Blockchain 2.0: What’s in store for the two ends—semiconductors (sup- pliers) and industrials (consumers)? Ten years after blockchain’s inception, it is presenting new opportunities for both suppliers, such as semiconductor companies, and consumers, such as industrials. Gaurav Batra, Rémy Olson, Shilpi Pathak, Nick Santhanam, and Harish Soundararajan JANUARY 2019 • ADVANCED ELECTRONICS PRACTICE © Imaginima/Getty Images Blockchain is best known as a sophisticated and cryptocurrency because this could increase demand somewhat mysterious technology that allows for chips. cryptocurrencies to change hands online without assistance from banks or other intermediaries. Both industrial and semiconductor players will But in recent years, it has also been promoted as need a solid understanding of specific blockchain- the solution to business issues ranging from fraud enabled use cases and the market landscape to management to supply-chain monitoring to iden- succeed in the new era. To assist them, this article tity verification. Despite the hype, however, block- reviews the changing market and then focuses on chain’s use in business is still largely theoretical. specific strategies for capturing value. One caveat: A few pioneers in retail and other sectors are all information in this article reflects data available exploring blockchain business applications as of December 2018. Cryptocurrency values related to supply-chain management and other fluctuate widely, so the numbers reported, including processes, but most are reluctant to proceed fur- those for market capitalization, may not reflect the ther because of high costs, unclear returns, and most recent data. Blockchain technology and the technical difficulties. competitive landscape are also evolving rapidly, and there may have been changes since publication. But we may now be at a transition point between Blockchain 1.0 and Blockchain 2.0. In the new era, Blockchain 1.0: The cryptocurrency era blockchain-enabled cryptocurrency applications It is not surprising that many people conflate will likely cede their prominence to blockchain blockchain with Bitcoin, the first and most dominant business applications that can potentially increase cryptocurrency. Until recently, the vast majority efficiency and reduce costs. These applications will of blockchain applications involved enabling be in a good position to gain steam since many large cryptocurrency transactions. Around 2014, however, tech companies may soon begin offering blockchain private companies began investigating the use of as a service (BaaS). Rather than just providing blockchain for other business applications. Since the hardware layer, as they’ve traditionally done, most of these players are still at the pilot stage, it is these companies will extend their services up the fair to say that blockchain-enabled cryptocurrency technology stack to blockchain platforms and tools. has been the focus of the Blockchain 1.0 era. As blockchain deployment becomes less complex and expensive, companies that have sat on the The emergence of cryptocurrencies sidelines may now be willing to take the plunge. (See Bitcoin hit the market in 2009 as an open-source sidebar, “What advantages do blockchain business software application. It was first used in a commer- applications offer?”) cial transaction in 2010, when two pizzas were bought for 10,000 bitcoin (under $10 then, but about Will blockchain business applications continue to $35 million as of December 2018). With no central grow and finally validate their promise? Industrial authority or server to verify transactions, the public companies, which were largely on the sidelines was initially skeptical about Bitcoin and reluctant during the Blockchain 1.0 era, want an answer to to use it. Beginning in 2014, however, Bitcoin has this question because they could find opportunities experienced a meteoric increase in user base, brand- to deploy business applications that improve name recognition, and transaction volume. Its value their bottom line. Semiconductor companies are is extremely volatile, however, and it has declined also interested in the growth of both blockchain sharply from its late 2017 peak of over $19,000. business applications and blockchain-enabled 2 Blockchain 2.0: What’s in store for the two ends—semiconductors (suppliers) and industrials (consumers)? The past two years have seen the most growth in Ripple). Of all the alternative cryptocurrency blockchain-enabled cryptocurrencies, with the networks, Ethereum is most popular. It is an number increasing from 69 in 2016 to more than open-source platform that allows users to build 1,500 in 2018. Even though Bitcoin’s value has and launch decentralized applications, including decreased this year, an influx of initial coin offerings cryptocurrencies or digital ledgers. Users must spend (ICOs) has increased the market capitalization for a specific digital currency, Ether, to run applications cryptocurrencies (Exhibit 1). on Ethereum. Ether can also serve as an alternative to regular money, but its primary purpose is to Universal 2019 Many of the additional currencies—also called facilitate Ethereum operations. Blockchain 2.0: What's in store for industrial and semiconductor players? “altcoins”— were created to address certain gaps or Exhibit 1 of 3 inefficiencies with Bitcoin, and they are available Together, the market capitalization of a select set of through various networks. Popular altcoins major cryptocurrencies was about $150 billion in include Dash, Litecoin, and XRP (offered through December 2018, with Bitcoin and the four leading Exhibit 1 The number of active cryptocurrencies and their market capitalization has soared. Cryptocurrencies active in the 1,500+ Cryptocurrency market 177 market, number capitalization,1 $ billion ~150 392 11 69 7 4 8 29 33 2 2013 2018 2013 2018 1 This is the market capitalization for a select bundle of cryptocurrencies. Bundle includes: Bitcoin, Dash, Ethereum, Litecoin, Ripple, and several other altcoins. Figures are as of Dec 11, 2018. Source: McKinsey analysis Blockchain 2.0: What’s in store for the two ends—semiconductors (suppliers) and industrials (consumers)? 3 altcoins representing about 75 percent of this value. About 50 to 60 percent of companies that Bitcoin’s market capitalization of about $60 billion manufacture ASICs for Bitcoin transactions are was the highest. based in the Greater China region (Exhibit 2). (Some of these began creating ASICs for cryptocurrency Transaction verification mining before Bitcoin entered the market in The method used to verify transactions varies by 2008, since this was already viewed as a potential cryptocurrency. With Bitcoin, the first participant, growth area.) BitMain Technologies, a China- or “miner,” to validate a transaction and add a new based company, supplied 70 to 80 percent of the block of data to the digital ledger will receive a cryptocurrency ASICs in 2017. Its customers certain number of tokens as a reward. Under this typically use “crypto rigs”—basically, multiple model, which is referred to as a proof-of-work (PoW) ASICs working together—to optimize compute speed. system, miners have an incentive to act quickly. By conservative estimates, BitMain Technologies But validating a transaction doesn’t simply involve has a gross margin of 65 to 75 percent and an verifying that Bitcoin has been transferred from one operating margin of 55 to 65 percent—equivalent to account to another. Instead, a miner has to answer a $3 billion to $4 billion in 2017. That figure is roughly cryptographic question by correctly identifying an the same as the profit margin for NVIDIA, which has alphanumeric series associated with the transaction. been in business for 20 years longer. This activity requires a lot of trial and error, making the hash rate—the compute speed at which an opera- Although most major cryptocurrencies now reward tion is completed—extremely important with Bitcoin. miners with high compute speed, some have taken steps to prevent large mining pools with crypto In the beginning, many individuals mined Bitcoin rigs from dominating the market. For instance, as a hobby. But as interest in cryptocurrencies Ethash, the hashing algorithm that Ethereum grew, the number and size of Bitcoin miners soared, uses, is designed to be ASIC resistant—and that necessitating more sophisticated hardware and means miners must fetch random data and compute more intense computing power. This shift has randomly selected transactions to solve their favored the rise of large mining pools. Many of cryptographic questions. Both activities require these, including AntPool and BTC.COM, are based frequent access to memory, which ASICs alone won’t in China. The top five mining pools account for 70 to provide. Ethereum miners primarily rely on a system 85 percent of the overall Bitcoin network’s collective that utilizes a GPU in combination with memory. hash rate, or computing power. Blockchain 2.0: Uncertainty about Hardware for cryptocurrency players cryptocurrencies and the emergence of In the early day of cryptocurrency, amateur business applications hobbyists relied on central processing units (CPUs) The Blockchain 2.0 era will likely usher in many to optimize compute performance. When the changes. The cryptocurrency market could become Bitcoin network began expanding around 2010, more diverse if Bitcoin continues to decrease in price, the graphics-processing unit (GPU) replaced the since ICOs may see the situation as an opportunity CPU as the accelerator of