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[Note] Business Transformation through Blockchain – Volume I

1. Blockchain Economic Networks: Economic Network Theory—Systemic Risk and Blockchain Technology

Economic Network Analysis Fedwire Example: The net- work has a tightly connected core of banks to which most other banks connect. Large banks are disproportionately connected to small banks and vice versa; the average bank is connected to 15 others, but this does not give an accurate idea of the reality in which most banks have only a few connections while a small number of hub nodes have thousands.

Economic Network Analysis Cryptocurrency Examples: Digital cryptocurrencies are an emerging sector that is evolving rapidly. Since cryptocurrencies entails the notion of operating a monetary system on a computing graph, network science is a natural mode of analysis for such digital financial networks. What follows is a discussion of contemporary research applying network analysis to cryptocurrencies. Cryptocurrencies are especially amenable to network analysis since currently (unlike fiat currencies), cryptocurrencies have a database of all transactions since their inception. Although known for their decentralized nature, running on distributed networks and not requiring intermediaries such as banks and governments, ironically, cryptocurrencies are also centralized in that there may be a consolidated transaction record, which is not available in traditional financial systems

Blockchain Economic Networks

Step 1: Digitization of Assets: Having an asset registered to a blockchain means that the private key that controls the asset must be used for any transaction involving the asset. Any attempted transactions without the private key would be invalid

Step 2: Real-Time Asset Valuation and Payment Channels: Since assets are digitized, this means that they may be contractually obligated in ways that provide more assurance and trust to both owner and counterparty. Capital is tied up unproductively in the friction of conducting business, particularly international business. Ripple cites firms having $5 trillion in local cash balances in their coun- tries of operation. $3.9 trillion of working capital is obligated in global supply chains (PWC 2015). There is an estimated $1.5 trillion global trade finance gap (i.e. trade finance transactions rejected by banks but needed for global distribution) (The Economist 2017). Business require- ments that have traditionally restricted the use of capital might be eased by blockchain technology’s ability to transfer payments immediately and instantiate ongoing credit relationships across borders. Further, block- chains enable a lower cost of detailed control which allows new forms of remuneration structures such as payment channels. Digitized assets mean that it is easy to have “an account relationship” with business partners instantaneously because assets can be trustfully pledged on digital net- works without having to know the other party (and verify them in an internal vendor/partner qualification process). Payment channels are the idea of contractually obligating an asset (a prepaid escrow of capital or another asset obligation), tracking consumption of a resource against the escrow and then settling on a net basis in one transaction at the end of the period.

Step 3: Business Networks, Shared Business Processes, and Shared Ledgers Across Value Chains: In the implementation of block- chain technologies, business practices might be redesigned and stream- lined into shared processes in business networks. The implication of shared business processes is that there could also be shared ledgers which incorporate the economic side of business processes

Conclusion: This chapter investigates systemic risk as an unsolved problem in financial networks that has high social and economic costs. Blockchain economic networks might have a beneficial impact, both economically and socially. The broader possibility is that blockchain technology not only modernizes banking, finance, and legal operations (and eventually governance) by digitizing them, it also pro- duces social goods. Thus, a more modern and efficient world is being created, and also a better world that is more humane through the genera- tion of intangible social goods such as surety, access, equity, choice, and trust, which are available to more persons globally.

2. Blockchain Adoption: Technological, Organisational and Environmental Considerations

The Blockchain Concept: Each block in the chain is an acknowledge- ment by network participants that the transaction took place and was not fraudulent. Each block contains information from the previous block, thus ordering chronologically, creating a chain of blocks (Nakamoto 2008). To add a block to the chain, it is necessary to solve a cryptographic puzzle, with the solution being included in the block (Wright and De Filippi 2015). It takes approximately ten minutes for the entire network of miners to solve this cryptographic puzzle (Ito et al. 2017). The new transactions must be verified by most users before being added to the ledger. This opera- tion results in approximately a one-hour processing period, which is still a significantly shorter period than that of current financial institutions.

However, solving this puzzle takes specially created computers and consumes vast amounts of energy; hence this task is usually completed by miners. Miners are participants in the blockchain network that solve cryptographic puzzles in the hope of being the first to do so. If the miner is successful in solving the puzzle, they will be awarded 25 Bitcoins. This value halves periodically, as a maximum number of Bitcoins of 21 million has been assigned to control inflation (Nakamoto 2008; Vlasov 2017). Eventually, miners will not be awarded any coins for their work. This design could potentially result in network users refusing to mine crypto- graphic puzzles, as the cost of doing so is too high. To overcome such an issue, it is possible for the payer to assign a reward to the puzzle them- selves, to encourage miners to work on this puzzle promptly. This is usu- ally 1 micropayment, called a Satoshi, or 0.00000001 Bitcoin (Ron and Shamir 2012). In the future, when the maximum limit of 21 million Bitcoins is reached, the rewards of such Satoshis will be the only incentive for miners (Nakamoto 2008).

Blockchain Benefits

Anonymity: Anonymity is a key feature of this infrastructure which attracts individu- als and organisations alike to implement it (Zyskind et al. 2015; Reid and Harrigan 2012). Blockchains allow users to only be identified by public keys, an essential element of the cryptosystem. It is encouraged that users generate as many public keys as necessary, with some users creating a new key for each transaction (Nakamoto 2008; Reid and Harrigan 2012). This feature allows any person or organisation to transact any sum of money to any place in the world, with no government intervention and extremely low transaction costs. This has seemed to attract many multi- nationals to the technology, with blockchain firms receiving $1 billion in investment from global companies such as American Express, Deloitte, Goldman Sachs and the New York Stock Exchange (Crosby et al. 2016).

Immutability: Immutability is a fundamental characteristic of blockchain and has been identified repeatedly as one of the reasons of its success thus far (Pilkington 2015; Tapscott et al. 2016; Iansiti and Lakhani 2017). By virtue of its design, changing one block in the chain would involve changing each subsequent block, as each block contains information of the previous

Transparency: Blockchains can be categorised as being private or public. The sole dis- tinction between a private and a public blockchain is that in a private blockchain context, also referred to as a permissioned blockchain, access to the network is restricted (e.g., an access-restricted platform controlled by a commercial entity, a private equity tracking tool for private equity agreements etc.)

Blockchain Use Cases: Smart Contracts, Supply Chain Management, Voting Systems, Micropayments, Internet of Things, The Adoption of IT Innovations

Smart Contracts: Smart contracts are defined as computer programs that automatically execute the terms of a contract, or contracts that are exe- cuted when user interfaces are combined with computer protocols. A number of risks are involved with the use of smart contracts, such as volatility creating possible market bubbles, as well as the lack of regulation, and the irrevocability of agreements (Piazza 2017). In contrast to this, the risks incurred by smart contracts are greatly reduced in comparison to traditional because they are autonomous, self- sufficient and decentralised (Ross 2017). Because of smart contract’s infancy, the advantages and disadvantages may not be clearly defined yet

3. Blockchain-Based Decentralized Business Models in the Sharing Economy: A Technology Adoption Perspective

4. Blockchain as a Platform

5. Blockchain Technology: The Autonomy and Self-Organisation of Cyber-Physical Systems

6. Bitcoin and Investment Portfolios

7. Blockchain in the Payments Industry: Developing a Discussion Agenda Based on Pain Points and Opportunities

8. Blockchain and Initial Coin Offerings: Blockchain’s Implications for Crowdfunding

Crowdfunding to Initial Coin Offerings: While crowdfunding and crypto-tokens have worked in isolation from one another for some time, combining them turned out to be a very suc- cessful way for startups to raise early-stage financing. Instead of spending weeks convincing a venture capitalist or bearing the cost of an IPO of stock to get money for growth, blockchain startups began to sell their tokens—a process called initial coin offering (Conley 2017).

While ICOs bear some resemblance to IPOs, their structures and pro- cesses differ in many aspects, such as underwriting, distribution, and regulations (Kuo Chuen et al. 2017). A token sale refers to a method of selling participation or royalties in an economy or a project that starts at a later date, whereas an IPO sells a share of ownership in the company. An ICO presents a new form of crowdfunding, in which participants exchange existing forms of cryptocurrencies (mostly Bitcoin or Ether) for entity-specific crypto-tokens (Robinson 2017). The phenomenon was first called the Bitcoin model for crowdfunding in 2014 and was described as a new business model for open-source software, in which any partici- pant in a blockchain protocol can participate anonymously in the fund- ing, development, and revenue collection using tokens (Ravikant 2014; Kuo Chuen et al. 2017). However, the ways in which campaign creators and potential investors are brought together differ significantly between crowdfunding and token sales. As crowdfunding platforms need interme- diaries such as payment services to collect money, ICOs are completely decentralized and rely solely on P2P mechanisms provided by blockchains (Danmayr 2014; Ehrsam 2016; Schweizer et al. 2017).

9. Insurance Under the Blockchain Paradigm

Security and Immutability: Blockchain is a shared, tamper-proof replicated ledger where records are irreversible and cannot be forged thanks to one-way cryptographic hash functions. Although security is a relative concept, we can say that block- chains are relatively secure because users can transfer data only if they pos- sess a private key. Private keys are used to generate a signature for each blockchain transaction a user sends out. This signature is used to confirm that the transaction comes from the user and also prevents the transaction from being altered by anyone once it has been issued

Transparency: Records are auditable by a predefined set of participants, albeit the set can be more or less open. The governance structure determines the authorisa- tion and the control policy management functions

Automation and Smart Contracts: Blockchains embed an automatic dispute resolution that can prevent conflicting and double transitions to be recorded in the ledger

 

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