Technical Merits of Blockchain

The technical merits of blockchains can range from the use of cryptography to the implementation of smart contracts. These technical merits are generally accepted to be proven and effective around blockchain.

It is important to remember that blockchains are not built on new technologies. They are, for the most part, built from a molding of three existing technologies that have been around for decades. The molding of these technologies presents innovations for enterprises to create efficiencies, provide transparency, and results in numerous other benefits.

These technologies are proven and effective in their implementations from a historical perspective are as follows:

• Peer-to-peer networking
• Cryptography
• Computer code (smart contracts)

When we consider these technologies, we can see how simple the use cases for each technology could be applied at a high level. For example, encryption is used to ensure that your message data is sent securely from the sender to the receiver in such a manner that it cannot be read by anyone other than the receiver. Privacy, security, and confidentiality could all be achieved.

I appreciate how companies can view peer-to-peer (P2P) networking negatively and want to shut down discussions about it. Centralization is comfortable for companies since they're in the driver's seat. With decentralization, companies are effectively in the passenger seat regarding control and governance.

At its truest sense, decentralization is all about trust. Successful blockchains work in a manner of true consortium with a shared responsibility model. A shared responsibility model is where all the consortium members collaborate and contribute finances and labor.

A smart contract is nothing more than the implementation of computer logic, aka computer code. Essentially, either we receive a positive result or the smart contract (code) does not execute the proposal.

Smart contracts provide the greatest benefits when there is an intermediary process that was once a manual process that now can be removed. Smart contracts are not complex. There are containers in most blockchains with limited functions that could be executed.

Another way to describe a smart contract is as a microservice. A microservice contrasts to a traditional, monolithic application, which, from a software development perspective, is designed and built as one integrated application. An application could have 10, 20, or even hundreds of microservices. Microservices can aid in the development of an application and provide significant cost savings around manual processes. Smart contracts are microservices, and microservice, which can be combined to create a distributed application.

For more on microservices, smart contracts, and dapps, refer to Chapter 10, Chapter is now “Blockchain Development”

Removing manual processes through the implementation of smart contracts provides clear efficiencies around costing models, error rates, and the processing speed of a transaction. For example, if your bank once had transactions, such as a wire transfer, that would take hours or even a day to be executed and confirmed, this type of process would be a great target for a smart contract to provide value and, therefore, a possible use case.

Technical merits provide other benefits, such as user experience, integration, or a more efficient experience for the enterprise. However, some technical aspects—such as not being able to achieve transactions per second (TPS), latency, risk mitigation, or other significant concerns—can hinder a use case implementation.

Business Merits of Blockchain

The most compelling use cases focus on reducing inefficiencies, providing transparency, and meeting compliance demands that companies face in this dynamic world. For example, removing inefficiencies could unlock value in areas of existing industry where trusted intermediaries were once required to record, validate, and reconcile transactions. This would be a change of a business model, which could be very disruptive to the status quo.

Generally, enterprises want to realize cost savings and create efficiencies in their current transactional processes. If you can provide cost savings in your blockchain solution, then you are well on your way to having a potential use case.

Common Elements of Blockchain Adoption

Some common elements that can be assessed by the blockchain-focused organization are whether or not a blockchain deployment could be performant. Elements such as transparency will be realized in a public blockchain, whereas others will be realized in a permissioned or a private blockchain.

The following are some commonly realized advantages of private blockchains:

• Networking and collaboration benefits
• User experience enhancements
• Security and risk mitigation
• Privacy enhancements
• Transparency and performance
• Cost savings for the enterprise

Cross-Border Payments

Companies that provide value by processing payments, processing cross-border payments/transfers, and offering other financial intermediary services are typically a clear target for blockchain adoption and for that matter, initiators of blockchain innovation.

The inefficient payment protocols and payment systems of the legacy banking networks. Blockchain provides instantaneous payment solutions without payment intermediaries.

• The historical fragmentation of payment networks that have been in existence for more than 50 years. Blockchain is a newer and more efficient approach that is able to cross borders without fragmentation.
• Intentionally high costs around payments and their processing fees that are passed on to consumers. Blockchain costs are a fraction of what a traditional payment processor charges.
• Ever increasing and more complex compliance regulations and governance required in the banking sector. Blockchain is a peer to peer to platform that is not heavily regulated and requirements are limited as of today.
• The lack of transparency coupled with low consumer trust that has been inherent in the banking systems. Blockchain can be deployed in a public manner where anyone can join, send and receive funds and even view transactions. Transparency is the key benefit here.

Two examples of innovation through a consortium method are R3 and Ripple, which have effectively written the book on creating value around blockchain for their consortium members.

The concisely documented benefits—such as cost efficiencies, processing speed, and compliance adherence—are just a starting point for financial institutions. Reducing complexity, increasing efficiency, and providing value are generally the hallmarks of these leading companies.

Financial institutions typically have significant overhead in areas such as compliance, legal, and personnel. In the case of payments, there has traditionally been several challenges for organizations. Payments are considered inefficient and generally more complex than needed.

An organization that has intermediaries that effectively process, validate, and post transactions can benefit immediately from employee costs in all three of those areas.

• Ancillary benefits for the enterprise could be reduced fraud, elimination of chargebacks, and customer retention.
• Ancillary benefits for the customer base would be transparency, reduced fees, and increased efficiency of funds receipts/deposits.

Organizations traditionally have had challenges around payments, such as compliance requirements, systems that are not integrated, and costly inefficiencies. There are blockchains that can provide some significant efficiencies around cross-border payments. One such platform is Ripple.

Ripple has been increasing the acceptance of its cross-border payment technology at a rapid pace and onboarding a slew of new companies with their payment processing benefits. At the time of writing, 19 companies either have already implemented XRP for cross-border payments or are planning to, according to the latest report from Ripple Labs.

R3 recently announced that it will be providing XRP integration into its R3 Corda platform as well. R3 Corda is a consortium of some of the world's largest financial institutions. R3 Corda Consortium created an open source distributed ledger platform called Corda and has a wide acceptance in the financial industry. Its partner network has more than 60 companies. This integration of Ripple XRP integration opens the door to even more exciting and efficient opportunities with Corda.

Part of the Ripple ecosystem includes XRapid and Ripplenet. Ripplenet is the actual payment network of more than 200 banks and payment providers. XRapid is a liquidity solution that eliminates delays in global payments on Ripplenet while also dramatically lowering their cost, thus making cross-border payments instant and inexpensive.

Figure 8.1 shows how a payment transfer with Ripple works with xRapid settlement.

Ripple is a real-time gross settlement system (RTGS), currency exchange, and remittance network that has a well-established footprint in the financial sector.

The following are some highlights about Ripple and its underlying structure:

• Ripple enables global payments through its digital asset called Ripples or XRP. XRP is the native token on Ripple's blockchain.
• Ripplenet is the private implementation of Interledger (ILP), which is the open protocol suite for sending payments across different ledgers.
• xCurrent is Ripple's enterprise solution that is responsible for facilitating the instantaneous settlement and end-to-end tracking of cross-border payments between RippleNet members.
• The RippleNet ecosystem has two categories for participants: network members (banks and payment providers) and network users (consumers and corporations).
• Transactions per second (TPS) average 1,500 TPS, a substantial TPS for an enterprise blockchain.

From a technical perspective, there is a lot to consider and understand about Ripple. Ripple has clearly defined several use cases around cross-border payments and other significant aspects in the financial sector. You can find out more about Ripple at https://www.ripple.com/.

Know Your Customer

Knowing your customer (KYC) is one area that blockchain shows some promise for improvements. KYC processes are commonplace within traditional businesses for many good reasons. The main reason is government compliance. Other reasons are around the goal of reducing fraud, reducing chargebacks, and reducing any liability exposure.

Financial institutions are required to participate in the KYC process with customers to comply with regulations that are routinely identified as either one or both of the following:

• Anti-money laundering (AML)
• Countering the financing of terrorism (CFT)

Organizations have challenges around KYC, most of which include the following:

• High validation costs
• Redundancy in companies with multiple lines of business
• Customer satisfaction
• Lack of complete audit trails

Figure 8.2 shows how a blockchain-based KYC solution works.

The customer typically provides KYC documents each time they require services from different organizations. This could also be true if you have tried to open a bank account one day and then an IRA a week later. They may require verification of the same documents such as your state identification, SSN number, tax ID, or even credit information.

Imagine if companies were able to share customer KYC information in a secure and easy manner while retaining the confidentiality and privacy of customer documents. This could provide some great benefits for the customer and the financial institutions. A consortium blockchain could be implemented to address this and would instantly reduce some redundancies since the consortium members would share the costs.

Blockchain will now allow for an accumulation of data from multiple authoritative service providers into one single, cryptographically secured database.

Verifications by a blockchain architecture will present the opportunity for financial institutions to provide a faster KYC solution for their customer base. This alleviates the headaches such as wait times on certain transactions after an account is opened.

The following are some benefits of a KYC blockchain:

• Increased customer satisfaction and higher retention
• Reduced operational costs while increasing efficiency
• Increased features such as audit trails, logging, and search

Blockchains can address most compliance requirements well due to their immutability—specifically, around maintaining records of customer identification, transactions, and privacy data.

Peer-to-Peer Lending

Anyone who has ever taken out a loan knows that the process can be cumbersome and inefficient. A decentralized blockchain solution can provide clear benefits.

• Increased efficiency in loan approvals, providing a faster time to market
• Reduced costs for both the lenders and consumers where efficiencies can be clearly documented
• Elimination of third parties in the lending process, resulting in both cost efficiency as well as a reduction in manual errors
• Increased customer satisfaction and loan performance, resulting in a higher return on investment for the lender

Lendoit is a good example of a P2P blockchain-based company. Figure 8.3 shows the P2P lending process that Lendoit uses to provide business loans. Its platform is decentralized from its disclosures.

You can find out more about Lendoit at https://lendoit.com/.

Security Tokenization

Security tokenization is one area of FinTech that is clearly a major discussion point at both blockchain and FinTech conferences. Security tokenization works by taking assets that are considered illiquid and making them liquid by “tokenization” on a blockchain-based platform. For example, a major financial trading firm could take a collateralized real estate fund that has real estate assets and essentially make fractions of a 20-story building available to noncertified investors.

When it comes to tokenization, it is important to realize that the Security and Exchange Commission has provided two categories of tokens: security tokens and utility tokens. The main concern for providing a new blockchain project is to understand which type of token they will be releasing to the public as an investment with strict regulations.

The Howey test is used to determine whether a token is a security token or a utility token. The test was devised by the U.S. Supreme Court to determine whether certain transactions qualify as “investment contracts.” For more about the Howey test, see https://consumer.findlaw.com/securities-law/what-is-the-howey-test.html.

A crypto token that passes the Howey test is historically deemed a security token. This type of token derives its value from an external, tradable asset. Because these tokens are deemed a security, they are subject to federal securities regulations. If all the regulations are properly met, then these tokens have immensely powerful use cases.

Supply Chain

One the more interesting use cases for blockchain is in the logistical area of supply chain management. One of the biggest challenges that enterprises might deal with is effectively managing their supply chain and handling transparency for partners, customers, and regulators.

In the use case for logistics, the use of a blockchain can provide an immutable historical record, for example, of a mining operation and for its material purchases the ability to validate when a specific lot of gold, diamonds, or other commodities were mined and from which mine. This can provide transparency as well for the consumer.

One of the more compelling logistics supply chain blockchains is called TrustChain. A collaboration between jewelry industry conglomerates, TrustChain enables customers to track their jewelry from source to dealer. The consortium is now past the proof-of-concept stage and expanding its membership.

The main benefit realized from TrustChain is transparency across the entire diamond, gold, and finished jewelry supply chains. Jewelry customers can be assured that their products were sourced ethically, efficiently, and transparently. Consumers will be provided with a permanent digital record of all the transactions in the diamond and jewelry value chain.

Internet of Things

There is no question that the Internet of Things (IoT) is one of the technologies that is gaining a significant amount of interest. The convergence of blockchain and IoT has been prioritized by the blockchain industry as one of the most promising use cases for blockchain. Building smart machines that can communicate and operate via blockchain has clear advantages.

By their very nature, blockchain records are transparent; therefore, activity can be tracked and analyzed by any party authorized to connect to the network. For example, tracking, health monitoring, or fitness devices could use a decentralized ledger that would provide an immutable record of behavior.

The data collected by these devices could be stored on a ledger not only for immutability but for data standardization. For example, a blockchain platform called IOTA is a decentralized transactional platform on various development projects. IOTA's Tangle is a transactional data transfer and settlement system for connected devices. These connected devices could be connected and validated to a decentralized ledger.

The following are the three main benefits of blockchain for IoT according to IBM:

• Building trust
• Cost reduction
• Acceleration of transactions

From IBM's point of view, it's clear that blockchain and IoT will likely proceed into a deeper relationship in the sense of integration with other platforms.

The security and transparency provided by numerous blockchain-based platforms can empower but also enhance smart cities' use cases relying on shared information, common databases, ledger features, and other benefits.

For more information on IOTA, see https://www.iota.org/.

Farm to Table

Perhaps one of the more complex use cases would be a “farm-to-table” use case in the agriculture sector. Farms are generally slow to invest and adapt to technology, and record keeping is not a consistent process. Blockchains could resolve a significant issue around recording where a product came from, where it is in the supply chain, and when it will arrive at its destination. A significant number of blockchain-focused agricultural solutions focus on improving food source traceability as well as accountability.

However, this brings into play an amazing use case of identifying challenges that can be addressed by implementing a blockchain. The challenges include provenance, traceability, transparency, and even compliance concerns around U.S.-based customs requirements.

Now more than ever, customers are demanding more accountability from their supermarkets and food suppliers. There is clearly a need for a more transparent producer-to-consumer system.

A blockchain could enable not just a food supply chain but any chain that requires traceability. This would enable a true use case of transparency for a food chain entirely verified by the consortium members. For example, if there were a concern around food safety, then all parties involved would have clear transparency, provenance, and even the ability to address other concerns through a blockchain-based implementation of a farm-to-table solution.

One of the more compelling use cases addresses the food supply chain directly. Figure 8.4 references the food supply chain with high-level details to show the number of intermediaries, sources, stakeholders and so on.

Stakeholders could be farmers, food inspectors, logistics providers, distributors, consumers, and even governments. The challenge is that the present food logistics structure is maintained at different levels by several intermediate stakeholders.

In the case of food source accountability, blockchain can provide for transparency, trust, and provenance. Enabling blockchains can provide significant advantages to stakeholders, including real-time access, trusted data, and peer-to-peer networking. When blockchain is combined with IoT, the benefits can easily be realized during the logistics processes. For example, some benefits could be that farmers are paid more quickly traceability is immediate, insurance claims could be processed faster and so on.

For more information on a farm to table blockchain solution, see https://tefoodint.com/.

City/State of Dubai

Dubai is clearly in the forefront of blockchain technology investments and use case adoption. The UAE announced that by 2021, 50 percent of the government's transactions will be achieved through a blockchain, thus saving time and resources. For example, Dubai expects to unlock 5.5 billion dirhams in savings annually in document processing alone.

The initial leap was taken by the Dubai Department of Finance, which recently launched a blockchain-powered payment system intended to provide a more accurate and transparent governance process, as well as to enable real-time payments within and between government structures.

The Dubai Blockchain Initiative is a strategy that will help Dubai achieve the vision of H.H. Sheikh Mohammed bin Rashid Al Maktoum, who stated, “Dubai [will be] the first city fully powered by Blockchain by 2020 and make Dubai the ‘happiest city on earth (https://interestingengineering.com/smart-city-dubai-the-happiest-city-of-the-future). The Dubai Blockchain Initiative strategy will use three strategic pillars: government efficiency, industry creation, and international leadership.

To find out more on the Dubai Blockchain Initiative, visit https://smartdubai.ae/initiatives/blockchain.

Country of Georgia

The country of Georgia has an interesting use case that involved its National Agency of Public Registry (NAPR). The NAPR was an early adopter of Hyperledger and piloted a blockchain-based land-titling registry in February 2016. (Recall that Ethereum and Hyperledger were barely released in 2016.)

This proof of concept (POC) was impressive since they were the leaders in blockchain adoption for enterprises before enterprise blockchains were even in the field. The blockchain was deployed as a private blockchain, as expected with Hyperledger, and was effectively “off-chained” to the Bitcoin blockchain. They accomplished this by using a distributed digital timestamp to validate and sign a document that contained citizen information and ownership of land.

A user would log in to a web-based application and initiate a request. The backend, being the blockchain-based network, would deploy a smart contract and execute accordingly.

The country of Georgia states that the following are the most essential characteristics of their blockchain registry:

• Overall system transparency
• Fault tolerance
• Intelligibility for end users

Based on the articles that have been posted about this project, it appears that all these characteristics have been realized.

The main benefits are convenience and cost. More critically, however, the added level of security as a result of using hashing reduces risk and provides greater security.

To find out more about NAPR, visit https://exonum.com/story-georgia.

Zero-Knowledge Proofs

The application of zero-knowledge proofs (ZKPs) to blockchains is another area that could be utilized by numerous industries. ZKPs enable users to confirm something without revealing the actual details behind it. Essentially, a user could use the Ethereum blockchain and have a totally private transaction.

ZKPs are one area that major blockchains are taking seriously due to the demand for additional privacy-focused features. Ethereum, for example, has some interesting developments on the road map, such as the Aztec Protocol, which would enable ZKPs on the public Ethereum blockchain.

Even private chains have begun partnering with projects like Zcash to better understand applications for ZKPs to their blockchain solutions. Enterprise blockchains will have components or features that will support this. Hyperledger announced support of ZKPs in upcoming releases.

ZKPs provide the following benefits:

• Enable private transactions
• Reduce blockchain size
• Provide scalability
• Enable cross-asset interoperability

ZKPs are a growing area of interest, and there are a significant number of projects being announced in this area.

Social Impact, Charity, and Fundraising

Blockchains can provide a transparent and auditable trail for donations in order to prevent fraudulent activity. Governments could use this information to easily identity transactions and therefore give appropriate credits.

The world of social impact (or social good, as it is also known) is clearly a growing area for blockchain use cases. For example, platforms can incentivize social organizations to run projects in a transparent way and get paid for achieving their goals. The blockchain solutions can reduce the requirements for financial and legal intermediaries, which are generally costly and prone to mistakes.

One of the more interesting use cases of social impact is called Alice (https://alice.si/). Alice allows for complete transparency for each funding project and makes it publicly available on the Ethereum blockchain. This allows for immediate transparency but also provides actionable historical insight into what funding projects are working.

Distributed Cloud Storage

Improvements in data security stem from a shift from a centralized means of storage to a decentralized one. Instead of going to AWS, Azure, or GCP for cloud storage, perhaps you can just use a peer-to-peer approach.

One of the more interesting cloud storage plays is called Storj. The Storj cloud platform lets users rent storage from their peers on the network. All network transactions are conducted in Storj's crypto asset, which is also called Storj and uses a token launched on the Ethereum blockchain.

According to the website, storing 1 GB on the Storj network costs $0.015 per month on average. This is far below the current cloud industry standard for cloud object storage.

For more information on the Storj storage platform, see https://storj.io/index.html. For more information on the Storj cryptocurrency on the Ethereum platform, see https://www.coingecko.com/en/coins/storj.

Identity Management

Identity verification in the world of KYC/AML provides a new dimension to security, removing verification bottlenecks and providing more accurate results.

One interesting use case of identity management is about Civic's Secure Identity Platform (SIP). This Secure Identity Platform is designed specifically for multifactor authentication without the need for passwords or usernames. SIP relies on the user's biometric information, which is verified by the blockchain ledger.

For more information about the Civic blockchain, see https://www.civic.com/.