party who has grown in popularity since then. process and mediate any electron- Section I: BlockChain ic transaction. The role of trusted Technology The popularity of the Bitcoin has third party is to validate, safeguard never ceased to increase since then. and preserve transactions. A certain 1. Short History of Bitcoin Moreover, the underlying Block- percentage of fraud is unavoidable Chain technology is now finding new in online transactions and that needs In 2008, an individual (or group) range of applications beyond finance. mediation by financial transactions. writing under the name of Satoshi This results in high transaction costs. Nakamoto published a paper enti- 2. Blockchain Technology: tled “Bitcoin: A Peer-To-Peer Elec- How does it work? Bitcoin uses cryptographic proof tronic Cash System”. This paper instead of the trust-in-the-third-party described a peer-to-peer version of We explain the concept of the block- mechanism for two willing parties to the electronic cash that would allow chain by explaining how Bitcoin execute an online transaction over online payments to be sent directly works since it is intrinsically linked to the Internet. Each transaction is from one party to another without the Bitcoin. However, the blockchain protected through a digital signature, going through a financial institution. technology is applicable to any digital is sent to the “public key” of the Bitcoin was the first realization of this asset transaction exchanged online. receiver, and is digitally signed using concept. Now “” is the “private key” of the sender. In the label that is used to describe all 1. Validate Entries order to spend money, the owner of networks and mediums of exchange 2. Safeguard Entries the needs to prove that uses cryptography to secure 3. Preserve Historic Record his ownership of the “private key”. transactions-as against those systems where the transactions are channeled through a centralized trusted entity.

The author of the first paper wanted to remain anonymous and hence no one knows to this day. A few months later, an program implement- ing the new protocol was released, beginning with the Genesis block of Figure 2: Traditional Online Financial Transactions using third trusted party (Banks, PayPal, etc.)1 9 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review The entity receiving the digital cur- checking every transaction against so that the entire rency then verifies the digital signa- the spender’s account, or “pub- can agree regarding the order of ture, which implies ownership of lic key”, that is registered in the transactions, which is a daunt- the corresponding “private key”, by ledger. This ensures that there is ing task in a distributed system. using the “public key” of the send- sufficient balance in his account er on the respective transaction. before finalizing the transaction. The Bitcoin solved this problem by a mechanism that is now popularly known Each transaction is broadcasted to However, there is question of main- as Blockchain technology. The Bitcoin every node in the Bitcoin network taining the order of these transac- system orders transactions by placing and is then recorded in a public tions that are broadcasted to every them in groups called blocks and then ledger after verification. Every sin- other node in the Bitcoin peer-to- linking these blocks through what is gle transaction needs to be verified peer network. The transactions do called Blockchain. The transactions for validity before it is recorded in not come in order in which they in one block are considered to have the public ledger. The verifying are generated, and hence there is happened at the same time. These node needs to ensure two things a need for a system to make sure blocks are linked to each-other (like a before recording any transaction: that double-spending of the crypto- chain) in a proper linear, chronolog- currency does not occur. Consider- ical order with every block contain- 1. Spender owns the cryptocur- ing that the transactions are passed ing the hash of the previous block. rency, through the digital signa- node by node through the Bitcoin ture verification on the transaction. network, there is no guarantee that There still remains one more prob- orders in which they are received at lem: Any node in the network can 2. Spender has sufficient crypto- a node are the same order in which collect unconfirmed transactions currency in his account, through these transactions were generated. and create a block and then broad checking every transaction against The above means that there is the spender’s account, through a need to develop a mechanism

Figure 3: Financial Transactions using the BlockChain Technology2 10 Applied Innovation Review Issue No. 2 June 2016

Figure 4: Double spending due to propagation delays in peer-to-peer network. cast it to the rest of the network as a chain provided it contains an answer to The average effort required is ex- suggestion as to which block should a very special mathematical problem. ponential in the number of zero be the next one in the blockchain. bits required but verification pro- How does the network decide which This is also known as “proof of cess is very simple and can be block should be next in the block- work”: a node generating a block done by executing a single hash. chain? There can be multiple blocks needs to prove that it has put enough created by different nodes at the same computing resources to solve a time. One can’t rely on the order since mathematical puzzle. For instance, blocks can arrive at different orders a node can be required to find a at different points in the network. “nonce” which when hashed with both transactions and hashes of pre- Bitcoin solves this problem by intro- vious blocks produces a hash with ducing a mathematical puzzle: each certain number of leading zeros. block will be accepted in the block

Figure 5: Generation of BlockChain from unordered transactions 11 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review

Figure 6: Mathematical race to protect transactions - I4

This mathematical puzzle is not triv- Occasionally, however, more than “miner” nodes” and are finan- ial to solve and the complexity of one block will be solved at the same cially awarded for their efforts. the problem can be adjusted so that time, leading to several possible on average it takes ten minutes for a branches. However, the math needed The network only accepts the longest node in the Bitcoin network to make to be solved is very complicated and blockchain as the valid one. Hence, a right guess and generate a block. hence the blockchain quickly stabiliz- it is next to impossible for an attack- There is very small probability that es: after this, every node is in agree- er to introduce a fraudulent transac- more than one block will be gener- ment about the ordering of blocks. tion since it has not only to generate ated in the system at a given time. a block by solving a mathematical The first node, to solve the The nodes donating their com- puzzle, but it also has to race math- problem, broadcasts the block puting resources to solve the puz- ematically against the good nodes to to the rest of the network. zle and generate blocks are called generate all subsequent blocks in or-

Figure 7: Mathematical race to protect transactions - II4 12 Applied Innovation Review Issue No. 2 June 2016 der for it to make the other nodes In particular, Ethereum has created to Bitcoin, all with different char- in the network accept its transaction lot of excitement for its programma- acteristics and purposes, and all of and block as the valid one. This ble platform capabilities. The com- them taking advantage of the scar- job becomes even more difficult pany allows anyone to create their city and resilience guaranteed by since blocks in the blockchain are own cryptocurrency and use that the Bitcoin blockchain. In turn, linked cryptographically together. to execute and pay for Smart Con- the Bitcoin blockchain can iterate tracts, while it also possesses its own to support additional features for Section II: Existing Market cryptocurrency (ether) which is used these experimental Sidechains, once to pay for the services. Ethereum they have been tried and tested. Blockchain technology is finding is already powering a wide range of applications in both financial and early applications in areas such as Companies such as IBM, Samsung, non-financial areas that traditionally Governance, autonomous banks, Overstock, Amazon, UBS, Citi, relied on a third trusted online en- keyless access, crowdfunding, finan- Ebay, and Verizon Wireless, to tity to validate and safeguard online cial derivatives trading and settle- name a few, are all exploring alterna- transactions of digital assets. There ment, all by using Smart Contracts. tive and novel uses of the blockchain was another application “Smart Con- for their own applications. Nine of tracts” that was invented in year 1994 Also, there are a number of block- the world’s biggest banks including by . It was a great idea to chains in existence to support a Barclays and Goldman Sachs5 have automatically execute contracts be- wide range of applications be- recently joined forces with the New tween participating parties. However, sides cryptocurrency. Currently York based financial technology it did not find usage until the notion there are three approaches in the firm R3 in September 2015 in or- of crypto currencies or programma- industry to support other appli- der to create a framework for using ble payments came into existence. cations and overcome perceived the blockchain technology in the fi- Now the two programs, Blockchain limitations of Bitcoin blockchain: nancial market. This is the first time and Smart Contracts can work to- banks have come to work together gether to trigger payments when a Alternative : A system of to find applications of blockchain preprogrammed condition of a con- using the blockchain algorithm to technology. Leading banks like JP- tractual agreement is triggered. Smart achieve distributed consensus on Morgan, State Street, UBS, Royal Contracts are really the killer appli- a particular digital asset. The sys- Bank Of Scotland, Credit Suisse, cation of the cryptocurrency world. tem may share miners with a parent BBVA and Commonwealth Bank of network such as Bitcoin’s, which is Australia have joined this initiative. Smart Contracts are contracts which called merged mining. These Alter- are automatically enforced by com- native Blockchains have been sug- Now we turn to give a short de- puter protocols. Using blockchain gested to implement applications scription of the types of interest- technology has made it much more such as DNS, SSL certification ing applications and projects that easier to register, verify and execute authority, file storage and voting. innovative and visionary com- them. Moreover, open source com- panies are doing in this space. panies like Ethereum and Codius Colored Coins: An open source are already enabling Smart Con- protocol that describes a class of Section III: Applications of tracts using blockchain technology methods for developers to cre- Technology-Compelling Use and many companies which operate ate digital assets on top of Bitcoin Cases in both Financial and on bitcoin and blockchain technolo- blockchain by using its function- Non-Financial Areas gies are beginning to support Smart alities beyond digital currency. Contracts. Many cases where assets 1. Financial Applications: are transferred only after meeting Sidechains: Alternative Blockchains certain conditions, which require which are backed by via a 1.1. Private Securities Lawyers to create a contract and Bitcoin Contract, just as dollars and Banks to provide Escrow services, pounds used to be backed by Gold. It is very expensive to take a com- can be replaced by Smart Contracts. One can possibly have a thou- pany public. A syndicate of banks sands of Sidechains “pegged” must work to underwrite the deal 13 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review and attract investors. The stock ex- security and other issues related to al- history of the diamond using block- changes list company shares for sec- ternative cryptocurrencies. Uses can chain. The characteristics which ondary market to function securely range from registering securities, such uniquely identify the diamond such with trades settling and clearing in as stocks, bonds and derivatives, to se- as height, width, weight, depth, color a timely manner. It is now theoret- curing bank balances and mortgages. etc are hashed and registered in the ically possible for companies to di- ledger. The verification of diamonds rectly issue the shares via the block- Coinsetter is a New York based bitcoin can be done by insurance compa- chain. These shares can then be exchange. It is working on a Proj- nies, law enforcement agencies, purchased and sold in a secondary ect Highline, a method of using the owners and claimants. Everledger market that sits on top of the block- blockchain to settle and clear financial provides a simple to use web service chain. Here are some examples: transactions in T+ 10 minutes rather API for looking at a diamond, and than the customary T+3 or T+2 days. create, read or update claims by in- NASDAQ Private Equity: NASDAQ surance companies, and to the same launched its Private Equity Ex- Augur is a decentralized predic- for police reports on diamonds. change in 20146. This is meant to tion market that will allow users provide the key functionalities like to buy and sell shares in anticipa- 2. Non-Financial Applications: Cap table and investor relationship tion of an event with the probabili- 2.1 Notary Public management for the the pre-IPO ty that a specific outcome occurs. or private companies. The current This can also be used to make fi- Verifying authenticity of the docu- process of trading stocks in this ex- nancial and economic forecasts ment can be done using blockchain change is inefficient and slow due based on the “wisdom of crowds”. and eliminates the need for central- to involvement of multiple 3rd par- ized authority. The document cer- ties. NASDAQ has joined hands Bitshares are digital tokens that re- tification service helps in Proof of with a San Francisco based Start- side in the blockchain and reference Ownership (who authored it), Proof up called chain.com7 to implement specific assets such as currencies of Existence (at a certain time) and private equity exchange on top of or commodities. The Token hold- Proof of Integrity (not tampered) BlockChain. Chain.com is imple- ers may have the unique feature of of the documents. Since it is coun- menting BlockChain based smart earning interest on commodities, terfeit-proof and can be verified by contracts to implement exchange such as gold, and oil, as well as dol- independent third parties, these functionality. This product is expect- lars, euros and currency instruments. services are legally binding. Us- ed to be fast, traceable and efficient. ing blockchain for notarization se- 1.2 Insurance cures the privacy of the document Medici is being developed as a secu- as well as those who seek certifica- rities exchange that uses the Coun- Assets which can be uniquely identi- tion. By publishing proof of publi- terparty implementations of Bitcoin fied by one or more identifiers that cation using cryptographic hashes 2.0. The goal here is to create a are difficult to destroy or replicate of files into blockchain takes the cutting edge stock market. Counter- can be registered in blockchain. notary timestamping to a new lev- party is a protocol that implements This can be used to verify ownership el. Using blockchain technology traditional financial instruments as of an asset and also trace the transac- also eliminates the need for expen- the self-executing smart contracts. tion history. Any property (physical sive notarization fees and ineffec- These smart contracts facilitate, or digital such as real estate, automo- tive ways of transferring documents. verify or enforce the negotiation of biles, physical assets, laptops, other contracts and eliminate the need for valuables) can potentially be regis- Stampery is a company which can a physical document. This elimi- tered in blockchain and the owner- stamp email or any files using block- nates the need for an intermediary, ship, transaction history can be vali- chain. It simplifies certifying of such as a broker, exchange or bank. dated by anyone, especially insurers. emails by just emailing them to an email specifically created for each is an open source Everledger is a company which cre- customer. Law firms are using Stam- project with focus on Side- ates permanent ledger of diamond pery’s technology for a very cost chains to avoid fragmentation, certification and the transaction effective way to certify documents. 14 Applied Innovation Review Issue No. 2 June 2016 Viacoin is one of the compa- information in a public ledger. In ad- the blockchain and validate it anytime nies which uses clearinghouse dition to rights ownership informa- using native blockchain mechanisms. protocol for notary service. tion, the royalty split for each work, as determined by Smart Contracts, The major advantages of this service Block Notary is an iOS app which could be added to the database. This is security and privacy that allow a helps you create proof of existence of Smart Contracts would in turn define user to give decentralized proof of any content (photo, files, any media) the relationship relationships be- the document that can’t be modi- using TestNet3 or a Bitcoin network. tween different stakeholders (address- fied by a third party. The existence es) and automate their interactions of the document is validated using Crypto Public Notary uses Block- blockchain that does not depend chain of Bitcoin to notarize doc- 2.3 Decentralized proof of exis- on a single centralized entity. Proof uments by using trivial amount tence of documents of Existence webservice is avail- of bitcoins to record the file’s able at https://proofofexistence.com/. checksum in a public blockchain. Validating the existence or the pos- session of signed documents is very 2.4 Decentralized Storage Proof of Existence is another ser- important in any legal solution. vice which uses blockchain to The traditional document valida- Cloud file storage solutions such SHA256 digest of the docu- tion models rely on central author- as Dropbox, Google Drive or One ment in bitcoin blockchain. ities for storing and validating the Drive are growing in popularity to documents, which presents some store documents, photos, video and Ascribe is another company which obvious security challenges. These music files. Despite their popularity, does authorship certification us- models become even more difficult cloud file storage solutions typically ing blockchain. It also offers trans- as the documents become older. face challenges in areas such as securi- fer of ownership service with at- ty, privacy and data control. The ma- tribution to the original author. The blockchain technology provides jor issue is that one has to trust a third an alternative model to proof-of-ex- party with one’s confidential files. 2.2 Applications of Blockchain in istence and possession of legal doc- the Music Industry uments. Proof of Existence is a simple Storj provides a blockchain based service that allows one to anony- peer-to-peer distributed cloud stor- The music industry has gone a big mously and securely store online age platform (see Appendix for de- change in last decade due to the proof of existence of any document. tailed description) that allows users growth of Internet and availability of This service simply stores the cryp- to transfer and share data without a number of streaming services over tographic digest of the file, linked to relying on a third party data pro- the Internet. This change is impact- the time in which a user submits his vider. This allows people to share ing everyone in the music industry: document. It is worth noting that the unused internet bandwidth and artists, labels, publishers, songwrit- cryptographic digest or fingerprint is spare disk space in their personal ers and streaming service providers. what is stored, and not the actual doc- computing devices to those look- The process by which music royal- ument. In this way, the user does not ing to store large files in return ties are determined has always been need to worry about the privacy as- for bitcoin based micropayments. a convoluted one, but the emergence pect and protecting his information. of the Internet has made it even more Absence of a central control elimi- complex giving rise to the demand of This allows then a user to later nates most traditional data failures transparency in the royalty payments certify the existence of a docu- and outages, as well as significant- by both artists and songwriters. ment that existed at a certain time. ly increasing security, privacy and data control. Storj’s platform de- This is where the blockchain By leveraging the blockchain, pends upon a challenge algorithm can play a role. The technology a user can simply store the sig- to offer incentivization for users to can help mantain a comprehen- nature and timestamp associ- properly participate in this network. sive and accurate distributed da- ated with a legal document in tabase of music rights ownership 15 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review In this way, Storj can periodically nd TeleHash (Peer-To-Peer Mes- 2.7 Internet Applications check the integrity and availability of a saging). file cryptographically, and offer direct Namecoin is an alternative block- rewards to those maintaining the file. Filament is a startup that provides a chain technology (with small varia- decentralized IoT software stack tions) that is used to implement a In this example, Bitcoin-based mi- that uses the bitcoin blockchain decentralized version of Domain cropayments serve as both an in- to enable devices to hold unique Name Server (DNS) that is resilient centive and method of payment identities on a public ledger. to censorship. Current DNS servers while a separate blockchain is used are controlled by governments and as a datastore for file metadata. 2.6 BlockChain based Anti-Coun- large corporations, and could abuse terfeit Solutions their power to censor, hijack, or 2.5 Decentralized IoT spy on a consumer’s Internet usage. Counterfeiting is one of the biggest With Blockchain technology Inter- The Internet of Things (IOT) is in- challenges in modern commerce. net’s DNS or phonebook is main- creasingly becoming a popular tech- In particular, it is one of the big- tained in a decentralized manner nology in both the consumer and gest challenges that digital com- and every user can have the same the enterprise space. A vast majority merce world faces today. Existing phone book data on their computer. of IOT platforms are based on a cen- solutions are based on reliance on tralized model in which a broker or trust on a third party trusted entity Public Key Infrastructure (PKI) hub controls the interaction between that introduces a logical friction be- technology is widely used for cen- devices. However, this approach tween merchants and consumers. tralized distribution and manage- has become impractical for many ment of digital certificates. Every scenarios in which devices need to The blockchain technology, with its device needs to have root certificate exchange data between themselves decentralized implementation and of the Certification Authority (CA) autonomously. This specific re- security capabilities, provides an al- to verify digital signature. While quirement has lead to efforts to- ternative to existing anti-counterfeit- PKI has been widely deployed and wards decentralized IoT platforms. ing mechanisms. One can envision incredibly successful, dependence a scenario in which brands, mer- on a CA makes scalability an issue. The blockchain technology facili- chants and marketplaces are part tates the implementation of decen- of a blockchain network with nodes The characteristics of the Block- tralized IoT platforms such as se- storing information to validate the Chain can help address some of the cured and trusted data exchange as authenticity of the products. With limitations of the PKI by using Key- well as record keeping. In such an the use of this technology, stake- less Security Infrastructure (KSI). architecture, the blockchain serves holders in the supply chain need not KSI uses cryptographic hash func- as the general ledger, keeping a rely on a centralized entity for au- tions, allowing verification to rely trusted record of all the messages thenticity of the branded products. only on the security of hash functions exchanged between smart devic- and the availability of a blockchain. es in a decentralized IoT topology. BlockVerify provides blockchain based anti-counterfeit solutions that Section IV: Risks of IBM, in partnership with Sam- introduce transparency to supply Adoption sung, has developed a platform chains. It is finding applications in ADEPT (Autonomous Decentral- the pharmaceutical, luxury items, BlockChain is a promising break- ized Peer To Peer Telemetry) that diamonds and electronics industries. through technology. As we described uses elements of the bitcoin’s un- before, there are vast array of applica- derlying design to build a distribut- tions or problems that can be solved ed network of devices, or decen- using BlockChain based technology, tralized Internet of Things (IOT). spanning from Financial (remittance ADEPT uses three protocols in to investment banking) to non-finan- the platform: BitTorrent (file shar- cial applications like Notary services. ing), Ethereum ( Smart Contracts) 16 Applied Innovation Review Issue No. 2 June 2016 Most of these are radical innova- the adoption by introducing new growind adoption. tions. As it happens with the adop- laws to monitor and regulate the tion of radical innovations, there industry for compliance. In a way, This enthusiasm may be because of are significant risks of adoption. this may help adoption in the Unit- the large quantities of capital being ed States as these agencies carry injected into the digital infrastruc- Behavior change: Change is constant, customer trust. In more controlled ture. Excitement grows as Bitcoin but there is resistance to change. In economies like China, the adop- and blockchain firms have received the world of non-tangible trusted tion will face significant headwind. a record US$1 Billion in investment third parties introduced by Block- as 2015 came to an end. American Chain, customers need to get used to Fraudulent Activities: Given the pseud- Express, Bain Capital, Deloitte, the fact that their electronic transac- onymous nature of BlockChain Goldman Sachs, MasterCard, the tions are safe, secured and complete. transactions, coupled with ease of New York Life Insurance Compa- The present day intermediaries like moving valuables, the “bad guy”s ny, the New York Stock Exchange; Visa or Mastercard (in case of a may misuse the technology for fraud- all of them have poured millions of credit cards) will also go through a ulent activities like money trafficking. dollars into Bitcoin firms recently. change of roles and responsibilities. That said, with enough regulations We envision that these companies and technology-support, law enforce- Corporate funding into Bitcoin & will also invest and move their plat- ment agencies will be able to moni- Blockchain infrastructure is grow- forms to be BlockChain-based. They tor and prosecute these individuals. ing and generating interest in several will continue to provide services segments. Nasdaq is tapping block- to further customer relationship. Quantum Computing8: The basis of chain technology to create a more se- BlockChain technology relies on cure, efficient system to trade stocks. Scaling: Scaling of the current na- the very fact that it is mathemati- DocuSign, a company that special- scent services based on BlockChain cally impossible for a single par- izes in electronic contracts, just un- presents a challenge. Imagine your- ty to game the system due to lack veiled a joint idea with Visa to use self executing a BlockChain trans- of needed compute power. But blockchain to track car rentals and action for the first time. You will with the future advent of Quantum reduce paperwork. Microsoft will have to go through downloading Computers, the cryptographic keys unveil details about its venture into the entire set of existing Block- may be easy enough to crack with- Smart Contracts that use blockchain Chains and validate before execut- in a reasonable time through a sheer technology. Meanwhile, this new ob- ing your first transaction. This may brute force approach. This would session with blockchain technology take hours or longer as the number bring the whole system to its knee. has reached a point that companies of blocks increase exponentially. The counter-argument would be for are even experimenting with creating keys to become even stronger so smaller, “private blockchains” inside Bootstrapping: Moving the existing that they may not be easy to crack. their own offices: for example, they contracts or business documents/ are hiring companies like BlockCy- frameworks to the new BlockChain Section V: Corporate pher, a startup out of Redwood City, based methodology presents a signif- Funding & Interest California to develop blockchain icant set of migration tasks that need technology within their own business. to be executed. For example, in case In 2015, the bitcoin currency has of Real Estate ownerships,, the exist- reached yearly highs in both vol- Conclusion ing documents lying in County or Es- ume and price over the course of crow companies need to be migrated September-October. The digital BlockChain is Bitcoin’s backbone to the equivalent BlockChain form. currency is gaining traction both technology. The distributed led- This may involve time and costs. in the consumer marketplace as a ger functionality coupled with the tradeable security, as well as with security of BlockChain makes it a Government Regulations: In the new regulators. It isn’t just digital-cur- very attractive technology to solve world of BlockChain-based trans- rency enthusiasts that are bullish: the current financial as well as actions, government agencies like equity research firm Wedbush ex- non-financial industry problems. FTC and SEC may slow down pects it to rise to $600 because of its 17 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review

Figure 8: Bitcoin price in 20159.

As far as the technology is con- The adoption definitely faces strong ry environments for BlockChain1. cerned, the cryptocurrency-based headwind as described before. How- technology is either in the down ever, even large financial institutions We envision BlockChain technology ward slope of inflated expectations such as Visa, Mastercard, Banks, and going through slow adoption due to or in trough of disillusionment as NASDAQ, are investing in exploring the risks associated. Most of the start- shown in Figure 10 in the next page. applications of current business mod- ups will fail with few winners. Having els on BlockChain. In fact, some of said this, we should be seeing signif- There is enormous interest in them are searching for new business icant adoption in a decade or two. BlockChain-based business ap- models in the world of BlockChain. plications and hence numer- ous start-ups working on them. Some would like to stay that they are even ahead of the curve in terms of transformed regulato- ry environments for BlockChain.

Figure 9: VC funcing in Sep/Oct 2015 18 Applied Innovation Review Issue No. 2 June 2016

Figure 10: VC Showing cryptocurrencies in the trough of dissillusionment in Gertner’s Hype Cycle10.

References 4. Driscoll, Scott. “How Bitcoin 8. Infante, Andre. “Quantum Com- Works Under the Hood”. Impon- puters: The End of Cryptography?”- 1. Borenstein, Joram. “A Risk- derable Things. Jul.14,2013. Web. MakeUseOf. N.p., 16 Nov. 2014. Based View of Why Banks Are 03 May 2016. Web. 03 May 2016. Experimenting with Bitcoin and the Blockchain.” Spotlight on Risk 5. Kelly, Jemima. “Nine of World’s 9. Lee, Timothy B. “Bitcoin’s Value Technology. N.p., 18 Sept. 2015. Biggest Banks Join to Form Block- Is Surging. Here Are 5 Charts on Web. 03 May 2016. chain Partnership.” Reuters. Thom- the Growing Bitcoin Economy.” son Reuters, 15 Sept. 2015. Web. Vox. N.p., 03 Nov. 2015. Web. 03 2. Barski, Conrad, and Chris Wilm- 03 May 2016. May 2016. er. “The Blockchain Lottery: How Miners Are Rewarded - CoinDesk.” 6. “Why NASDAQ Private Mar- 10. Rivera, Janessa. “Gartner’s 2015 CoinDesk RSS. CoinDesk, 23 Nov. ket.” Nasdaq Private Market |. Hype Cycle for Emerging Tech- 2014. Web. 03 May 2016. N.p., n.d. Web. 03 May 2016. nologies Identifies the Computing Innovations That Organizations 3. Wild, Jane, Martin Arnold, 7. “Chain | Enterprise Blockchain Should Monitor.” Gartner’s 2015 and Philip Stafford. “Technology: Infrastructure.” Chain | Enterprise Hype Cycle for Emerging Tech- Banks Seek the Key to Blockchain Blockchain Infrastructure. N.p., nologies Identifies the Computing - FT.com.” Financial Times. N.p., 1 n.d. Web. 03 May 2016. Innovations That Organizations Nov. 2015. Web. 03 May 2016. Should Monitor. N.p., 18 Aug. 2015. Web. 03 May 2016.

19 Applied Innovation Review Issue No. 2 June 2016 Applied Innovation Review

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