Beyond Bitcoin: How The Blockchain Could Disrupt Our Financial System

Dan Wellers

If you haven’t been paying attention to Bitcoin because you don’t understand how a digital currency might be relevant to your business, you might want to reconsider.

It’s unlikely that Bitcoin will replace the dollar, pound, Euro, or yen anytime soon (or ever). However, you’re still going to be hearing a lot more about it. That’s not because people are willing to consider it money. What’s most interesting about Bitcoin actually has very little to do with money — and everything to do with its underlying technology, known as the blockchain, which could challenge our assumptions about what makes commerce secure and trustworthy.

In a blog post last year, Nobel-winning economist Paul Krugman dismissed Bitcoin as a fever dream for anti-government partisans. Still, he agreed that “[I]t does indeed solve an interesting information problem — although it’s not at all clear whether solving that problem has any economic value.”

However, leading names in finance say the blockchain is the economic value. They say that blockchain technology could very well transform the world in the next decade. What’s more, they make the provocative claim that anyone who fails to pay attention today risks being caught as flat-footed as those who failed to see the potential of the Internet.

Behind the blockchain

The details are complex and large amounts of computing power and cryptography are required, but The Economist’s simplified explanation covers the basics. Think of the blockchain as a sequential spreadsheet of transactions, constantly updated on a global network of computers, which serves as a distributed ledger. The ledger is encrypted as it’s being written so the transactions it contains can be safely verified by legions of other computers across the network.

Essentially, the blockchain is the long sought-after solution a logic puzzle known as the “Byzantine Generals Problem.” A general in the Byzantine army sends orders via messenger to other generals about whether to attack an enemy. However, every general knows that one or more of them is a traitor.  How can any general be sure that, after receiving an order to attack, the same order was sent to the others and he’s not being ordered to attack on his own? Or that the other generals will faithfully give the correct order to their troops, and not try to undermine the plan? Until now, there’s been no solution that didn’t require introducing a trusted third party who can guarantee to everyone’s satisfaction that an order is authentic.

Similarly, this is why third-party institutions like banks must exist in today’s economy. Banks provide the high levels of trust required to verify financial transactions. They guarantee that parties legitimately have the money they claim to possess, that they follow through on commitments to transfer ownership, and that these transactions cannot be reversed or otherwise subverted.

Why is the blockchain disruptive?

The blockchain removes the need for a trusted third party to guarantee a transaction. By combining distributed architecture with powerful encryption, the blockchain itself coordinates agreement among all the parties in a transaction — and does so in a way that’s highly resistant to interference.

The process is simple, yet sophisticated: The entries in a digital ledger are created and protected with cryptography that becomes increasingly secure the more people participate in it. In the case of Bitcoin, individuals are paid (through mining or small transaction fees) for their work in verifying blockchain transactions. With tens of thousands of individuals verifying every transaction, colluding to subvert things becomes so expensive and difficult that there’s simply no point in trying. Thus, rewards for honest behavior are built into the system, while dishonest behavior isn’t rewarded.

Ironically, this has made Bitcoin and other cryptocurrencies (as the blockchain is called when applied to money) more attractive to criminals. As a recent story in the New York Times points out, cryptocurrency transactions can easily serve as the digital equivalent of the briefcase full of unmarked cash: decentralized, unalterable, and irreversible.

Still, blockchain technology itself is no more inherently criminal than a banknote. Just the opposite, in fact. Because the ownership and provenance of a transaction can be embedded in the blockchain at the earliest stages of the transaction and verified at every subsequent stage, it has direct relevance to any transaction that needs to be secure and verifiable. Examples include:

  • validating the authenticity and accuracy of a broad range of documents: voter IDs, birth certificates, passports, wills, contracts, criminal records, medical records, building permits, health and safety inspections, business licenses, vehicle registrations, and many more
  • establishing and clarifying land rights (Honduras began creating land titles based on blockchain technology in May 2015)
  • enabling trade in stocks and bonds
  • establishing ownership and provenance of all kinds of intellectual property
  • managing ownership of and access to physical items, from homes to vehicles to safe deposit boxes
  • releasing funds in transactions only when certain conditions are met, e.g., when a document is filed appropriately or a third-party consents
  • verifying the chain of custody of sensitive data
  • managing software and hardware licenses
  • protecting patents, copyrights, and trademarks

In an increasingly insecure world with a multiplicity of bad actors eager to interfere with transactions for power and profit, blockchain technology creates a highly tamper-resistant structure that can make almost any kind of transaction secure and verifiable. Despite the controversies, the blockchain model of trust, through massively distributed digital consensus, is a breakthrough that could reshape commerce across the entire digital economy.

Download the Executive Brief: Bitcoin’s Blockchain – A New Model For Trust

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To learn more about how exponential technology will affect business and life, go to Digital Futures.

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About Dan Wellers

Dan Wellers is founder and leader of Digital Futures at SAP, a strategic insights and thought leadership discipline that explores how digital technologies drive exponential change in business and society.

What Is Blockchain?

Claudio Brecht

Blockchain has long been resonating beyond the walls of the software industry. Every day, messages circulate about the development of the Bitcoin price index, while startups are competing to create the next earth-shattering business model based on this technology.

Yet what do we really understand about it?

At the peak of the 2008 financial crisis, an individual or a group of individuals acting under the pseudonym Satoshi Nakamoto sent a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” to a mailing list. It contained a practical solution to a problem that had left virtual currency theorists scratching their heads: the Byzantine General’s Problem.

Creating consensus among decentralized players

The Byzantine General’s Problem originates in an historical legend at the time of Constantinople’s fall to the Ottoman Empire in 1453. The fortified city could only be successfully overrun with help of carefully planned troop movements coming from various directions. To achieve this, the commanding Ottoman generals had to resort to communicating through messengers. However, the decision about the moment of attack was severely hampered by one key detail: As some of the generals wanted discredit their colleagues to the sultan, they purposefully provided false information to instigate a premature attack. From that point on, none of the generals could be sure if the incoming messages were authentic or not.

The crux of the problem was the issue of consensus, deriving from the fact that the individual decision-makers could not trust one another.

Money and the role of the intermediary

The same situation applies to digital transactions of value. How can we reach consensus that a virtual dollar will not be paid out twice? To date, the answer could not have been simpler: by involving an intermediary third party to oversee all transactions; in other words, a bank.

This isn’t always smooth sailing. International payments in the form of SWIFT transfers often take several days to process due to the various parties involved. This increases the transaction costs and makes small one-off payments inconvenient. The option of being able to cancel a transaction also has its pitfalls; to be able to minimize fraud, providers of irreversible services are required to collect more information about their customers than is usually necessary.

Yet for physical value transactions the problem has been largely resolved. Take the following example: If Alice wants to pay Bob a certain sum of money, it is sufficient for her to hand him a counterfeit-proof coin that represents the respective value. It is impossible for Alice to make two separate payments simultaneously using the same coin.

There have been many attempts to convert the principle of physical currency into the digital world, yet with varying degrees of success. Bitcoin was the first to largely meet these demands.

Cryptographic signatures and digital value

To ensure that digital coins can only be spent by their lawful owners, Bitcoin uses public-key cryptography. This involves a private key made up of randomly-generated numbers, which, in turn also derives a public key. Conversely, public keys cannot be used to derive the corresponding private key. A digital signature is generated from the private key and a set of data. The public key enables users to determine that the signature derives from the corresponding private key, without needing to know it.

Bitcoin also uses the cryptographic hash function, which converts large strings of data into fixed-length data values, otherwise known as a hash. A good hash function is characterized by a high level of security and can assign various input quantities using as few of the same hashes as possible.

Compared to an encryption, this process cannot be reversed. When applied to the same input quantity, the hash function always produces the same hash yet it cannot be attributed to the original input quantity. Every change to the input quantity generates a completely different hash. For this reason, hashes are also known as digital fingerprints.

A coin in the Bitcoin system is ultimately a combination of digital signatures. The coin is passed on when the owner (Alice) digitally signs a hash from the previous transaction and the receiver’s (Bob) public key. For Bob to be sure that Alice has not already used her coin in another transaction, all transactions are publicly available.

Mathematical race to reach consensus

Bitcoin achieves this through a peer-to-peer network. A network node compiles various transactions together in a block, generates a hash from them, and releases it with a time stamp. Each block contains the hash from the previous block, thereby forming a chain: the blockchain.

This brings us back to the “Byzantine General’s Problem:” all nodes must agree on which transaction has taken place first and whether another block should be added to the chain. Bitcoin here uses the so called proof of work method. To add an additional block to the chain, the respective computer nodes are required to solve a complex mathematical puzzle. The node that first finds the solution then shares it with all the other nodes. Once the solution has been verified by them, every node adds the block to their copy of the chain. The process then starts all over again.

To comply with the changing total computing power in the network, the difficulty of the puzzle is constantly adapted, so that new blocks are added to the chain approximately every 10 minutes. If two blocks are found simultaneously, the next block found determines which sub-chain will be kept. The longest chain wins.

Since the puzzle must be re-solved for every change to the block, which is also the case for all subsequent blocks, the chain becomes more secure the longer it becomes. To change it, an attacker would have to re-solve the mathematical puzzle for all blocks before being able to add a new block to the chain. The element of trust, which currently exists in the form of a bank, is thereby contained within blockchain’s mathematical logic.

The Internet of value

Blockchain functions as a distributed public journal that records irreversible transactions. Users can quickly and cost-effectively verify and audit their transactions without intermediaries.

Use cases of public blockchain have the potential to completely transform existing markets.

Blockchain technology use cases are by no means restricted to Bitcoin. Blockchain is far more a message about the transmission of value — the “Internet of Value.” The database serves as the ultimate determination of ownership rights. All kinds of assets that can be transformed into digital twins can be included in blockchain: diamonds, buildings, good deliveries – the possibilities are endless.

Whether this innovation is disruptive or incremental depends on the areas of operation. Reaching consensus within or between companies means evolutionary change, while use cases of public blockchains have the potential to completely transform existing markets.

One blockchain use case is Everledger, a startup that produces digital twins for diamonds. These digital twins are calculated from 40 data points and are stored on blockchain, enabling the stone’s ownership to be traced from when it first mined to when it becomes a piece of jewelry. Over 1 million jewels have already been digitally secured — a real success story.

Learn more about how SAP is bringing blockchain to the enterprise.

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Claudio Brecht

About Claudio Brecht

Claudio Brecht is a Communications Specialist at SAP.

Blockchain: Hit Or Miss For Supply Chain?

Richard Howells

Earlier this month I participated in an interesting show on the topic of “Blockchain Technology: A Hit or A Miss for Supply Chain Networks?” with Irfan Khan, CEO and president of Bristlecone.

The discussion was based on blockchain’s ability to drive end-to-end value, eliminate inefficiencies, and improve customer experience. Blockchain – a decentralized, distributed ledger payment system using cryptocurrency – is powering digital transformation for companies around the world.

“It’s difficult to make predictions, especially about the future.”

I set the stage by using this quote that has been attributed to several people, from Nostradamus to Mark Twain (who is attributed almost every quote known to man). It works perfectly for blockchain, which, according to Gartner’s latest Hype Cycle for Supply Chain Execution (July 2017), was rated “transformational” but with a market penetration of “less than 1 percent.” The key is to predict and identify use cases to improve transparency, traceability, and performance and that can benefit from secured transactions.

Where can blockchain benefit supply chain processes?

During our discussions, a few areas of opportunity emerged.

Logistics processes

It has been estimated that 90 percent of global trade is carried out by ocean shipping industry, and the cost of trade-related documents and administration is estimated to represent up to 20 percent of the actual transportation cost. And this process relies on a web of disparate systems across freight forwarders, customer’s brokers, port authorities, ocean carriers, and trucking companies. Imagine if we could digitize the process to collaborate across companies and authorities, reduce the paperwork, streamline cross boarder movements, and reduce fraud and errors. Blockchain has the potential to help enable us to manage and track a “digital twin” of shipping containers across the world.

Track and trace and genealogy processes

In many industries, we are continually pushing for improved traceability by both regulatory bodies, and consumers. For example, in the food and beverage industries, we are seeing an increased demand for local and organic products with a clear proof of origin and sustainability.

Let’s look at the simple coffee bean as an example. This starts literally, at the source, in remote farms in Africa where 70-80 percent of the world’s coffee beans are grown. Imagine if we could have mobile machines that could capture the grade, color, size, and quality the coffee carries at source, and by leveraging AI and machine learning, determine a fair-trade price for the specific lot. This could be transmitted to the buyers who could agree a purchase with the farmer and perform an electronic transfer of funds immediately. Imagine also that the quality information and price paid is tracked throughout the harvesting, logistics, roasting and consumption of those beans all over the world. A consumer could have an app that would tell them where the coffee came from, the journey from farm to cup, and even if the farmer was compensated fairly.

This example is not too far-fetched. Check out what a company called Bext360 is doing as a proof of concept today.

Asset lifecycle management

Many industries have capital-intensive, business-critical assets (think airplanes, mining equipment, trucks, tractors) that are expected to be in use for 10 or even 30 years. Over its lifespan, each asset will go through numerous upgrades, repairs, and refurbishments and may also go through numerous owners. This ensures that all the parts used to perform these activities are of high quality, from reliable, legitimate sources and are critical for end user or passenger safety and security. We can now put IoT-enabled sensors on every part within an asset and track (Big) Data at a level never imagined a few short years ago. Ensuring the traceability and security of this data is critical to ensure the history and provenance of parts, the or the maintenance and repair history of a capital-intensive piece of equipment.

Blockchain, along with other technologies such as IoT, predictive analytics, and machine learning has the potential to manage assets from the design of the product, through manufacturing and throughout its active life and keep a secure, digital twin that can be tracked and analyzed for a complete history of that asset.

Blockchain is a key part of a digital supply chain

Blockchain, although relatively early in its existence, has the potential to help digitize our supply chains. However, as we discussed, it is not a solution by itself. We see several technologies coming together to enable the digital supply chain. The Internet of Things enables smarter and connected products and assets that are generating amazing amounts of data from all areas of the supply chain. This “Big Data” is the catalyst for predictive analytics, and machine learning adds intelligence to this data and drives automation and artificial intelligence through physical devices. Blockchain’s role is to automate transactions, ensure traceability, and address cybersecurity.

For more on blockchain, see Blockchain: Much Ado About Nothing? How Very Wrong!

Article published by Richard Howells. It originally appeared on Huffington Post and has been republished with permission.

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About Richard Howells

Richard Howells is a Vice President at SAP responsible for the positioning, messaging, AR , PR and go-to market activities for the SAP Supply Chain solutions.

Diving Deep Into Digital Experiences

Kai Goerlich

 

Google Cardboard VR goggles cost US$8
By 2019, immersive solutions
will be adopted in 20% of enterprise businesses
By 2025, the market for immersive hardware and software technology could be $182 billion
In 2017, Lowe’s launched
Holoroom How To VR DIY clinics

Link to Sources


From Dipping a Toe to Fully Immersed

The first wave of virtual reality (VR) and augmented reality (AR) is here,

using smartphones, glasses, and goggles to place us in the middle of 360-degree digital environments or overlay digital artifacts on the physical world. Prototypes, pilot projects, and first movers have already emerged:

  • Guiding warehouse pickers, cargo loaders, and truck drivers with AR
  • Overlaying constantly updated blueprints, measurements, and other construction data on building sites in real time with AR
  • Building 3D machine prototypes in VR for virtual testing and maintenance planning
  • Exhibiting new appliances and fixtures in a VR mockup of the customer’s home
  • Teaching medicine with AR tools that overlay diagnostics and instructions on patients’ bodies

A Vast Sea of Possibilities

Immersive technologies leapt forward in spring 2017 with the introduction of three new products:

  • Nvidia’s Project Holodeck, which generates shared photorealistic VR environments
  • A cloud-based platform for industrial AR from Lenovo New Vision AR and Wikitude
  • A workspace and headset from Meta that lets users use their hands to interact with AR artifacts

The Truly Digital Workplace

New immersive experiences won’t simply be new tools for existing tasks. They promise to create entirely new ways of working.

VR avatars that look and sound like their owners will soon be able to meet in realistic virtual meeting spaces without requiring users to leave their desks or even their homes. With enough computing power and a smart-enough AI, we could soon let VR avatars act as our proxies while we’re doing other things—and (theoretically) do it well enough that no one can tell the difference.

We’ll need a way to signal when an avatar is being human driven in real time, when it’s on autopilot, and when it’s owned by a bot.


What Is Immersion?

A completely immersive experience that’s indistinguishable from real life is impossible given the current constraints on power, throughput, and battery life.

To make current digital experiences more convincing, we’ll need interactive sensors in objects and materials, more powerful infrastructure to create realistic images, and smarter interfaces to interpret and interact with data.

When everything around us is intelligent and interactive, every environment could have an AR overlay or VR presence, with use cases ranging from gaming to firefighting.

We could see a backlash touting the superiority of the unmediated physical world—but multisensory immersive experiences that we can navigate in 360-degree space will change what we consider “real.”


Download the executive brief Diving Deep Into Digital Experiences.


Read the full article Swimming in the Immersive Digital Experience.

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Kai Goerlich

About Kai Goerlich

Kai Goerlich is the Chief Futurist at SAP Innovation Center network His specialties include Competitive Intelligence, Market Intelligence, Corporate Foresight, Trends, Futuring and ideation. Share your thoughts with Kai on Twitter @KaiGoe.heif Futu

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Blockchain: Much Ado About Nothing? How Very Wrong!

Juergen Roehricht

Let me start with a quote from McKinsey, that in my view hits the nail right on the head:

“No matter what the context, there’s a strong possibility that blockchain will affect your business. The very big question is when.”

Now, in the industries that I cover in my role as general manager and innovation lead for travel and transportation/cargo, engineering, construction and operations, professional services, and media, I engage with many different digital leaders on a regular basis. We are having visionary conversations about the impact of digital technologies and digital transformation on business models and business processes and the way companies address them. Many topics are at different stages of the hype cycle, but the one that definitely stands out is blockchain as a new enabling technology in the enterprise space.

Just a few weeks ago, a customer said to me: “My board is all about blockchain, but I don’t get what the excitement is about – isn’t this just about Bitcoin and a cryptocurrency?”

I can totally understand his confusion. I’ve been talking to many blockchain experts who know that it will have a big impact on many industries and the related business communities. But even they are uncertain about the where, how, and when, and about the strategy on how to deal with it. The reason is that we often look at it from a technology point of view. This is a common mistake, as the starting point should be the business problem and the business issue or process that you want to solve or create.

In my many interactions with Torsten Zube, vice president and blockchain lead at the SAP Innovation Center Network (ICN) in Potsdam, Germany, he has made it very clear that it’s mandatory to “start by identifying the real business problem and then … figure out how blockchain can add value.” This is the right approach.

What we really need to do is provide guidance for our customers to enable them to bring this into the context of their business in order to understand and define valuable use cases for blockchain. We need to use design thinking or other creative strategies to identify the relevant fields for a particular company. We must work with our customers and review their processes and business models to determine which key blockchain aspects, such as provenance and trust, are crucial elements in their industry. This way, we can identify use cases in which blockchain will benefit their business and make their company more successful.

My highly regarded colleague Ulrich Scholl, who is responsible for externalizing the latest industry innovations, especially blockchain, in our SAP Industries organization, recently said: “These kinds of use cases are often not evident, as blockchain capabilities sometimes provide minor but crucial elements when used in combination with other enabling technologies such as IoT and machine learning.” In one recent and very interesting customer case from the autonomous province of South Tyrol, Italy, blockchain was one of various cloud platform services required to make this scenario happen.

How to identify “blockchainable” processes and business topics (value drivers)

To understand the true value and impact of blockchain, we need to keep in mind that a verified transaction can involve any kind of digital asset such as cryptocurrency, contracts, and records (for instance, assets can be tangible equipment or digital media). While blockchain can be used for many different scenarios, some don’t need blockchain technology because they could be handled by a simple ledger, managed and owned by the company, or have such a large volume of data that a distributed ledger cannot support it. Blockchain would not the right solution for these scenarios.

Here are some common factors that can help identify potential blockchain use cases:

  • Multiparty collaboration: Are many different parties, and not just one, involved in the process or scenario, but one party dominates everything? For example, a company with many parties in the ecosystem that are all connected to it but not in a network or more decentralized structure.
  • Process optimization: Will blockchain massively improve a process that today is performed manually, involves multiple parties, needs to be digitized, and is very cumbersome to manage or be part of?
  • Transparency and auditability: Is it important to offer each party transparency (e.g., on the origin, delivery, geolocation, and hand-overs) and auditable steps? (e.g., How can I be sure that the wine in my bottle really is from Bordeaux?)
  • Risk and fraud minimization: Does it help (or is there a need) to minimize risk and fraud for each party, or at least for most of them in the chain? (e.g., A company might want to know if its goods have suffered any shocks in transit or whether the predefined route was not followed.)

Connecting blockchain with the Internet of Things

This is where blockchain’s value can be increased and automated. Just think about a blockchain that is not just maintained or simply added by a human, but automatically acquires different signals from sensors, such as geolocation, temperature, shock, usage hours, alerts, etc. One that knows when a payment or any kind of money transfer has been made, a delivery has been received or arrived at its destination, or a digital asset has been downloaded from the Internet. The relevant automated actions or signals are then recorded in the distributed ledger/blockchain.

Of course, given the massive amount of data that is created by those sensors, automated signals, and data streams, it is imperative that only the very few pieces of data coming from a signal that are relevant for a specific business process or transaction be stored in a blockchain. By recording non-relevant data in a blockchain, we would soon hit data size and performance issues.

Ideas to ignite thinking in specific industries

  • The digital, “blockchained” physical asset (asset lifecycle management): No matter whether you build, use, or maintain an asset, such as a machine, a piece of equipment, a turbine, or a whole aircraft, a blockchain transaction (genesis block) can be created when the asset is created. The blockchain will contain all the contracts and information for the asset as a whole and its parts. In this scenario, an entry is made in the blockchain every time an asset is: sold; maintained by the producer or owner’s maintenance team; audited by a third-party auditor; has malfunctioning parts; sends or receives information from sensors; meets specific thresholds; has spare parts built in; requires a change to the purpose or the capability of the assets due to age or usage duration; receives (or doesn’t receive) payments; etc.
  • The delivery chain, bill of lading: In today’s world, shipping freight from A to B involves lots of manual steps. For example, a carrier receives a booking from a shipper or forwarder, confirms it, and, before the document cut-off time, receives the shipping instructions describing the content and how the master bill of lading should be created. The carrier creates the original bill of lading and hands it over to the ordering party (the current owner of the cargo). Today, that original paper-based bill of lading is required for the freight (the container) to be picked up at the destination (the port of discharge). Imagine if we could do this as a blockchain transaction and by forwarding a PDF by email. There would be one transaction at the beginning, when the shipping carrier creates the bill of lading. Then there would be look-ups, e.g., by the import and release processing clerk of the shipper at the port of discharge and the new owner of the cargo at the destination. Then another transaction could document that the container had been handed over.

The future

I personally believe in the massive transformative power of blockchain, even though we are just at the very beginning. This transformation will be achieved by looking at larger networks with many participants that all have a nearly equal part in a process. Today, many blockchain ideas still have a more centralistic approach, in which one company has a more prominent role than the (many) others and often is “managing” this blockchain/distributed ledger-supported process/approach.

But think about the delivery scenario today, where goods are shipped from one door or company to another door or company, across many parties in the delivery chain: from the shipper/producer via the third-party logistics service provider and/or freight forwarder; to the companies doing the actual transport, like vessels, trucks, aircraft, trains, cars, ferries, and so on; to the final destination/receiver. And all of this happens across many countries, many borders, many handovers, customs, etc., and involves a lot of paperwork, across all constituents.

“Blockchaining” this will be truly transformational. But it will need all constituents in the process or network to participate, even if they have different interests, and to agree on basic principles and an approach.

As Torsten Zube put it, I am not a “blockchain extremist” nor a denier that believes this is just a hype, but a realist open to embracing a new technology in order to change our processes for our collective benefit.

Turn insight into action, make better decisions, and transform your business. Learn how.

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Juergen Roehricht

About Juergen Roehricht

Juergen Roehricht is General Manager of Services Industries and Innovation Lead of the Middle and Eastern Europe region for SAP. The industries he covers include travel and transportation; professional services; media; and engineering, construction and operations. Besides managing the business in those segments, Juergen is focused on supporting innovation and digital transformation strategies of SAP customers. With more than 20 years of experience in IT, he stays up to date on the leading edge of innovation, pioneering and bringing new technologies to market and providing thought leadership. He has published several articles and books, including Collaborative Business and The Multi-Channel Company.