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Digital Transformation

How is Blockchain used today to change business?

  • Former Paypal-CEO Bill Harris in 2018 was still of the opinion that “Bitcoin is a scam and will fail” and is no more than gambling, but like other colleagues in the financial industry, he has now revised his opinion and predicts a great future for cryptocurrencies in the financial world.
  • Bitcoin is a waste of energy and consumes more energy than entire countries! This is another statement that can be heard again and again in discussions about the blockchain, but unfortunately, although only applicable to Bitcoin in particular, it is often generalized to the technology of the blockchain as a whole. However, as this technology is currently developing rapidly, there are now countless cryptocurrencies, tokens and other technologies that do not require the energy required for mining Bitcoin and thus circumvent one of the main disadvantages of early blockchain technology.

Statements like these from experts in the financial industry can often be found without reflection in newspaper articles and on websites and unfortunately lead to individuals and companies being very skeptical of the blockchain and the underlying distributed ledger technology. However, this technology, which works in the background of the blockchain, can do much more than just represent a new type of payment:

For example, it is possible to store certain logics in the blockchain, which are automatically executed when predefined conditions are met. These are so-called “smart contracts”. Put simply, smart contracts are a program code in the background of the blockchain that represent a preprogrammed contract and are executed under certain conditions. Since the blockchain is a technology that is based on storing unchangeable information, such a smart contract cannot be adapted by one party during the course of the agreement without informing the other party and seeking their consent. As a result, there is no need for various middlemen such as lawyers, notaries, etc. or even for mutual trust between the two parties for contracts in the blockchain.

The first smart contracts

Even the best-known among the cryptocurrencies, Bitcoin, is fundamentally based on a smart contract, albeit with very limited functionality: It is possible to carry out a transaction between two people without an additional middleman or underlying server, which is then written down on the blockchain and can no longer be changed. A smart contract within the Bitcoin blockchain would look something like this:

If person X wants to transfer a number Y of tokens (“Bitcoin”) to person Z, check whether the desired number of tokens is available in person X’s account. If yes, do the transfer, if no, don’t do it.

This example shows quite clearly that smart contracts are actually just simple blocks of code that represent a digital contract. However, the example mentioned here is nowhere near enough to explain the hype behind blockchain technology. This requires much more developed logics, which only came into play with the help of the Ethereum blockchain.

Smart Contracts under Ethereum

In contrast to Bitcoin, Ethereum is not a crypto currency that can be exchanged purely as a substitute for money, but an open source platform based on the blockchain, on which so-called “decentralized apps” (DApp) can be developed with the help of smart contracts. Ethereum was conceptualized and developed in 2013 (a good 4 years after the development of Bitcoin) by Vitalik Buterin, who at that time wanted to develop the “full potential behind Bitcoin”. To do this, the development of smart contracts had to be expanded and simplified compared to Bitcoin. To achieve this, a programming language called “Solidity” was introduced in 2014 and developed by the Ethereum Foundation, whose aim was to program significantly more sophisticated smart contracts.

After a new smart contract has been developed and tested, it can be stored in the blockchain and treated there like an independent human user. This means that every smart contract and the conditions stored in this contract can be viewed and monitored by all users of the network. In order to use the service of one of these DApps, a separate crypto currency called Ether is used in the Ethereum network. This currency can then be used to buy or pay for the various services behind the contracts.

But what options do you have within the blockchain to use smart contracts and why is this so interesting for companies?

Possible business applications

There are now a large number of smart contracts in various application areas, distributed across various platforms. In addition to Ethereum, other platforms like NEM or the “Neo Smart Economy”, for example, should be mentioned as public platforms, each trying to set different focuses. As one of the largest providers of private blockchains, the Hyperledger project has emerged. This is a collaboration between different projects, which is led by the Linux Foundation and further developed with the help of many other companies. The diversification across different platforms enables a versatile development and implementation of smart contracts in different areas such as supply chain management or decentralized finance (“deFi”).

Here is a small selection of interesting projects from various areas:

Supply Chain Management

  • Diamond tracking via tracr: A big problem in the diamond trade are blood diamonds, i.e. diamonds that are mined under inhumane conditions such as slavery or violence against the workers. With the help of the blockchain, it is possible to track diamonds right from the start across the entire supply chain, thus ensuring that only legally mined diamonds are purchased. For this purpose, the complete delivery route to the customer is written on the blockchain using images of the diamond and a GPS tracker that is enclosed with the diamond and can be traced at any time: https://www.tracr.com/
  • Food industry: Here, too, the blockchain can be used to prevent illegal fishing, for example, by directly attaching a tracker to caught fish. Its path can then be traced from the place of catch via the transport route to the dealer and, if necessary, even the maintenance of the cold chain can be checked: https://opensc.org/

Decentralized finance

  • Lending of crypto assets on the blockchain: With the help of a loan security stored on the blockchain in the form of Ethereum or other crypto assets, loans can be taken out based on Ethereum smart contracts. These can then be used, for example, on the Airbus Heritage Platform as a basis for new DeFi projects. Examples are MakerDAO, Dharma or Compound
  • Blockchains for the generation of derivatives such as futures, forwards or options: This gives the opportunity to bet on or invest in crypto assets, precious metals and other assets, analogous to the financial world. A “stablecoin” is required for this, which replicates the value of conventional currencies such as the euro or USD. With the help of so-called oracles (smart contract-based price tracking protocols), the price of these assets is reproduced on the blockchain and can therefore be traded at any time. An example of such a platform is Synthetix or Kwenta
  • Insurance: In order to insure against the loss of crypto currencies through hacks, for example, some providers are now offering decentralized insurance on the blockchain. In this way, a so-called “discretionary mutual”, i.e. a deposit into a common pool on the blockchain, can be used to build up a security that can be accessed by individual members as required. For example, the “Nexus Mutual” platform offers protection against faulty smart contracts or the loss of private keys

IOTA

Another very interesting approach is being pursued by the IOTA Foundation: In the future, it will be possible to earn cryptocurrencies by sharing data while driving and at the same time relieve traffic. Together with Jaguar and Land Rover, a smart wallet is being installed in the Jaguar F-Pace and Range Rover Velar, which will enable these cars to send and receive data while driving and to carry out microtransactions that can be used to pay for various services . This can come into play, for example, at customs stations on the motorway or within a parking garage. In addition, information on the condition of the route such as road damage or traffic jam information can also be passed on from your own car, for which the driver is then rewarded again by receiving crypto currencies from other participants in the system.

This is only a small excerpt of the possibilities that are already offered by the technology of smart contracts. Since this is still a very young technology, it will probably be a few more years before the real potential of smart contracts can be recognized and their benefits can be fully exploited.

Managing Consultant

Achim Franke is Managing Consultant and working for ifb SE since 2016. His main focus is in accounting for banking and insurance, where he has been implementing SAP FPSL for the last 3 years. Additionally, he is working with the Blockchain and its possible applications for over 4 years.