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Blockchain. A brand new driver of the global business transformation.

October 2016

Analytical Report (full version)

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Analytical Report (full version)

Blockchain. A brand new driver of the global business transformation.
Blockchain. A brand new driver of the global business transformation.
October 2016

Blockchain. A brand new driver of the global business transformation.

October 2016

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In this research consultants from J’son & Partners Consulting analyzed the blockchain concept evolution and its development prospects in frames of the existing business models. The study considers the technological side of blockchain, its ecosystem, a list of its probable future use cases and the transformation potential of this phenomenon.  

 

 

The blockchain concept emergence and its definition

 

The Internet has provided free network access to the information contained on the websites and servers of other users available in a fully automatic mode without human intervention and regardless of its location.

 

Services of the companies like Google and Facebook, have demonstrated an effective model of resource allocation in which the prime costs of executing user queries due to the multi-million user audience fell literally to nothing. As a result modern services based on the principle of the shared economy, make our lives economical and convenient.

 

Many experts at early stages of the Internet development also thought that in a short time both the internal and external transaction costs of companies would significantly decrease  (e.g. costs of search, coordination and communication). However, the Internet has not had a strong influence on the modern corporate and business architecture, and most plans of significant reducing the transaction costs have failed.

 

Despite all the variety of participants and services, the Internet for business remained quite vulnerable, largely centralized and it still needs intermediaries who are involved in lots of data, finances, and other aspects of business.

 

At the same time, on the sidelines of the Hi-Tech communities in the developed countries people seriously prepare for a new phase of Internet development which could radically affect the cost system of the enterprises, completely change the corporate landscape of entire industries and even the state.

 

As it is quite difficult to guarantee anything in business, as well as reproduce trust in any way, until now the society needed a vast number of mediators who would serve as guarantors of trust. The cyberspace trust is based on two requirements: you have to prove that you are who you say you are (authentication), and prove that you have the necessary permission to perform an action (authorization). These requirements are best implemented using the blockchain concept.

 

The blockchain concept is constantly expanding, it is constantly supplemented being still in its first turbulent development phase. A blockchain is a distributed database that contains a constantly growing list of data records (transactions). This data register of common use is distinguished by a high level of security against falsification and revision, as well as the complete absence of reference to a specific geographical location.

 

 

«Blockchain is a magical computer, on which anyone can download some programs and leave them for self-execution, and where the current and all previous states of each program are always available to the public; this computer has a very strong cryptanalytic security, according to which the programs will continue running inside the blockchain exactly as the protocol requires».

 Vitalik Buterin,

founder of Ethereum

 

 

Now, when we talk about transactions we usually mean financial transactions, but such transactions can also be registration of documents, ownership, or even change of any entity’s status. In a broad sense, transactions and data are synonyms.

 

The blockchain represents a decentralized and safe framework for transaction processing. The main property of the blockchain is its ability to record the facts and data with built-in protection from malicious intervention, which gives you undeniable advantages over other distributed systems of data processing and storage; so we can get rid of intermediaries in many spheres of life, reconsider traditional methods of transaction, information storage, transfer and registration of rights.

 

William Mougayar in his book "The Business Blockchain: Promise, Practice and Application of the Next Internet Technology" describes the blockchain as "tsunamilike wave, slowly covering and putting in the code all the facts of reality. In other words, this is the newest level of the Internet development, a new layer of reality, while the web was only the beginning. This new layer is based on trust, so we can call it the Internet of trust."

 

 

The blockchain technology

 

The blockchain technology, assuming permanent storage of records of all the performed transactions and the data, leads to the fact that the data cannot be erased or modified unnoticed. At its core, the blockchain is an infinite digital record of all human reality, and the built-in authentication and validation transaction system allows this chain to manage without any centralized node for control and supervision.

 

 

«The technology of a single space in which there is no intermediary and, for example, a rapid transfer of payments is provided by the client by him-/herself, can be used in various fields. This technology will definitely develop. You can ignore it, but in 2017-2018 we will see real examples of use of this technology in the financial sector».

 First deputy governor of the Central Bank of Russia Olga Skorobogatova,

from the speech at the meeting of bankers with the management of the Central Bank

 

 

The basic building units in the system are blocks. As these blocks are filled with validated transaction records, they join the already existing chain of blocks. Subsequent generated blocks, which also successfully passed through the consensus mechanism are attached to the previous ones and become a continuation of an infinitely extendable chain. In the most popular blockchain-network "Bitcoin" all the transactions are verified by so-called miners – the system members, who confirm the authenticity of the performed actions for a fixed fee, and then form the transaction blocks from the records. Obtaining of unique hashes in the process of mining is connected with solution of complex mathematical problems, so the miners should have a huge computing power. The end clients and the most interested builders of this entire blockchain are these participants.

 

Each block consists of a number of unique transactions. For example, if to talk about Bitcoin, such transactions are money transfers between the system users.

 

The main advantage of the blockchain over traditional financial or other transactions is the absence of intermediaries. Currently, any operation with money, documents or other data inevitably need intermediaries, regulatory players and regulators. The authenticity of financial transactions is confirmed by banks or nonbank institutions, and public authorities or notaries certify the authenticity of many other operations.

 

The blockchain is absolutely decentralized and completely autonomous, so all the transactions are validated by the system participants, which allows to simplify many procedures and get rid of the middlemen. The blockchain participants create a kind of notary ecosystem where everyone confirms the validity of the information in the registry.

 

All the blockchain users form a network of computers, each of which stores a copy of data from the blockchain. This is usually a full copy of all blocks. This in turn means that if you want to turn the blockchain off or damage it, you will have to hack the computers of all participants, which is a much harder task compared to hacking a corporate network with any degree of security. At the same time the existence of at least one computer with data on the blocks is a sufficient condition for the existence of the system.

 

The open nature of the software code allows anyone to track information on any transaction. Any user can easily read any block and see all the entries in this block. Thus, all data in the blockchain is easy to check, so you do not necessarily have to trust other network members, you can always check it and get a true answer on any transaction.

 

However, such an openness of the registry does not mean any disclosure of the personified data. The system is completely anonymous, and the only way to obtain such information is to obtain a special key from the owner.

 

It is assumed that the blockchain can be used to reduce the cost of the following operations:

  • financial transactions;
  • execution and authentication of documents;
  • identification of users;
  • intellectual property protection;
  • storing information;
  • maintenance of various registers;
  • management of enterprises;
  • crowdfunding campaigns;
  • supply chains;
  • signing and execution of contracts.

 

«We must look 5-10 years forward, how this technology can help the national economy, relations between the state and the person, there are many different ideas».

 Head of the Ministry of Telecom and Mass Communications of the Russian Federation Nikolay Nikiforov

 

 «As for me, the Blockchain means that each person can log in to the database and get all the necessary documents to purchase a land lot, then send them to the relevant authorities, within one hour, and get the response in another hour. It is definitely a revolution. I still dream about the moment when if a politician promises and proposes something, each of us can see on the computer screen whether his statement meets the resources the state has».

Ex-Minister of Finance of Russian Federation Alexei Kudrin,

in frames of the discussion about the fourth industrial revolution

at the 46th International economic forum in Davos

 

 

The blockchain evolution

 

Despite the fact that bitcoin is something relatively new, its appearance was preceded by several decades of work of many scientists in various fields. At a fundamental level, the system "Bitcoin" is a breakthrough in computer science that was built on 20-year research of cryptographic currency and 40 years of experience in the field of cryptography of thousands of researchers around the world. First protocols for electronic cash were proposed in the early 80-ies of the last century.

 

«Virtual currency is a very interesting international experiment that breaks the paradigm of currency issuance. They definitely should not be forbidden, we should try to understand them and maybe control them properly. These technologies are rapidly developing abroad. It is not yet very clear for us here why some authorities are trying to close this business. It will be a huge step back if this happens, but I really hope that this will not happen. The Blockchain will change everything, and unfortunately, the state bodies too, I say unfortunately, because it will be a challenging transformation for all of us».

German Gref, head of Sberbank,

in frames of the discussion about the fourth industrial revolution

at the 46th International economic forum in Davos

 

 

Blockchain appeared due to the first cryptocurrency "Bitcoin". However, currently, the blockchain is starting to develop as a separate technological entity. Even if bitcoin does not develop, and its popularity does not grow, the blockchain technology will make its appearance a historic event.

 

In 2016, Gartner placed the blockchain on the top of the most promising technologies.

 

 

It is worth noting that the definition "bitcoin" can be confusing because the word used for the name of the platform "Bitcoin", which produces cryptocurrency. The word bitcoin is used to describe the data transfer protocol and the technology itself, which allows you to get bitcoin and exchange it within the system. The third meaning of the word is the currency and unit of calculation – bitcoin (BTS). Most of the cryptosystems also contain three things: platform, protocol, and currency. For example, competing with "Bitcoin" Litecoin has its own protocol and it is a platform with its own blockchain registry, has its own currency, which you can use inside the system. Some protocols, such as Counterparty, however, also have their own currency (XCP), but use the Bitcoin blockchain.

 

 

 

The blockchain ecosystem

 

The blockchain ecosystem is growing rapidly and already consists of many superplatforms, hundreds of apps and services and involves an increasing number of countries and the largest companies in the world.

 

Conventionally, the segments of the blockchain development can be divided into three classes:

  • private blockchain systems;
  • infrastructural and solutions, having a protocol level;
  • decentralized autonomous organizations and applications, services based on such organizations.

 

The blockchain technology shows a high investment potential. Over the past few years even very large companies such as NASDAQ, American Express, MasterCard and Visa, began to participate in investment rounds in bitcoin and blockchain-related startups. According to Greenwich Associates, financial and technology companies have invested about $1 billion in the blockchain technology development in 2016 to bring this technology to the capital markets. As a result, the number of startups in the field of blockchain also increases rapidly. According to Crunchbase by September 2016, only 269 startups are associated with blockchain, and 877 — to "Bitcoin". According to AngelList only 627 companies are involved in the blockchain development and 1419 startups are engaged in "Bitcoin".

 

The number of startups in the ecosystem of blockchain grows and fills with more and more sectors and niches. Although the ecosystem has a large number of startups, most of them are trying to improve the system "Bitcoin" and to eliminate the shortcomings that currently exist. The next category of startups is aimed at the development of services based on the bitcoin payment mechanism, connecting the transfer of other assets within the bitcoin system and self-fulfilling contracts. There are startups that deal with the consensus system development in the blockchain to increase the processing speed.

 

 

 

The blockchain use cases

 

According to forecasts from Deloitte, 2016 should be the year when the blockchain technology leaves the lab environment, and along with this, there will appear many different consortia that will develop the technology together. There is already a number of national, inter-state, industry and university consortia to develop the technology.

 

The main advantage of the blockchain is the ability to record the facts and data. In this sense, the blockchain can be used to create systems of circulation of documents and rights of ownership with built-in protection against tampering. The blockchain phenomenon promises to intensify its development working with smart contracts, when a small or a countless number of conditions can be a prerequisite for transferring money and ownership rights. The development of smart contracts will turn the blockchain from a tool recording data in the public registry into the tool, which independently ensures the implementation of commitments and carry out all the requirements at all stages of transactions.

 

The blockchain can be used for any kind of asset registry, inventory and exchange, including the fields of finance, economics and money; physical assets; intangible assets (votes, ideas, reputation, intention, information about the condition and valuable information).

 

Assets, encrypted in the blockchain system becomes a smart asset, which can be sold with help of smart contracts. An example of use of the blockchain for controlling and transferring works of art is Swancoin where works of art are available for purchase and transfer through the Bitcoin blockchain network. Any asset can be registered in the blockchain, and thus, its ownership may be monitored by the one who has the private key. The owner can then sell the asset by passing the private key to another party. Smart asset, thus, is an asset, ownership of which is controlled via the blockchain with use of contracts regulated by the existing legislation.

 

Having such a property as the absence of any trust, blockchain allows you to run a whole series of efficient transformations in different systems. For example, this property can greatly affect the lending market not only by reducing fees as a result of reduction of transactions with intermediaries, but also by reducing fraud. In fact, the contracts based on the blockchain allow strangers to borrow money, requiring the guaranty in the form of smart property. At the global level, such a system will make credits much cheaper.

 

In the field of stock trading we also expect to see some serious changes. For example, the online retailer Overstock.com with its subsidiary TØ built a system that allows companies to issue shares and loans under their mortgage through the blockchain, and a startup called Chain together with Nasdaq, is now working on trading shares of private companies using the blockchain.

 

Another direction of further development of the blockchain is digital identity of people. Services like OneName and BitID, now offer services for digital identity. Such services can substitute identity services through social networks that have gained popularity in recent years.

 

A very promising direction of the future development of the blockchain is replacement (decentralization and differentiation) of state functions on rendering services to the citizens. The blockchain could serve as a repository for all public documents, playing the role of a global registry.

 

Another interesting direction of the blockchain development is an emerging paradigm of global enterprises, which means an association of large global enterprises in frames of a new innovative method called Decentralized conglomerates. The development of this idea began with the launch of OpenLedger platform on the BitShares 2.0 with use of the blockchain technology Graphene, licensed by the Massachusetts Institute of technology.

 

These conglomerates provide a way for multiple companies to join their assets on a universal platform that allows them to invest in the success of each other. Ronny Boesing, CEO of the Danish cryptoexchange CCEDK and founder of OpenLedger, in his commentary mentioned that this platform will allow organizations to invest in each other, and the profits can be shared without the need for companies to coordinate joint actions.

 

It is expected that the blockchain will cause drastic changes in the field of telecommunications, Internet of things, public administration, improving the efficiency of labor in many areas of production, including industry and agriculture.

 

One of the conditions of effectiveness of the blockchain is the involvement of many parties, which provides prerequisites for the creation of partnerships and alliances for performing researches and developing new scenarios for use of the blockchain in separate specific sectors. A good example of this Alliance is the R3 consortium, created last year, which included more than 40 leading financial institutions of the world.

 

Individual companies seek to establish so-called network leadership in the ecosystem, helping to connect different players. These players are interested in larger sites in terms of expanding opportunities for marketing and knowledge sharing.

 

The R3 Project consortium unites more than 60 largest global banks and financial institutions. R3, or R3CEV LLC in the beginning of its career just a year ago consisted of nine participating companies, and now it is the largest global consortium in the blockchain world. Technologically the project is built on platforms from Ethereum, Chain.com Intel and IBM.

 

When implementing projects in the field of blockchain or related initiatives consultants from J'son & Partners Consulting recommend to take into account the international experience of its use and to focus primarily on testing the technology to collect the data and expertise when making business plans. In the near future, the development of blockchain technology will lead to a significant increase in productivity and growth performance indicators, and at the same time, this technology can affect the disappearance of many fields of business. For this reason, J'son & Partners Consulting recommends to form a strategy, which takes into account the impact of the blockchain on current activities and to develop activities for using the blockchain as a new point of growth and business transformation.

 

According to the consultants of J'son & Partners Consulting, Russia's priority areas of innovative ideology of the blockchain will be the financial sector and banks, telecommunications and transport, industry and agriculture. In the longer term many other sectors including public administration and the system of international exchange of goods and services will be also affected.

 

Consultants of J’son & Partners Consulting are ready to provide any consulting, informational and analytical support to all stakeholders in the emerging blockchain ecosystem in Russia when forming the strategy, business plan, budget calculation, case study, feasibility study, as well as when implementing the projects.

 

 

More detailed results of the research are presented in the full version:

«Blockchain. A brand new driverof the global business transformation»

 

 

You can order any report via our e-mail: news@json.tv

or via phone: +7 495 625 72 45; +7 926 011 43 17

 

 

VOCABULARY, ABBREVIATIONS AND DEFINITIONS

 

SUMMARY

 

1.THE BLOCKCHAIN ON A CONCEPTUAL LEVEL

 

1.1.The blockchain revolution

1.2.Definition of blockchain

1.3.Types of blockchain

1.4.The blockchain properties

 

2.THE BLOCKCHAIN TECHNOLOGY

 

2.1.General description

2.2.Digital signature

2.3.Mechanism of consensus

2.4.P2P networking and distributed consensus

2.5.Proof-of-Stake as the alternative to Proof-of-Work

2.6.The Brewer’s theorem, forking and double-spending

 

3.THE BLOCKCHAIN EVOLUTION

 

3.1.Blockchain 1.0. The Bitcoin era

3.2.Blockchain  2.0. mart-contracts

3.3.Blockchain  3.0. Fantastic future

 

4.THE BLOCKCHAIN USE CASES

 

4.1.Blockchain as a driver of new transformations

4.2.Banks and the financial sector

4.3.Теlecommunications

4.4.IOT

4.5.The public service sector

4.6.Other sectors

 

5.THE BLOCKCHAIN ECOSYSTEM

 

5.1.Private blockchains

5.2.Infrastructure solutions and solutions at the protocol level

5.3.Altchains and Sidechains

5.4.Investments in blockchain

5.5.Startups in the field of blockchain

5.1.Consortia

 

 

 

6.RISKS

 

6.1.Scalability

6.2.Security, privacy, and attacks

6.3.State regulation

6.4.Cybercrimes

6.5.Maturity and institutional organization

6.1.Unreadiness of the corporate environment

6.2.Ecology

 

CONCLUSIONS

 

VOCABULARY

 

APPENDIX, LIST OF THE MENTIONED COMPANIES

 

List of figures

 

Figure 1. Mechanics of the blockchain

Figure 2. Structure and connection of blocks in the blockchain

Figure 3. Key features of Proof-of-Work and Proof-of-Stake

Figure 4. Circuit division in the blockchain

Figure 5. Revolutionary stages of the technology development

Figure 6. Capitalization of the 5 largest cryptocurrencies as of September 2016:

Figure 7. The blockchain evolution

Figure 8. Three variants of business transformation via the blockchain

Figure 9. S-curve technology adoption

Figure 10. What innovations will affect the financial sector in terms of fraud prevention in the field of payments the most in next 3-5 years?

Figure 11. The blockchain in financial services and a chain of the blockchain influence on the financial industry

Figure 12. Potential of using the blockchain in the financial sector

Figure 13. Chronology of activities of the main financial players in the field of blockchain

Figure 14. Initiatives of the largest companies in the field of blockchain

Figure 15. "Equity Timeline View" (timeline for assets)

Figure 16. Strengthening the role of the blockchain

Figure 17. Closeup of the blockchain ecosystem

Figure 18. Perimeter of the Ethereum functionality

Figure 19. Hierarchy and relationship of blockchain networks:

Figure 20. Venture capital investment in Bitcoin in recent years:

Figure 21. The blockchain ecosystem in numbers:

Figure 22. Map of the biggest startups according to Venture Radar:

Figure 23. Startups divided into 7 main areas in the Bitcoin ecosystem:

Figure 24. Funding of the blockchain for the past years

Figure 25. Main breakthroughs in the blockchain development in 2016

Figure 26. The technology maturity cycle — Gartner Hype Cycle, 2016, August.

 

List of tables

 

Table 1 The Internet and blockchain development

Table 2. Bitcoin and non-Bitcoin blockchain systems

Table 3. List of Bitcoin use cases

Table 4. The most popular bitcoin platforms::

 

 

This information note is prepared by J’son & Partners Consulting, We strive to provide factual and prognostic data that fully reflect the situation and are available to us before issuing the material

 

 

The media may use any graphics, data or forecasts contained in this market review only with reference to the source of information - J'son & Partners Consulting. ™ J'son & Partners [registered trademark]

 

 

 

In this research consultants from J’son & Partners Consulting analyzed the blockchain concept evolution and its development prospects in frames of the existing business models. The study considers the technological side of blockchain, its ecosystem, a list of its probable future use cases and the transformation potential of this phenomenon.