Blockchain as a Foundation for Disruptive Business Models
Most writing about blockchain in 2018 began with the disruption and worked backwards to the technology, if it arrived there at all. This paper takes the opposite route. It establishes what a blockchain actually is, and only then asks which business models the technology could plausibly displace.
What a blockchain is
No single definition existed, so the paper builds one. A blockchain is a kind of database whose data are stored in blocks and linked into a chain by cryptographic methods.
The structure is easier to see than to define. Each block holds its transactions, a nonce, and the hash of the block before it. The nonce is a randomly generated number that serves as the starting point for the proof-of-work calculation, recalculated until the resulting hash carries a series of leading zeros, at which point publishing the block is itself the evidence that the work was done. Because every block carries its predecessor’s hash, altering an old block would invalidate every block after it, which is what anchors the chain against forgery. The one exception sits at the start, where the chain needs a fixed first block, the genesis block, hard-coded into the source before the chain is ever published.
What makes that construction work is four concepts, each answering a different requirement.
| Concept | What it provides |
|---|---|
| Cryptographic hash function | Identification and integrity |
| Digital signature | Authentication, provability, confidentiality |
| Peer-to-peer network | System of record, availability, transaction bookkeeping |
| Distributed consensus | Currency of the data, a single agreed state |
Hashing gives every transaction an unambiguous identifier and makes tampering detectable. Digital signatures establish that a transaction came from who it claims and that the sender cannot later deny it. The peer-to-peer network removes the central authority: every peer is an equal participant, so any participant can verify the state of the whole network, and there is no single point whose failure takes the system down.
Consensus is the part that does the real work. Even inside a closed network, peers run at different speeds and technical faults leave them holding different states, so something has to decide which state is true and prevent malicious peers from corrupting the data. Proof of Work requires solving a computationally expensive problem, and providing computing time for that is what mining means, so computing power determines the probability of producing the next block. Proof of Stake instead selects validators in proportion to their existing share of the network. The terminology follows the logic: under Proof of Stake the process is called minting rather than mining, closer to coining than to digging.
The word itself has a longer history than the technology. Block chaining appears in a 1976 patent describing Cipher Block Chaining, blocks of plaintext joined by an XOR operator and then encrypted, each depending on the one before. Nick Szabo described proof-of-work chains for his Bit Gold currency in 2005, and Satoshi Nakamoto took up the idea in 2008 for Bitcoin. Nakamoto never used the word blockchain in the Bitcoin paper at all. It was the emails between Nakamoto and Hal Finney that fixed the term.
Smart contracts
Szabo defined smart contracts in 1994 as a computerised transaction protocol that executes a contract automatically. Where a traditional contract rests on law, this one rests on program code. A blockchain supplies what the idea had always lacked: automatic execution across a decentralised network, a copy of the contract on every node, and direct authentication between parties with no intermediary. Ethereum, combining a decentralised mining network with a development platform, is the first universally usable implementation.
The paper then argues against itself, which is its strongest passage.
A program cannot interpret intent the way a person can, so a contractual intention that seems entirely unambiguous to both parties can be read differently by the code and produce a result nobody wanted. Because nothing can be changed once the contract is triggered, no error can be corrected either, and that applies both to the terms and to bugs in the code. A change in circumstances can produce a perfectly legitimate wish to amend the contract that simply cannot be honoured, and execution cannot be aborted under any circumstances, including when both parties want it stopped. At the time of writing, no legal basis for smart contracts existed at all.
Where it could actually bite
The financial case rests on a gap between capability and practice: in an era of cross-border real-time communication, a simple transnational bank transfer still takes several working days.
The more interesting argument concerns access. Billions of people, predominantly in developing countries, have no bank account, yet most hold a smartphone and already use it for payments. In Kenya, Gabon, Sudan and Algeria the share of the adult population using mobile payment services vastly exceeds the number of bank branches per hundred thousand people. Traditional financial infrastructure is largely absent while internet-capable devices are not, and that is a developmental disadvantage which building more branches will not close. Blockchain settles global payments in seconds at almost no fee, dispensing with servers, clearing houses and compliance checks, and avoiding currency conversion entirely.
Stellar is examined as the case, a distributed open-source platform aimed specifically at giving people in developing countries access to international transactions. Comparing the key indicators over the turn of 2017 into 2018:
| Bitcoin | Ethereum | Ripple | Stellar | |
|---|---|---|---|---|
| Mean transaction time | 8 m 47 s | 15.8 s | 3.3 s | 5 s |
| Mean transaction cost | $33 | $0.80 | $0.02 | $0.000078 |
| Max. transactions per second | ~7 | ~15 | ~1500 | > 2000 |
| Consensus algorithm | Proof of Work | Proof of Stake | XRP Ledger Protocol | Stellar Consensus Protocol |
At a speed comparable to Ripple, Stellar undercuts Ripple’s already low costs by a factor of 256. Bitcoin and Ethereum are left behind on transaction time and above all on throughput, and it is the combination of speed, low cost and scalability that makes everyday use in cross-border payments possible at all.
The second application is government. Estonia began testing hash-linked time-stamping in 2008, before Bitcoin brought the technology to general attention, and has stored citizen data on its own KSI Blockchain since 2012, carrying health, prescription, legal, court, police, banking and business services. Its eResidency programme had around 27,000 users by the start of 2018. The detail worth keeping is the age distribution: for a service built on novel technology and seemingly aimed at digital natives, nearly 30 per cent of users were between 31 and 40, and only about 20 per cent were under 30.
Conclusion
The judgement is that blockchain is far more than a new way of storing data. It is a new way of storing value, with the potential to lay fresh foundations under industry, the economy and public administration.
The tempering follows immediately. This is the beginning of the technology, its potential is only slowly being recognised, and research into application scenarios has barely started. Technologies arriving in parallel, named in the paper as deep learning, artificial intelligence and the internet of things, will unquestionably form application possibilities for it. Wide implementation therefore has to proceed cautiously and successively, so that the technology can keep developing while it is being adopted.
The closing sentence, written in January 2018 and worth reading against what followed: it will probably take decades before blockchain technology has entered everyday life.
Cite this work
@techreport{golombeck2018blockchain,
author = {Golombeck, Marius},
title = {{Blockchain als Grundlage disruptiver Geschäftsmodelle}},
institution = {University of Applied Sciences and Arts Dortmund},
address = {Dortmund, Germany},
year = {2018},
month = jan,
language = {german},
doi = {10.13140/RG.2.2.22862.72007},
url = {https://www.researchgate.net/publication/330162734}
}