Bitcoin Transactions: How they work

https://medium.com/@verify.as/the-process-of-bitcoins-transactions-38cda18a2a83

Difference Between PoW, PoS, and PoI

Not a day goes by without hearing these two terms when you are involved in cryptocurrency and blockchain technology, PoW and PoS(there is a third one that you don't hear about that much, but you will get to know it here). when you are trying to find the next best choice for investment in cryptocurrency, one of the factors that could affect your portfolio is the algorithm that the project is using(except Bitcoin which has a totally different situation). let's go through each one and see how they work.




Proof of Work
PoW(Proof of Work) algorithm mainly is based on computation power, it means you are as powerful as the number(and power) of your CPUs. This algorithm is the oldest and the most common one in blockchain technology, one of the problems that PoW has, is that if you want to mine coins, you need to have powerful devices specially made for this purpose which cost some money, and also you need to spend a great amount of electricity and bandwidth over the process of mining, the whole thing does not seem profitable and in reality that is correct(if you don't have proper equipment, you probably will spend more that you earn).


Another problem other than wasting energy is, in future when there is no coin to mine anymore, miners only get paid by transaction fees, and because the mining process is very expensive, they will accept any fees which will lead to having fewer miners and finally being prone to 51% attack(when a miner have 51% or more percent of mining power and is able to change data in blocks), another problem was that the rich would get richer because the more resource you provide the more coin you will mine.

Proof of Stake


As you see PoW is not the best algorithm for blockchain, so another algorithm was developed that works completely different and makes you powerful as your stakes, in another word the amount of the coins that you earn is related to amount of stakes that you hold, for example, if you have 10% of a coin in your account, you would earn 10% of new coins that are created in future(the concept is simplified, there are more details in technical terms) because the probability of you signing next block would be related to your amount of stake. in this case you don't need to solve very hard mathematical challenges anymore which prevents wasting many resources like electricity, and also if someone wants to own more than 51% of the stakes to do the attack, he/she has to buy 51% of the stakes which is practically impossible because when he/she starts buying all the coins, the price would go to the moon and he/she won't be able to afford all that money.


Again one problem here is the person that holds the oldest set of coins or have more, gets more(rich gets richer, the same as PoW) which is not everybody's favorite condition,the only thing that needs to be done is to prove the ownership of your stakes or the number of the coins you possess. so what should we do?! the answer is already found actually. by the way, the first coin that implemented PoS was PeerCoin(PPC).


Proof of Importance


This is where PoI comes in, because of the problems that were mentioned above, PoI algorithm came around, the idea behind this algorithm is that you are important as your activity on the network. it mean those who are active on the network and help project to benefit(loyal users) are going to be rewarded, each address(user) is given a trust score, and by activities on the network it gets higher, the higher it gets, the more chance you will have to be rewarded by the network, this way rich necessarily does not get richer and everyone has the chance to be rewarded based on loyalty and effort of the user. as I said before the whole thing is being simplified to get you a general and basic understanding, it has more technical complexity in it, though.

the coin that is using this algorithm is called NEM(XEM) which is one of the promising coins for long-term investment exactly because of this well thought algorithm.

Ethereum Versus NEM - The Obvious Choice

                               

Lots of new projects and startups are coming into the crypto space. Right now, more than 10 ICOs are running at the same time, and every day we see more and more coming.

It is very important to focus on the planification and procedures of everything related to blockchain technology when we want to start a new project. The money and confidence of thousands of investors is one of the most difficult things to achieve in this early stage, and The DAO incident is still present in the minds of every single member of the ecosystem.

Every entrepreneur in the world knows how difficult is to run a startup, and one of the most important things to have in mind is that the confidence of the clients is really difficult to achieve and really easy is to lose, and this behavior is even more accentuated in our sector.

The blockchain ecosystem has long had massive software catastrophes one after another, and this is probably one of the reasons for its slowed expansion. Because of this, we need now, more than ever, a development framework which lets us build robust applications with the highest level of security possible.

Nowadays, Ethereum is the blockchain system which provides us more flexibility to build Smart Contract based systems. It has a broad range of development tools made by and for developers, and some of its architecture and security standards have been well defined.

However, Ethereum contracts are still like legal contracts in the ancient Greek age, where humans had some “secure” and standardized contracts but when they had to write more complex contracts, lots of tricks and backdoors appeared.

This sticking point for lots of developers and entrepreneurs is one of their highest pains right now.

We can compare Ethereum with the Android OS. Android, for example, is really useful because it lets developers make mobile apps easily, but one of the tradeoffs for this is the security. Lots of phishing apps have been discovered, and lots of money has been lost because of this broad freedom to create mobile apps provided by Android.

We also spend lots of time thinking about how to promote adoption on blockchain technology. For this to happen, we probably need some more simple applications which are more secure, so we can promote its use while developing more complex systems and testing them.

Here’s where NEM kicks in. NEM was built from scratch and has been tested by many banks and big corporations. With extensive enterprise developing experience under their belts, several full-time NEM developers write and execute thousands of tests before every development cycle and release, and this gives NEM a very secure core.

NEM’s approach is to let developers use a wide range of combinable functionalities which let them build powerful applications based on a closed set of atomic operations, and opens the network to almost any technological combination thanks to its REST API. Notably, mix matching and combining Namespaces (unique domains), Mosaics (customizable assets), 2.0 multisig contracts, and three forms of messaging, allows for a wide variety of application frameworks to be built. By assigning meaning to these different functions and combining these in various ways a wide range of applications are currently under development including apps for transmitting financial value, notarizations, tracking and logistics, voting, land management, ID management, and more.

NEM's architecture makes it very simple for developers to build blockchain applications in almost every device with the same degree of decentralization and security. To give an example, the NEM NanoWallet can run on a desktop and smartphone without any problem and can be used as a boilerplate to build more complicated applications making customized apps built with it accessible on Windows, Mac, Linux, iOS, and Android.

Another critical thing for a decentralized application is scalability. Right now, Ethereum can have at most, near 15 transactions per second, while NEM can scale to hundreds of transactions per second, and has already been tested privately and independently to scale to thousands of transactions per second in the Catapult release. Catapult is currently in a closed beta and is scheduled to go live in 2017 if all goes well.

But the most important thing is the following; NEM has never had a serious security issue. The commitment of the NEM Foundation and the core developers with regards to the security and the availability of the network is of utmost importance, and this gives to the community, third-party developers, and investors a guarantee which is hard to equalize.

No one doubts on the strong potential of both technologies, and right now NEM seems to be a more stable choice for building new applications which have to support real business models and do so now. Its security and development facilities can let blockchain entrepreneurs focus on relevant problems and not in technical difficulties, and its learning curve is far and away smoother than the Ethereum.

NEM is great for lots and lots of applications that many people would want and it is easy to build on. Ethereum is better for very specialized projects but needs somebody who has a very high level of skill to do it exactly right. Whereas, in NEM, it’s already done for you, so you can't really hurt yourself if you go wrong.

What is Proof-of-Importance (POI) and Why Is It Better, and What Is Vesting?

What is POI?

Proof-of-Importance, proof-of-work, and proof-of-stake all have one thing in common. They are all algorithms, which when applied to cryptocurrency help to maintain the order in which blocks are selected. This becomes important when we start to think of things such as double spending. This is where money is spent more than once (fraudulently). For example, some currencies use verification of each transaction in the blockchain to prevent this.

To understand why NEM's idea of POI is so revolutionary, we first need to understand how POW and POS work.

POW (Proof-of-Work) was the first system to be implemented and is used by cryptocurrencies such as Bitcoin and also Scrypt coins such as Dogecoin.

In order to “earn” these cryptocurrencies, you must use your computer to mine the coin; the greater your machine’s power, the bigger chance you have of earning.

Why did they make it so that making a block was both expensive and time-consuming? As it requires large computational power to make a block, attacks on the blockchain become harder to carry out as the attacker would have to use an unfeasible amount of resources.

Note that very many cryptocurrencies (including NEM) have some sort of blockchain explorer, which allows anyone to see any transactions as well as the mining of blocks.

Blockchain technology can also be used for file sharing and proof of asset ownership, and many other things!

However, it was not long before people realised the obvious problems.

Mining (the process in which computational power is used to make new blocks), has very little use.

As technology gets better, people have to spend more money to get the latest ASICs (machines specifically for mining), meaning, even more energy is wasted.

It is pointless to try mining with a CPU. You are competing against companies with rooms of ASICs, and electricity costs mean it is a waste of time. For example, if you had a decent CPU hash rate of 0.1kH, in one week you would not even make a cent!

Another problem is that as the rich can afford expensive ASICs, they only get richer and richer. In other words, wealth is spread very unevenly, with the top 1% in Bitcoin holding 80% of all Bitcoins (starts from 2014). Many of the richest do not actively use their money, meaning that they are contributing very little to the community.

This was why the POS (Proof-of-Stake) system was introduced. It was implemented first by the well-known Peercoin cryptocurrency. Instead of conventional mining, it asks participants to prove ownership of their “stake,” or how much Peercoin they possess.

Larger and older sets of coins have a higher probability of signing the next block, and a lot of computing power is saved.

Again, however, there are problems. Richer users are more likely to sign the next block, and the more blocks they obtain, the richer they get. The problem is the same, richer users will gain wealth much faster than others.

This is where NEM comes in. Its POI system not only rewards those with a large account balance, but also takes into account how much they transact to others and who they transact with.

This means that those who actively help the economy and therefore NEM benefit, meaning the right people, are rewarded. Each user is given a trust score, the higher it is, the more chance they have of being rewarded.

The good thing is that this will mean much more even wealth distribution; anyone who contributes can gain extra XEM (the currency of the NEM network). NEM is great because it gives similar opportunities to everyone. The main aim is to empower regular people.

This rewarding is done through harvesting, a process in which a node will calculate blocks and they are added to the blockchain.

To do this you need a vested balance of 10,000 XEM.

But what is vesting?

Vesting

When a person first deposits XEM into an account, none of it will be vested. After 24 hours, 10% of the balance becomes vested. After the next 24 hours, another 10% of the remaining unvested balance is then vested. This cycle carries on as long as the XEM is kept in your wallet. If you make a transaction, both vested and unvested coins will be used so that the ratio of unvested:vested coins remains the same.

The point of this is to build up trust; you have held your coins for a while or you have a very large amount (for example, if you have 100,000 NEM, it will take only 24 hours for you to have 10,000 vested coins).

Once you have enough vested coins, you can mine either through local harvesting or delegated harvesting.

Local harvesting is much easier to setup, but has more disadvantages than delegated harvesting.

To start local harvesting, select harvested blocks from the left-hand menu, then click “Start local harvesting.”

If you are interested in setting up delegated harvesting, please go here

What's the difference between XEM, BTC, and ETH?

Ever since the dawn of currency, currency was controlled by a central entity. This central entity could decide to do whatever it wanted with its currency. It could weaken it, strengthen it, take it away from you, anything. The money was only valuable because this central entity said it was. The sad part is, we're still using this form of currency today - in the form of your dollars, euros, yen, or anything of that sort.

In 2008 a man calling himself Satoshi Nakamoto decided he wanted to fix all this, and created the original cryptocurrency - Bitcoin. Bitcoin was a great and innovative idea, and it created the idea of the blockchain. The blockchain is a public ledger of every transaction that ever occurred, and as such could be verified by anyone.

Now it's 2016, and there are hundreds of other cryptocurrencies out there, so I'm going to explain to you the pros and cons of the larger ones, and why XEM is really the way to go.

Bitcoin
Bitcoin was the original. As we have seen, the original is not always best - but it still was innovative. It uses a public ledger called a blockchain for security, but that's about the only security measure added.

The ideas in Bitcoin are applied to both Ethereum and NEM, and a simple rundown of all of this can be found in this video, created around the time bitcoin started becoming popular.

The ideas behind bitcoin have been used in every cryptocurrency since, so it’s important to understand how a transaction in Bitcoin works.

As far as all the advantages of Bitcoin, NEM and Ethereum both do whatever Bitcoin can, but better.





Ethereum
If you want to know how a transaction works in Ethereum, look at the infographic about Bitcoin, it works the exact same way.

Ethereum is really big right now because it includes two main features over Bitcoin.

• Smart Contracts allow you to write applications in the blockchain that usually run as programmed.
• 'ASIC-proof' algorithm makes it profitable to mine for people without expensive hardware.

The asic-proof algorithm is still proof-of-work however, and so it suffers from the same exact pitfalls that Bitcoin suffers from.

The cryptocurrency community really loved smart contracts for a while. The way it was advertised was absolutely brilliant. "World Computer." "Applications that run as programmed with no possibility of downtime." Except, maybe it works a little too well.

Recently the largest smart contract in Ethereum was hacked, due to a fatal flaw with Solidity and how smart contracts work. This guy explains it well, which notes that if there is a smart contract vulnerability (which we just saw happen in an audited smart contract) - the hacker can legally take off with the funds. This is absolute heaven for a hacker.




NEM

NEM uses PoI, also known as proof-of-importance. This means that (unlike Bitcoin and Ethereum), NEM is environmentally friendly, and more secure. Unlike mining Bitcoin and Ethereum, network upkeep does not require hundreds and thousands of electricity hogging mining machines. A NEM node can be run on a computer as simple and cheap as a Raspberry Pi, which is only $35 and takes up very little electricity. PoI also encourages people to actually use NEM, rather than just hoard it. For a more detailed explanation, check out the previous article comparing PoW, PoS, and PoI.

NEM is also superior in security. It uses EigenTrust++ for node reputation, which is not used in any other cryptocurrency, and strengthens the security of the network considerably. It also uses localized spam protection, which shuts down spammers, and only the spammers, when the network is at full capacity. Both are only found in NEM.

NEM was built with a two tier design in mind as well. If you want a wallet, you don’t need a full node and a copy of the blockchain. Instead, you can just connect to any node, and have access to all the same features without trusting it. Even a malicious node has no access to your funds, and the worst it can do is just not work. In order to make sure that nodes continue to operate, the developers created a supernode program, which gives a greater incentive for people to maintain the network for years to come.

NEM isn’t only better in the security aspect, however. It also brings a lot of new or improved features to the table. Unlike Bitcoin, multi-signature accounts are on the blockchain, and do not require trusting a third party in order to have a multi-signature account. Ethereum does have contracts, but you need to write it yourself, which means that pretty much only developers can do it. As mentioned in the Ethereum section, this can be very, very hard to do right due to the language in which smart contracts are written. NEM has made making or editing multi-signature contracts as easy as a few clicks.

Another advanced feature is mosaics. This works similar to colored coins (custom currencies) in bitcoin, but is done completely on chain, rather than requiring the trust of a third party. The names of these colored coins are based off of namespaces, which are similar to how domain names work on the internet. Once a namespace is created, no one can claim the same one, and the owner can make unlimited subdomains.

A platform is never complete without messaging, however, and NEM includes either encrypted or unencrypted messaging between addresses, completely through the network. There’s even hex messaging for developers.

While Ethereum and Bitcoin are rewarding miners for making blocks, they aren’t giving incentives for running full nodes and supporting network throughput. NEM has a program called Supernodes that rewards people for running high powered nodes that serve light wallets with data quickly and securely. These rewards were set aside during the first block of the NEM network and are planned to last for years. In the event that the supernode funds do run out, there is always incentive to maintain the network. Anyone with 10,000 XEM can make a harvesting node, and collect transaction fees based on their PoI score. And instead of having to buy powerful and expensive mining equipment that uses high amounts of electricity, NEM harvesters can run a node on a computer as simple as a Raspberry Pi.

We are the first private/public blockchain, which is the same system that was used to create Linux, widely accepted as the most secure OS in the business world. NEM was built by experienced developers and was built for scalability and stability from day one. We are also currently the only platform that has been stress tested by banks and approved for financial use. Other currencies have been tested, but haven’t shared any proof, but all of our tests are open for anyone to see the results for.

NEM also has tried to make it as easy as possible for third parties to build on the blockchain. In platforms like Bitcoin most third party developers are locked into using one centralized service like Coinbase or Bitpay to build their ecosystem. This means that they rely on these services to build, update, and maintain APIs. And at Ethereum each developer will write their own code for contracts, which is much more versatile and flexible but as mentioned before comes with a risk that the developer must know exactly what they are doing. NEM on the other hand offers a full set of rich and easy to use JSON/restful APIs that work across the entire network with any node, and work with a large variety of calls including all transaction types.

All of this was built from 100% new code, and as such does not hit any of the pitfalls of the other two platforms. However, it can still benefit from the advantages of the other platforms, as it also uses the blockchain.

If you skipped all of that because you don’t like giant walls of text, here’s an easier to digest infographic.

Blockchain is the Future of Healthcare

Everything we know about health care can benefit from blockchain technology. Especially when it comes to medical records, sharing patient information, and making data more interoperable. Right now, there are a lot of intermediaries involved in sharing patient data as very few systems are compatible with one another. The blockchain will effectively create a new model for the exchange of health information. Electronic records are the way forward. However, they need to be made more efficient, secure, and no longer reliant on intermediaries.

Overcoming all of those challenges will not be easy, though. A blockchain-powered healthcare ecosystem would raise the bar as far as interoperability is concerned. Eliminating friction and reducing costs associated with using current systems will create a healthier ecosystem for all parties involved. Now is the time to capitalize on this technology and its momentum.

Additionally, using blockchain will help in generating valuable insights. Being able to see the proverbial bigger picture will benefit both patients and healthcare personnel alike. Moreover, it will help improve the value of care as well. All of this will require a universal blockchain system connecting health care facilities from all over the world. Using private blockchains which only require approved partners to examine and share data is not a viable strategy for the healthcare sector by any means.

“While digital technology has dramatically transformed the management of our financial information and transactions, most of us have not seen such gains when it comes to our health data. As the world watches the adoption of blockchain as a new model of decentralization and security for financial services, we believe the time has arrived when the health sector can finally offer the freedom to own our health data using a smart wallet to manage private and public keys with different levels of permission. This will enable patients to share data on an as needed basis with trusted providers.”

– Dr. Rhea Mehta

There are indeed economic, technical, and behavioral challenges that are faced by the current healthcare models. No one has built a large-scale blockchain ecosystem for the healthcare sector to date. That situation will come to change sooner rather than later, with companies like Bowhead Health working toward bringing blockchain technology to the medical sector as we speak. These unique opportunities need to be taken advantage of with properly developed proofs of concept.

Ultimate Cryptocurrency Guide

https://cryptocoinmastery.com/the-ultimate-cryptocurrency-guide-everything-you-need-to-know/

Contents -

Part 1: Introduction to the World of Cryptocurrencies

How Cryptocurrencies Work

What are Confirmations?

Choosing a Safe Wallet

Best Offline Wallets

Best Online Wallets

Bitcoin Wallets

Ethereum and Altcoin Wallets​

Cryptocurrency Exchanges

The Most Reputable Exchanges

Coinbase

Kraken

Poloniex

BitTrex

Buying, Selling and Trading Your Coins

Cashing Out Your Gains

Changelly

Coinbase

QuadrigaCX

CryptoPay

LocalBitcoins

Investing in ICO's

Part 1 Conclusion

Part 2: Technical Analysis Training

Introduction to Technical Analysis

Gain Focused Trading Strategy

Fundamental vs Technical Trading

Chart Setup

Volume Tutorial

RSI Tutorial

MACD Tutorial

Bonus Content!

The Blockchain and Us (2017)

The Blockchain and Us (2017)

Smart contract use cases in industry

Paper contracts can take weeks to travel around the globe, while digital documents are uncomfortably easy to forge. Is there a way to automate transactions to make them smoother, more efficient, and more secure for all parties? Leaders are looking at blockchain and smart contracts as a viable solution.

Blockchain technology is generating significant interest across a wide range of industries. As the field of applications for blockchains grows, industry leaders are customizing and tailoring the technology to fit very particular uses. Blockchain-based smart contracts—self-executing code on a blockchain that automatically implements the terms of an agreement between parties—are a critical step forward, streamlining processes that are currently spread across multiple databases and ERP systems. Smart contracts in the commercial realm have not yet been proven, but we believe that permissioned blockchains (those that are privately maintained by a small group of parties) in particular will find near-term adoption. Two blockchain-based smart contract use cases—(1) securities trade clearing and settlement and (2) supply chain and trade finance document handling—carry important lessons for business and technology leaders interested in smart contract applications. 

SIGNALS 

Smart contract VC-related deals totaled $116 million in Q1 of 2016, more than twice as much as the prior three quarters combined and accounting for 86 percent of total blockchain venture funding 

An Ethereum-based organization has raised over $150 million to experiment with and develop smart contract-driven applications.

• The Australian Securities Exchange is developing a blockchain-based post-trade solution to replace its current system
• The Post-Trade Distributed Ledger Group, an organization launched to explore post-trade applications on the blockchain, has 37 financial institutions as members
• Five global banks are building proof-of-concept systems with a trade finance and supply chain platform that uses smart contracts
• Barclays Corporate Bank plans to leverage a smart contract bill-of-lading platform to help its clients reduce supply chain management costs
• The state of Delaware announced initiatives to utilize smart contracts for state-recognized “distributed ledger shares” and to streamline back-office procedures

WHAT ARE BLOCKCHAIN-BASED SMART CONTRACTS?

Smart contracts represent a next step in the progression of blockchains from a financial transaction protocol to an all-purpose utility. They are pieces of software, not contracts in the legal sense, that extend blockchains’ utility from simply keeping a record of financial transaction entries to automatically implementing terms of multiparty agreements. Smart contracts are executed by a computer network that uses consensus protocols to agree upon the sequence of actions resulting from the contract’s code. The result is a method by which parties can agree upon terms and trust that they will be executed automatically, with reduced risk of error or manipulation.

Technology leaders envision many applications for blockchain-based smart contracts, from validating loan eligibility to executing transfer pricing agreements between subsidiaries. Importantly, before blockchain this type of smart contract was impossible because parties to an agreement of this sort would maintain separate databases. With a shared database running a blockchain protocol, the smart contracts auto-execute, and all parties validate the outcome instantaneously and without need for a third-party intermediary.

But when should companies employ blockchain-enabled smart contracts rather than existing technology? They can be a worthwhile option where frequent transactions occur among a network of parties, and manual or duplicative tasks are performed by counterparties for each transaction. The blockchain acts as a shared database to provide a secure, single source of truth, and smart contracts automate approvals, calculations, and other transacting activities that are prone to lag and error.

BLOCKCHAIN-BASED SMART CONTRACT BENEFITS

For a wide range of potential applications, blockchain-based smart contracts could offer a number of benefits:

Speed and real-time updates. Because smart contracts use software code to automate tasks that are typically accomplished through manual means, they can increase the speed of a wide variety of business processes.

Accuracy. Automated transactions are not only faster but less prone to manual error.

Lower execution risk. The decentralized process of execution virtually eliminates the risk of manipulation, nonperformance, or errors, since execution is managed automatically by the network rather than an individual party.

Fewer intermediaries. Smart contracts can reduce or eliminate reliance on third-party intermediaries that provide “trust” services such as escrow between counterparties.

Lower cost. New processes enabled by smart contracts require less human intervention and fewer intermediaries and will therefore reduce costs.

New business or operational models. Because smart contracts provide a low-cost way of ensuring that the transactions are reliably performed as agreed upon, they will enable new kinds of businesses, from peer-to-peer renewable energy trading to automated access to vehicles and storage units.

SMART CONTRACT USE CASES

To determine high-impact areas of potential, Deloitte’s analysis of smart contract use cases considered a number of factors, including: a sizable market opportunity; the presence of active, relatively well-funded start-ups targeting the opportunity; the participation of prominent investors; technical feasibility and ease of implementation; and evidence of multiple pilots or adoption by corporations. The lowest-hanging fruits today are applications in which contracts are narrow, objective, and mechanical, with straightforward clauses and clearly defined outcomes.

We have identified a range of applications—ranging from smart health records to pay-as-you-go insurance—that companies are piloting right now (see table). Using the criteria above, two use cases stand out for their immediacy to market: trade clearing and settlement and supply chain and trade finance.

Trade clearing and settlement

Blockchains provide a single ledger as the source of truth, and smart contracts offer the ability to automate approval workflows and clearing calculations that are prone to lag and error—thus reducing errors, cost, and the time to settlement. Trade clearing and settlement often entails labor-intensive activities that include various approvals and/or complex internal and external reconciliations. Banks maintain substantial IT networks, but independent processing by each counterparty causes discrepancies that lead to costly resolutions and settlement delays.

The opportunity to streamline clearing and settlement processes with the blockchain and smart contracts is immense. In 2015, the Depository Trust & Clearing Corp. (DTCC) processed over $1.5 quadrillion worth of securities, representing 345 million transactions. Santander Bank’s innovation fund, Santander Innoventures, expects blockchain technology to lead to $15–20 billion in annual savings in infrastructure costs by 2022. Seven start-ups, retaining funding of over $125 million, have platforms or services targeting this space: The list of more than 35 investors behind these companies is equally impressive; it includes not only major venture funds such as Khosla Ventures and SV Angel but also large banks such as Citigroup, JP Morgan, and Santander, and other organizations such as NASDAQ and the DTCC itself.

Wall Street has also been busy exploring this space. More than 40 global banks within the R3 consortium participated in testing that included clearing and settlement activity, and many of those banks have pursued further trials individually. The Australian Securities Exchange is also working on a smart contracts-based post-trade platform to replace its equity settlement system, and four global banks and the DTCC recently ran a successful trial of a smart contracts solution for post-trade credit default swaps.

Supply chain and trade finance documentation

Blockchains can make supply chain and trade finance documentation more efficient, by streamlining processes previously spread across multiple parties and databases on a single shared ledger. All too often, supply chains are hampered by paper-based systems reliant on trading parties and banks around the world physically transferring documents, a process that can take weeks for a single transaction. Letters of credit and bills of lading must be signed and referenced by a multitude of parties, increasing exposure to loss and fraud. Current technologies haven’t addressed this issue because digital documents are easy to forge; even current IT systems at banks simply track the logistics of physical documents for trade finance. A blockchain can provide secure, accessible digital versions to all parties in a transaction, and smart contracts can be used to manage the workflow of approvals and automatically transfer payment upon all signatures being collected.

Because current paper systems drive $18 trillion in transactions per year, there’s an attractive opportunity to decrease costs and improve reliability in supply chain and trade finance. Four start-ups have emerged in this area, all of which have noted engagement with banks in proof-of-concept activities. Funding has not been disclosed, but backers include three respected venture funds in addition to Barclays.

A number of corporations have also shown mounting interest in this area. Seven banks have revealed proof-of-concept testing, and the numbers noted by start-ups indicate more that haven’t been publicly revealed. One start-up in particular noted implementation roadmaps with five banks as well as a major insurer. Barclays Corporate Bank recently partnered with one of the start-ups, Wave, a platform that stores bill-of-lading documents in the blockchain and uses smart contracts to log change of ownership and automatically transfer payments to ports upon arrival. Bank of America, Standard Charter, and the Development Bank of Singapore are also among the banks pursuing proof-of-concepts of their own.

WHAT TO WATCH

Smart contract technology is still in its early stages. Business and technology leaders who want to stay current on implications of smart contracts should track both technology and business developments surrounding smart contracts.

On the technology side, certain advances will help broaden the applications and adoption of smart contracts.

Scalability. Smart contract platforms are still considered unproven in terms of scalability.

External information. Because smart contracts can reference only information on the blockchain, trustworthy data services—known as “oracles”—that can push information to the blockchain will be needed. Approaches for creating oracles are still emerging.

Real assets. Use cases that effectively link smart contracts to real assets are still in their infancy.

Flexibility. The immutability of blockchain-based smart contracts today means that developers must anticipate any conceivable scenario necessitating changes to the contract.

Privacy. The code within smart contracts is visible to all parties within the network, which may not be acceptable for some applications.

Latency. Blockchains suffer from high latency, given that time passes for each verified block of transactions to be added to the ledger. For Ethereum, the most popular blockchain for smart contracts, this occurs approximately every 17 seconds—a far cry from the milliseconds to which we are accustomed while using non-blockchain databases.

Permissioning. While excitement for smart contracts is growing in the realm of both permission-less and permissioned blockchains, the latter is likely to see faster adoption in industry, given that complexities around trust, privacy, and scalability are more easily resolved within a consortium of known parties.

Watch for major trials or deployments that achieve new milestones in scalability, or technologies that successfully address issues of privacy or enable greater trust of oracles. These are key signs of maturity, signaling that smart contracts are positioned for wider adoption.

On the business side, new capabilities and business models that extend beyond the digital realm driven by smart contracts will emerge in the coming months. For instance, start-ups have already paired smart contracts with IoT devices to provide access via smart locks or automatically enable electric vehicle charging stations. Pushing IoT sensor data to the blockchain will also open up countless possibilities; among them, look for new business models that are based on usage rather than time, and applications that employ micropayments automatically.

Revised legislation that accomodates smart contracts or recognition of smart contracts by legal authorities will also be critical for some applications of smart contracts. This will be another signal to watch for that indicates the technology is positioned for wider adoption.

CONSIDERATIONS FOR CORPORATIONS

Business leaders who may not be closely following blockchain developments should consider examining the technology and evaluate how it can be paired with smart contracts to drive efficiencies or new business capabilities.

Operations executives should look to their own processes to evaluate where smart contracts may be applicable. Some factors to look for include complex and manual work flows, multiparty agreements, lack of trust between parties, and interdependent transactions. Likewise, ideating on new capabilities that could be made possible by smart contracts should be considered in the context of current strategy or innovation efforts.

Given that smart contracts represent a new model of computing, software development teams and IT leaders should consider exploring the implications of this approach. Implementing smart contracts on a blockchain will require significant integration work, and it will be important to understand the new protocols and considerations when evaluating these applications for the enterprise.

Beyond bitcoin - Blockchain is coming to disrupt your industry

Blockchain technology can potentially make a great many things more secure and accountable: financial transactions, micropayments, IoT applications, health records, corporate audits, and more. If you’re not up to speed on blockchain, you need to be.

Blockchain, the “distributed ledger” technology that underpins bitcoin, has emerged as an object of intense interest in the financial services industry and beyond. Blockchain technology offers a way of recording transactions or any digital interaction in a way that is designed to be secure, transparent, highly resistant to outages, auditable, and efficient; as such, it carries the possibility of disrupting industries such as financial services, remaking business practices such as accounting and auditing, and enabling new business models. The technology is young and changing very rapidly; widespread commercialization is still a few years off. Nonetheless, to avoid disruptive surprises or missed opportunities, strategists, planners, and decision makers across industries and business functions should pay heed now and begin to investigate applications of the technology.

Signals

• A billion dollars in venture capital has flowed to more than 120 blockchain-related startups, with half that amount invested in the last 12 months.1
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• Thirty of the world’s largest banks have joined a consortium to design and build blockchain solutions.2
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• Nasdaq is piloting a blockchain-powered private market exchange.3
• Microsoft has launched cloud-based blockchain-as-a-service.4
• Blockchain concepts, prototypes, and investments are emerging in every major industry.

What is blockchain?

Consider this classic computer-science problem: A group of generals of the Byzantine army is camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. How can the loyal generals reach agreement, secure in the knowledge that traitors have not misled them?5 The “Byzantine Generals Problem” has broad implications in a world of globally distributed digital commerce, which lacks the trust inherent in a face-to-face transaction between two parties who know each other.

Blockchain technology is a new solution to a more challenging version of the Byzantine Generals Problem that includes the ability to add participants over time. A blockchain is a digital, distributed transaction ledger, with identical copies maintained on multiple computer systems controlled by different entities. Anyone participating in a blockchain can review the entries in it; users can update the blockchain only by consensus of a majority of participants. Once entered into a blockchain, information can never be erased; ideally, a blockchain contains an accurate and verifiable record of every transaction ever made.⁶ It would have made for a very reliable way for Byzantine generals to exchange information.

If you’re familiar with the term blockchain, it’s probably because it is the technology that underlies bitcoin, the digital cryptocurrency that has been in the news in recent years, unfortunately often in connection with wildly fluctuating valuations and sometimes illegal activities.⁷ Despite the sometimes unsavory uses to which bitcoin has been put—a characteristic it shares with old-fashioned currency—the technology that makes it possible has a growing number of technologists, strategists, and business leaders increasingly excited about a wide range of compelling applications for it. The public blockchain used by bitcoin, which anyone can join, is only one of several blockchain variants. An important variant that is rapidly evolving is private (or permissioned) blockchains, which limit participation to select entities.

The benefits of blockchain technology

Blockchain owes its potential to its many valuable characteristics:

Reliable and available. Because a wide circle of participants share a blockchain, it has no single point of failure and is designed to be resilient in the face of outages or attacks. If any node in a network of participants fails, the others will continue to operate, maintaining the information’s availability and reliability.

Transparent. Transactions on the blockchain are visible to its participants, increasing auditability and trust.

Immutable. It is nearly impossible to make changes to a blockchain without detection, increasing confidence in the information it carries and reducing the opportunities for fraud.

Irrevocable. It is possible to make transactions irrevocable, which can increase the accuracy of records and simplify back-office processes.

Digital. Almost any document or asset can be expressed in code and encapsulated or referenced by a ledger entry, meaning that blockchain technology has very broad applications, most as yet unimagined, much less implemented.

These key characteristics of blockchain technology open the door to disintermediating third parties from myriad transaction types, lowering transaction costs, and increasing the potential for innovation in every major industry.

Blockchain across industries

There are dozens of potential applications for blockchain. Most attention has focused on applications in financial services, but as we show below, concepts, prototypes, and investments are emerging in every major industry.

FINANCIAL SERVICES

The financial services industry is generating some of the greatest interest in and activity surrounding blockchain, with applications for both public and permissioned blockchains being explored. A report co-authored by Santander InnoVentures, the venture arm of Banco Santander, points to a key reason why: “In contrast to today’s transaction networks, distributed ledgers eliminate the need for central authorities to certify ownership and clear transactions.”⁸ A world in which parties can effect transactions securely without banks, stock exchanges, or payment processors is a very different one.

Santander InnoVentures has “identified 20 to 25 use cases where this technology can be applied.”⁹ Among these is securities trading, where the blockchain could enable near-instantaneous settlement. This could dramatically simplify middle and back-office processes and reduce settlement risk. The InnoVentures analysis “suggests that distributed ledger technology could reduce banks’ infrastructure costs attributable to cross-border payments, securities trading, and regulatory compliance by between $15–20 billion per annum by 2022.”¹⁰ Already, some 30 of the world’s largest banking institutions have joined a growing initiative to develop blockchain technology for the financial industry.¹¹

One high-profile project in this industry is under way at Nasdaq Inc., which is testing the use of blockchain for settling and clearing trades in the Nasdaq Private Market, a marketplace for pre-IPO trading of shares in private companies.¹² The Nasdaq team is particularly interested in the security, integrity, stability, and distributed-consensus features that a blockchain-based solution could bring to the private market.¹³

TECHNOLOGY, MEDIA, AND TELECOMMUNICATIONS

Applications discussed for the media sector include support for low-cost micropayments, processed without fees imposed by existing payment networks, which would enable, for instance, a newspaper website to charge readers per article or per page rather than per month.¹⁴ Some are looking at blockchain as a way of securing intellectual property and digital creative works such as images or music.¹⁵ The blockchain ledger is intended to be a secure and reliable way of proving a work’s attribution and provenance. And the programmable nature of the digital block makes it possible to enforce sophisticated usage rights.

In the technology sector, IBM and Samsung have produced a proof of concept—built in part using Ethereum, a blockchain-based framework distinct from the bitcoin blockchain—to illustrate how blockchain could support Internet of Things (IoT) applications by facilitating transaction processing and coordination among interacting devices. The distributed nature of the shared ledger may be particularly well suited for fostering coordination among large numbers of devices. And the cryptographic security on which blockchains rely can help mitigate the security challenges facing IoT deployments.¹⁶

At least one startup, which has so far raised $5 million, is pursuing the concept of blockchain-enabled IoT applications.¹⁷ Verizon Ventures, the venture arm of Verizon Communication, is an investor.¹⁸ Orange, another telecom company, is an investor in at least one blockchain startup¹⁹ and is seeking to bring together big companies and startups to jointly explore applications.²⁰

CONSUMER AND INDUSTRIAL PRODUCTS

In the consumer and industrial products industry, blockchain’s most obvious application—if not the most compelling because of entrenched competition from cash and credit and debit cards—is as an alternative payment platform in retail.

Other applications are more futuristic. For instance, DocuSign, a provider of electronic-signature and digital transaction-management technology, created an app for Visa’s “connected car” proof of concept; the app integrates with the bitcoin blockchain and can record contracts. It is intended to simplify the car buying and leasing processes and enable auto-based secure payments.²¹

In travel and hospitality as well as retail, blockchain may offer a superior means of powering loyalty-points programs, including more advantageous accounting treatment of the liabilities created by the accrual of points, real-time updating of points balances, and better management of points across franchised operations due to the fact that a shared distributed ledger can simplify the settlement process.²²

LIFE SCIENCES AND HEALTH CARE

The health care sector is starting to show interest in blockchain technology as a means of securing digital assets. Blockchain-based record-keeping service Factom, for instance, has struck a partnership with a provider of medical-procedure ordering and billing services. The companies intend to use blockchain to store health care records such as medical bills and client-physician communications to claims and disputes. The cryptographic security is likely to enhance the security of such records, while the immutable, irrevocable nature of transactions is intended to make claims processing more efficient and simplify dispute resolution.²³ Health records secured via a blockchain could make it easier, in theory, for patients to share records with multiple providers while retaining control over those records. Philips Healthcare has confirmed it is currently exploring potential applications for blockchain technology as well, though it has not disclosed what applications it is evaluating.²⁴

PUBLIC SECTOR

The public sector will likely find compelling applications for blockchain, particularly where existing record-keeping methods are inadequate. For instance, Factom has reportedly partnered with the Honduras government to pilot a blockchain-based program to record land ownership in the country. The intent is to reduce the corruption and fraud associated with a centralized registry under the control of government officials by substituting a distributed, transparent ledger instead.²⁵

Other use cases include creating tamper-proof voting records, vehicle registries, fraud-proof government benefits disbursements,²⁶ and digital identities for individuals, such as refugees, who lack government-issued identity documents.²⁷

ENERGY AND RESOURCES

Though industry participants have posited several ideas for applying blockchain in the energy and resources industry,²⁸ thus far there is little concrete happening. One exception is a South African company that integrated bitcoin payments into smart utility metering systems to allow customers to prepay for utilities digitally. This is a boon for unbanked customers and, the developer insists, is easier to administer than cash payments.²⁹

HORIZONTAL APPLICATIONS

A number of horizontal applications for blockchain relevant to almost every industry are on the horizon. Among these applications: smart contracts, automated audit, and improved cyber security.

Many see significant promise in smart contracts—agreements represented as software that can automatically trigger actions under certain conditions, such as when payments are made—or missed.³⁰ A smart contract could cut administrative costs by being “self-enforcing”—for example, making it possible for a driver to start her leased car only if she is current on her lease payments. Longtime blockchain watchers predict that smart contracts are on the way, albeit not to a significant degree in the very near term.³¹

Some see potential for blockchain to dramatically change the role of corporate auditors as well as the conduct of audits. Our colleagues from the Rubix by Deloitte team envision a blockchain solution that would “allow for an automated third-party verification by a distributed network to ensure that transactions are complete and accurate and unalterable.”³²

Blockchain technology may play a role in cyber security as well by enabling the immediate detection of data manipulation and the verification of the integrity of IT systems, thanks to the cryptographic signing used in blockchain systems. At least one firm, Estonia-based Guardtime, is looking to introduce blockchain-based solutions for this purpose.³³

Vendor landscape and investment trends

Venture investors, including corporations’ venture arms, have invested a billion dollars in more than 120 blockchain-related startup companies so far, about half of this investment in the last year alone.³⁴ Most of the startups are based in the United States, but blockchain-related ventures are operating on every continent but Antarctica. Some large companies such as Amazon, Bank of America, IBM, and MasterCard are staking a claim to the blockchain opportunity by filing their own patents related to blockchain.³⁵

The vendor ecosystem can be segmented into three broad categories:³⁶

• Applications and solutions: This segment includes operators of bitcoin wallets and payment providers. Examples include Circle and Coinbase (wallets), Ribbit.me (loyalty points), ShoCard (identity), and Ripple (cross-currency bank-to-bank payments). This segment has attracted nearly $600 million in venture capital funding to date.³⁷
• Middleware and services: Companies in this segment provide software platforms on which enterprises can build blockchain applications; examples of companies in this segment are BlockCypher, Chain Inc., Colu, and Factom. Venture funders have placed about $80 million with this segment.
• Infrastructure and protocols: This segment looks to use blockchain technology to develop cryptographically secure, distributed consensus mechanisms. Ethereum, a crowdfunded, open-source project, has emerged as an alternative to the bitcoin blockchain. Ripple, mentioned above as a solutions company, also offers its own distributed ledger technology. This segment has taken in just under $300 million in venture funding, two-thirds of that in 2015. In contrast to the other segments, 2015 investment in infrastructure and protocols is up sharply compared to 2014.

Prior to 2015, this market focused more on bitcoin itself than on blockchain; the majority of venture investments during this period went to applications and solutions providers, many of which have bitcoin-focused solutions.³⁸ Starting in 2014 and continuing through 2015, we are seeing funding shift toward middleware and infrastructure providers. Analysts at one investment bank commented on this trend in a recent report, writing, “We expect venture capital flows to accelerate in 2016 and lead to further development of the foundational and infrastructure services necessary to create a fertile ‘plug and play’ ecosystem for entrepreneurs and innovation that will ultimately escalate enterprise adoption from a trickle in 2016 to a multi-year boom starting in 2017.”³⁹

What to watch

Blockchain is an extraordinarily fast-moving phenomenon.⁴⁰ While it is impossible to know with certainty how this technology will be adopted across industries, the current areas of interest outlined above give a good indication of where innovation is likely to emerge in the near future. The innovation group at Deloitte LLP will continue to track the emergence of new use cases and adoption by major companies and innovative upstarts.

Where else can we look to sense the direction of blockchain? Venture capital investment is one type of signal, and recent patterns indicate shifting focus in the blockchain ecosystem. As noted above, the focus for investment has moved from currency applications (example: payment processing) in 2014 to non-currency applications (example: smart contracts, securities settlement) by the end of Q3 2015.⁴¹

Another type of signal is innovation that addresses technical challenges that blockchain faces, such as its scalability and transaction processing speed. Researchers at Cornell University, for instance, have proposed enhancements in blockchain design intended to reduce latency, increase throughput, and enhance security. Progress in this domain is likely to expand the technology’s adoption.⁴²

We will be tracking industry alliances, such as the 30 banks participating in the R3 consortium, and adoption by major companies, which will likely result in new applications emerging. We will also track regulatory developments, such as how the legal profession and courts view smart contracts, and whether technical solutions, such as those offered by startup Chainalysis, can smooth the way to regulatory compliance for blockchain-related activities.⁴³

Exploring possibilities

Many leaders in the financial services industry are taking blockchain seriously, and this industry is likely to feel the technology’s impacts first. Industry participants who are not closely following blockchain and exploring applications may want to consider increasing their engagement with the technology and the ecosystem of companies involved in it.

Businesses that deal with costly, slow, or unreliable transactions, or that serve markets with underdeveloped payments systems or large numbers of unbanked customers, have good reason to look closely at blockchain as a useful underlying technology.

As with many new technologies, there is the potential to apply distributed-ledger technology to improve efficiency and effectiveness and cut costs or to increase revenues by creating new products, services, and business models. Given blockchain technology’s broad applicability and transformative potential, corporate strategists may find it worthwhile to explore the range of possibilities available to their business and their sector.

Companies looking at digital technologies as enablers of competitive advantage and disruption innovation—technologies such as social, mobile, analytics, cloud, and cognitive technologies—should not overlook blockchain. It may be a year or more before we begin to see significant commercial applications of the technology taking hold, but it is increasingly likely that over time many industries will feel its impact.