Blockchain Digital Transformation Monitor January2018 - Europa EU
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Digital Transformation Monitor
Blockchain
January 2018
Internal Market,
Industry,
Entrepreneurship
and SMEs
Blockchain
Emerging from the world of crypto-currencies, Blockchain appeared as a new class of IT infrastructure with
numerous applications in the financial sector but also in many other domains. It is a secure way to share digital
information that reduces the need for intermediaries and regulatory authorities. This raises several challenges,
particularly regarding Blockchain’s ability to disrupt ecosystems, its legal acceptability and other risks linked with its
use in financially speculative activities.
To validate transactions, Bitcoin relies on A technology not limited to
1 a decentralized network of “miners”2.
Each “miner” is a computer – a node of a
cryptocurrencies
Beyond its use in cryptocurrencies,
decentralized network - which competes
Blockchain has found other applications
Trusted with other computers to validate
transactions. The first “miner” to validate
that have built upon its high level of
security.
Infrastructure a transaction receives a financial
incentive through the creation of new Secure, shared information storage
currency.
Blockchain gained notoriety with the rise Blockchain has evolved to define a large
of the Bitcoin cryptocurrency; but This mechanism, called “Proof of Work” range of technologies, that are
beyond this initial use, it can be an ensure the security of the system by fundamentally secure digital storage
important piece of infrastructure with demanding that miners invest significant facilities.
which trusted digital applications can be amounts of computing power and time in
built. the validation of transactions. Even if the implementation differs, the
core principles of Blockchain are
The technology behind Bitcoin To compromise the system, an attacker decentralization (no central authority),
would have to control over 50% of the and immutability (impossibility to delete
Blockchain is the technological heart of
processing power of the whole network3. or alter stored data). Blockchains can be
the cryptocurrency known as Bitcoin. It
acts as a shared digital registry that either public or permissioned registries
Limits of cryptocurrencies
records and stores every Bitcoin (that limit their access to a consortium).
transaction. It ensures the security of Although it brings security to the system,
Public or permissioned, the main and
exchanges in an online ecosystem where the “Proof of Work” mechanism is one of
most important feature of Blockchain is
there is no trust between parties. the limits of cryptocurrencies because it
to act as a neutral infrastructure, over
limits the number of transactions per
The need for a transaction ledger which no single actor has full control.
second and contributes to the high
Blockchain thus allows the exchange of
energy cost, limiting its scalability and
The Bitcoin cryptocurrency was data with third parties in which trust is
making it impractical as a global
launched in 2008-20091, and was seen limited (from complete strangers to the
payments system.
by its founders as a technological ecosystems of competitors).
response to the global financial crisis.
Figure 1: Blockchain Principles4
The objective of the Bitcoin initiative was
to create a form of currency that would
serve as a day to day means of exchange
and that would be independent, both
from nation states and central banks.
The new currency needed a dependable
digital infrastructure to ensure the
security and validity of transactions. This
led to the creation of Blockchain: a
secure digital registry that, for Bitcoin, is
used to monitor and store every past
transaction.
Mining - peer to peer validation in an
untrusted environment
2
Source: IDATE DigiWorld, Blockchain, October 2016
Blockchain
A registry for any type of data cryptocurrencies, such as “Proof of
Blockchain was first used as a secure
transaction ledger, and it has continued
Stake”7 algorithms, do exist, though they
are not as secure as Blockchain. The 2
limits of “Proof of Work” mostly apply to
to expand in this role, to the point where
public Blockchain, like that used by
it can now be used as a secure ledger for
all kinds of transactions.
cryptocurrencies, because it limits the Applications in
level of scalability. Conversely, “Proof of
Some of the key features of Blockchain Work” favours Blockchain applications Finance and
infrastructures, such as immutability and that are limited to a known, restricted
authentication have rapidly attracted the ecosystem (consortium Blockchain, with Beyond
attention of users with other purposes in different security requirements) such as
mind for the Blockchain ecosystem. those commonly used in B2B scenarios. Still mostly used in financial applications,
A consensus algorithm that would be Blockchain is increasingly considered an
In addition to acting as a transaction
secure, scalable and efficient in both application-neutral infrastructure.
ledger, Blockchain is now increasingly
used to securely store documents5. This open and restricted ecosystems would Financial applications
is especially relevant for documents have wide application potential, and
where the time of creation and remains an open research problem. Financial applications remain the most
authenticity must be preserved and common use for Blockchain. A
Limits of Smart Contracts distinction should however be made
secured.
Another important limit of Blockchain between applications targeting
Automated transactions: smart contracts cryptocurrencies and those using
concerns so-called “Smart Contracts”, a
promising but immature technology. In Blockchain as a form of back-office
Another extension of the initial principle
particular, the immutability and lack of infrastructure in traditional finance.
of Blockchain the possibility to use it to
define conditional financial transactions, recourse options make them Financial services for cryptocurrencies
that will execute only when the inappropriate for use as legal contracts
predefined conditions are met. as defined by traditional legislative Arising from Blockchain’s initial ability
standards8. Beyond this, the to perform direct peer-to-peer financial
This possibility, widely known as a immutability of a “Smart Contract” can transactions, a whole financial ecosystem
“Smart Contract”6 creates the option of cause significant issues if the computer now exists to service cryptocurrencies.
automated financial transactions. The program representing the contract is Its vendors provide similar operations to
“contract” is defined in software, and faulty or malfunctions, as occurred in the classic financial institutions, including
stored in the blockchain. case of “The DAO” 9, where substantial portfolio management, loans, short and
financial loss was incurred. long-term investment, trading, savings
Once agreed between the parties, the
accounts and crowdfunding (including
execution of the “contract” is entirely Controlling the edges of the system the “Initial Coin Offering”11 model). The
automated, with no need for third party
A final limit of Blockchain technology Chicago Stock Exchange recently started
authority and no possibility of
involves interactions between to allow the trading of Bitcoin futures
modification.
Blockchain environments and other less and derivatives12 in a sign of just how
Limits of the technology secure systems10. Information stored in accepted cryptocurrencies are becoming.
Although some Blockchain applications Blockchain can be trusted only to the This being said, despite their initial
are fully deployed and can be considered same extent as its original source – this conception as a means of online
mature, the technology still has constitutes a serious challenge from a exchange, cryptocurrencies have instead
substantial limitations. systems-engineering standpoint, and is evolved mostly as a speculative asset and
one of the main reasons why only a few in some cases, a reserve asset. For
Limits of consensus algorithms applications of Blockchain have found example a part of the Bitcoin community
Alternatives to the “Proof of Work” widespread usage, despite many for consider bitcoin as a reserve asset
concept underpinning traditional which proof of concept exists. similar to gold.
Figure 2 : Smart Contract principles.
Source: IDATE DigiWorld, Blockchain, October 2016
3
Blockchain
Figure 3 : Value chain and key applications. Infrastructure for cryptocurrencies
An important aspect in the expansion of
Blockchain infrastructure has been the
development of solutions targeting
cryptocurrencies. A whole industry
revolves around the “mining” activity,
including providers of specialized
“mining” software and hardware, as well
as operators of “mining” nodes. Indeed,
Chinese companies such as Bitmain23
and BitFury24 have gained significant
notoriety from their Bitcoin mining
activities. Various approaches to profit
exist, with some operators joining forces
to form node pools, where any rewards
earned are shared, whereas others have
pursued large, purpose-built datacenters
with optimized microprocessors devoted
to Bitcoin mining.
Source: IDATE DigiWorld, Blockchain, October 2016
The Blockchain technology
market is estimated to
Blockchain as a back office solution The main advantages of applying
Blockchain like this include lower grow in value from
Blockchain has also been adopted by the $210.2mn to $2.3bn
registry costs, lower costs for the
traditional financial sector as a back
office infrastructure solution for
validation of ownership certificates or between
B2B 2016
Blockchain and 2021 25.
providers
deeds and the level of security of the
facilitating data exchange between The main opportunity for the IT industry
record, which reduces the risk of fraud.
financial institutions and reducing the lies in integrating Blockchain with their
need for intermediaries and/or state The use of “Smart Contracts” also opens traditional portfolios of IT and security
supervision. Several experiments have up a host of possibilities for transferring software. Blockchain is well-suited for
seen banks form consortiums such as the ownership or rental and leasing this, given its ability to act as a neutral
R3VEC initiative, which included more arrangements22 (pay-per-use). data exchange platform within a complex
than 70 banks14, in order to explore the existing ecosystem (co-opetitors26). This
Blockchain as a form of secure
perceived benefits of Blockchain has presented market opportunities for a
infrastructure isn’t necessarily
infrastructure, particularly its ability to range of start-ups focused on providing
revolutionary, but its ability to deliver
cut costs, intermediary numbers and Blockchain for specific application
cost reduction and optimization
transaction times, especially for domains.
opportunities across many industries
international fund transfers.
makes it a technology worth watching. Perhaps more importantly, it has
Banks are not alone in this, with attracted industry leaders like IBM
Opportunities for infrastructure
insurance companies also closely (strongly positioned with its
examining the possibilities offered by The demand for Blockchain Hyperledger27 Blockchain ecosystem),
Blockchain, especially for “Smart infrastructure, arising from its wide Microsoft (promoting Blockchain as a
Contracts” to automate payments. For range of applications, represents an Service28 offering based on Microsoft
example, a initial service offering opportunity for new and established Azure and Ethereum), and other IT
developed by AXA automates the digital infrastructure providers, who service companies (Accenture, ATOS,
payment of flight-delay insurance have duly gone about devising a growing CapGemini, etc.).
through a Blockchain15. portfolio of Blockchain infrastructure
solutions.
The use of Blockchain for Figure 3 : Initial Coin Offering (ICO) Funding and Business Model.
bank to bank transactions
could reduce the cost of
international payments by up
to 42% 16.
Property and asset management
Blockchain’s ability to hold a secure,
future-proof ledger of transactions is
also attractive for tracking valuable non-
financial assets. A range of initiatives are
taking Blockchain technology and
applying it to other asset classes,
including digital art works17,
diamonds18, music files19, land registry20,
asset tracking21 etc. Source: IDATE DigiWorld, Blockchain, October 2016
4
Blockchain
5. Brave NewCoin, 2014,Using Blockchain Technology To
certifying trusted third party institutions. Prove Existence Of A Document, Available at:
https://bravenewcoin.com/news/using-blockchain-
3 Despite this, Blockchain offers the
potential for digital public services to be
technology-to-prove-existence-of-a-document/
6. The Economist, 2016,
Not So Clever Contracts, Available at:
https://www.economist.com/news/business/21702758-
provided in a manner that is more time-being-least-human-judgment-still-better-bet-cold-
Challenges secure, decentralized and open, to both
citizens and corporations, than today.
hearted
7. Blockgeeks, 2016,Proof of work vs Proof of stake: basic
mining guide, Available at:
While it may be tempting to consider Experiments with Blockchain use in land https://blockgeeks.com/guides/proof-of-work-vs-proof-of-
Blockchain as “just another form of IT registries have become notorious20, but stake/
8 Georgetown Law, 2017, The law and Legality of Smart
infrastructure”, the technology is unique other uses have also been considered Contracts, Available at:
due both to its link with the (notably in Estonia29) including public https://www.georgetownlawtechreview.org/the-law-and-
digital notaries and secure health record legality-of-smart-contracts/GLTR-04-2017/
cryptocurrency world and, more 9. Bloomberg Markets, 2017, The Ether Thief, Available at:
generally, to its disruption potential for applications. https://www.bloomberg.com/features/2017-the-ether-thief/
10. Oraclize, 2016, Understanding Oracles, Available at:
existing business models. The challenges of cryptocurrencies https://blog.oraclize.it/understanding-oracles-99055c9c9f7b
11. Forbes, 2017, Initial Coin Offering: A New Way To
The challenge of disintermediation Cryptocurrencies were created as a Fundraise For Your Business, Available at:
https://www.forbes.com/sites/theyec/2017/11/20/initial-
One of the most important challenges challenge for both nation states and the coin-offering-a-new-way-to-fundraise-for-your-
related to Blockchain thus far is its established financial sector. Despite the business/#610e26e2307d
12. Financial Times, 2017, US regulator gives green light for
ability to remove intermediaries from failure to achieve their original goals bitcoin futures trading, Available at:
transactions and interactions. (wide usage in day-to-day transactions), https://www.ft.com/content/43d69af8-d6b0-11e7-8c9a-
d9c0a5c8d5c9
they have been subject to regulation and 13. The Telegraph, 2017,
Bitcoin could be the new gold, says JP
Blockchain: intermediary free a reputation as a risky asset, meaning Morgan , Available at:
that they still face significant challenges. http://www.telegraph.co.uk/business/2017/12/04/bitcoin-
Despite its wide and varied applicability, could-new-gold-says-jp-morgan/
Blockchain technology in all its forms is Risks linked with speculation 14. R3CEV, 2015, Building the new operating system for
financial markets, Available at: https://www.r3.com/about/
considered a neutral data-sharing 15. AXA,
infrastructure. As such, much of its The use of cryptocurrencies (notably 2017, AXA goes blockchain with fizzy, Available at:
https://www.axa.com/en/newsroom/news/axa-goes-
promise lies in its power to enable true, Bitcoin) as speculative assets has raised blockchain-with-fizzy
direct peer-to-peer interactions while concerns about the creation of a 16. Ripple, 2016, The Cost-Cutting Case
reducing the transaction cost by speculative bubble. While the short-term for Banks, Available at:
https://ripple.com/files/xrp_cost_model_paper.pdf
removing intermediaries who would impact on the global economy of such a 17. Coindesk,
2015, How Ascribe Uses Bitcoin Tech to Help
typically take a percentage of the bubble bursting would be limited due to Underserved Artists, Available at:
https://www.coindesk.com/ascribe-bitcoin-tech-
transaction as a fee for its facilitation. the lack of existing ties with the underserved-artists/
traditional financial system, the trend 18. Financial Times, 2017,
De Beers to invest in blockchain-
Blockchain therefore poses a threat toward the development of based diamond platform, Available at:
https://www.ft.com/content/e86024d8-ce6f-3116-bf77-
firms whose main business model cryptocurrency-based derivatives may 64341c4b1a0b
involves being a “trusted third party”; open the door to much higher risk levels 19. BusinessInsider, 2017, Blockchain tokens could transform
this can include those who facilitate B2B in the future if cryptocurrencies begin to the music industry, Available at:
http://www.businessinsider.fr/us/blockchain-could-
relationships, maintain transaction become entwined with traditional transform-the-music-industry-2017-11/
ledgers, arbitrate disputes etc. financial products. 20. Kairos Future,
2017, The Land Registry in the blockchain,
Available at:
A necessary evolution of the trusted Legal uncertainties https://chromaway.com/papers/Blockchain_Landregistry_Re
port_2017.pdf
third party role 21. Provenance.org, 2016, From shore to plate: Tracking tuna
Cryptocurrencies are generally not on the blockchain, Available at:
Despite this potential, the widespread governed by well-defined legal https://www.provenance.org/tracking-tuna-on-the-
adaption of a fully decentralized model frameworks, even though financial blockchain
22. RTInsights,2016, Blockchain and Smart Contracts: A Pilot
seems unlikely in the near future. In fact, regulators do closely monitor their in the Car-Leasing Business, Available at:
most trusted third parties will benefit development. This lack of framework https://www.rtinsights.com/blockchain-pilot-smart-
contracts-docusign-visa/
from Blockchain in the short-term as it creates uncertainty for citizens, business 23. Quartz, 2017,China’s Bitmain dominates bitcoin mining.
will help streamline the complexity of and states regarding the status of Now it wants to cash in on artificial intelligence, Available at:
their exchanges and reduce their cryptocurrency holdings as an asset, https://qz.com/1053799/chinas-bitmain-dominates-bitcoin-
mining-now-it-wants-to-cash-in-on-artificial-intelligence/
operating costs. For the time being, it particularly from a fiscal and tax 24. Bitcoin.com, 2017,Bitfury is Building the “Largest Bitcoin
seems that the majority of end- perspective. Mining Operation in North America, Available at:
https://news.bitcoin.com/bitfury-is-building-the-largest-
consumers will continue to access the bitcoin-mining-operation-in-north-america/
services they require through their Similarly, even if the archive of a 25. The blockchain.com, 2016, Blockchain Market Worth 2.3
existing trusted third parties, with document held in a public Billion USD by 2021, Available at: http://www.the-
Blockchain causing changes in their role cryptocurrency Blockchain is technically blockchain.com/2016/10/11/blockchain-market-worth-2-3-
billion-usd-2021/
and organization rather than their able to prove the document’s 26. Stewart Southey, 2018,Blockchain and Coopetition. Show
demise. provenance, the status and validity of the me the Money, Available at:
archive itself is subject to no legal https://medium.com/@sgs_292/blockchain-and-coopetition-
show-me-the-money-5f74fb2c1e3a
The main challenge for Blockchain precedent, leaving great uncertainty as 27. Fortune, 2017,
Blockchain Is Pumping New Life Into Old-
therefore appears to be one of how it can to the outcome of any legal dispute. School Companies Like IBM and Visa, Available at:
facilitate changes that strengthen the http://fortune.com/2017/12/26/blockchain-tech-
companies-ibm/
trusted third parties it may one day
replace, while continuing to understand References 28. Nasdaq,2017, Microsoft Azure Bringing Blockchain Closer
To Real World Use, Available at:
http://www.nasdaq.com/article/microsoft-azure-bringing-
and exploit the opportunities inherent in 1Bitcoin, 2008,Bitcoin: A Peer-to-Peer Electronic Cash
blockchain-closer-to-real-world-use-cm835914
System, Available at: https://bitcoin.org/bitcoin.pdf
its design. 2. O’Reilly, 2015,
29. Coin Telegraph, 2017, How Estonia Brought Blockchain
Mastering Bitcoin: Unlocking Digital
Closer to Citizens: GovTech Case Studies, Available at:
Cryptocurrencies ISBN: 978-1449374044
Blockchain for public services 3. Bitcoin Stackexchange, 2011,
https://cointelegraph.com/news/how-estonia-brought-
What can an attacker with blockchain-closer-to-citizens-govtech-case-studies
51% of hash power do? Available at:
Public services themselves also stand to https://bitcoin.stackexchange.com/questions/658/what-can-
be directly impacted by Blockchain due an-attacker-with-51-of-hash-power-do
4. IDATE, 2016, Blockchain a new IT infrastructure, Available
to their common role in establishing and at: https://en.idate.org/product/blockchain/
5
About the Digital Transformation Monitor The Digital Transformation Monitor aims to foster the knowledge base on the state of play and evolution of digital transformation in Europe. The site provides a monitoring mechanism to examine key trends in digital transformation. It offers a unique insight into statistics and initiatives to support digital transformation, as well as reports on key industrial and technological opportunities, challenges and policy initiatives related to digital transformation. Web page: https://ec.europa.eu/growth/tools-databases/dem/ This report was prepared for the European Commission, Directorate-General Internal Market, Industry, Entrepreneurship and SMEs; Directorate F: Innovation and Advanced Manufacturing; Unit F/3 KETs, Digital Manufacturing and Interoperability by the consortium composed of PwC, CARSA, IDATE and ESN, under the contract Digital Entrepreneurship Monitor (EASME/COSME/2014/004) Authors: Bertrand Copigneaux, IDATE; Laurent Probst, Virginie Lefebvre, Julian Brown, PwC DISCLAIMER – The information and views set out in this publication are those of the author(s) and should not be considered as the official opinions or statements of the European Commission. The Commission does not guarantee the accuracy of the data included in this publication. Neither the Commission nor any person acting on the Commission’s behalf may be held responsible for the use which might be made of the information contained in this publication. © 2018 – European Union. All rights reserved.
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