Blockchain, a new era for business
LUZ PARRONDO
UPF Barcelona School of Management
Abstract
Since 2009, blockchain has served as a potentially transformative record technology that
is expected to be as revolutionary as the Internet. Originally developed as a
methodology for registering cryptocurrency transactions, Blockchain's functionality has
evolved into a large number of applications, such as banking, financial markets,
accounting, supply chains, voting systems and government services. This document
aims to explain blockchain technology while providing an initial discussion on how this
innovation could allow a real-time, verifiable and transparent business ecosystem. In
addition, blockchain has the potential to create digital companies through intelligent
contracts that allow automation and democratization of decision making.
Clasificación JEL: O33
KEYWORDS
Blockchain, Distributed Ledger Technology, technology, business
1. Introduction
Blockchain is the underlying technology of Bitcoin, described for the first time by
anonymous author Shatoshi Nakamoto, in the White Paper "Bitcoin: A Peer-to-Peer
Electronic Cash System" (2008). It is a distributed database where each node or user in
the network executes and registers the same transactions by grouping them in the form
of blocks. This distributed ledger not limited to digital currencies, despite becoming
popular when Bitcoin in 2013 experienced a 1000% rise in market value. However,
Blockchain's ability to register peer-to-peer transactions in an efficient, secure,
verifiable, and immutable way can be applied to all type of assets and processes such as
accounting, supply chain, marketing or quality control. It could finally help to solve the
problem of music and video piracy, allowing digital media to be legitimately purchased,
sold and inherited. From a social point of view, it can be used in the transmission of
votes, to certify the ethical origin of a product, the legality of clothing manufacturing
and the donations final destination. They also present opportunities in all types of public
services, such as health and well-being payments and even for document verification in
land titles. All of this in a transparent, safe and independent way without intermediaries
to validate the identity of the parties, the ownership of the assets or the legitimacy of a
transaction.
The 2007 financial crisis destroyed the confidence in the financial intermediaries and
was the trigger for developing a technology capable of shifting the control from banks
to users, limiting the need for the middlemen. This disintermediation could mean
greater transparency and greater democratization of financial, economic and political
systems. However, we must not undermine the power of governments and economic
giants, who are currently investing in this technology to position themselves in the
vanguard of the new era.
The second derivative of this technology however can mean a revolution for business
innovation and financing. The Blockchain has the ability to incorporate on its structure
applications such as smart contracts or distributed applications (DApps1). A smart
contract not only defines the rules and penalties around an agreement in the same way
that a traditional contracts do, but also automatically enforces those obligations. They
trigger payments and agreements automatically, with no need of human intervention,
paving the way for the implementation of Decentralized Autonomous Organizations
(DAO). A DAO is essentially a complex smart contract that engenders digital
organizations deprived of managers or employees, where decisions are made in a
decentralized manner and the actions are executed automatically and transparently.
This article provides an accessible approach for those entrepreneurs who are interested
in learning more about the development of blockchain and its potential impact on
business, economy and society. Section two presents an introduction on how blockchain
technology works. Section three analyzes the impact on the business structure, in areas
such as accounting, auditing, supply chain and financing. In section four, we introduce
the DAOs and finally section five concludes and encourages a debate on this
controversial technology that will continue to skyrocket.
2. How blockchain works
For centuries, organizations have used databases to record transactions and information,
and governments have used them to maintain public records, such as land ownership.
Until now it has always been necessary the presence of a central authority, such as
banks or governmental offices, as guarantors of transactions, as to verify legitimacy of
transactions. To guarantee the same €10 are not spent twice and the seller of a house
stands legal ownership. Presence of intermediaries allow unknown individuals to
exchange assets. The role of these intermediaries is to provide the necessary trust
between the parties and to control accessibility to the information. However, these
centralized and private registers create inefficiencies, opacity and prevail incapable of
deterring fraud and trust crises.
1
A DApp is very similar to a traditional web application. The interface uses the same technology to
render the page. The only fundamental difference is that instead of an API that connects to a database, it
has an intelligent contract that connects to a chain of blocks.
Blockchain ensures the legitimacy of a transaction without the need for a middleman to
verify and identity the parties and their ownership entitlement. This revolutionary
innovation is possible due to a distributed architecture (see figure 1) of the network and
a cryptographic process of validation, called mining that ensures the existence of a
single registration truth throughout the computing nodes.
Source: “Mesh World P2P Simulation Hypothesis” by Eric Grange
Figure 1. Type of systems
Cryptocurrencies, and more specifically Bitcoin, gave birth to Blockchain. Satoshi
Nakamoto, in his Bitcoin paper, defines electronic currency as a chain of digital
signatures. The owner of a cryptocurrency can transfer this asset by adding the hash
digital signature from the previous transaction and the public key of the new owner at
the end of the chain (see Figure 2). The disruptive innovation is the validation process
of consensus. Because transactions are public, participants can ratify the existence of a
universal and single truth. This truth is encoded in a chain of blocks not stored in a
server but distributed in all the nodes of the network. Any node in the system can
request that a transaction be added to the block chain, but transactions are only accepted
if all users validate their legitimacy. This verification process is called mining. Each
“miner” verifies in exchange of monetary reward that the request comes from the
authorized person. They also verify that the transmitter is the owner and that the
currency has not been previously transmitted. This mechanism applies to all types of
assets, and it can be extended to securities, votes, property rights or any type of
documental verification.
Source: “Bitcoin: A Peer-to-Peer Electronic Cash System”, Satoshi Nakamoto, 2008
Figure 2. Type of systems
Once the new block is added to the chain, no user can modify or delete it. The security
of this system is guaranteed by the fact that the information is not centralized in a single
custodian or intermediary, but distributed among all users of the system. "Hacking"
these records implies a simultaneous attack on all the nodes of the system. A 'fake
distributed ledger” is not possible because all users have their own original version of
the transactions.
These distributed ledgers are described as "permissionless” due to the absence of any
legitimized authority to grant verifying, adding or viewing licenses (Pass & Shi).
Despite the obvious controversy of universal access, supporters attribute to this
technology social and political values such as transparency, redistribution of the power
and higher democracy. However, some platforms, such as Hyperledger, have configured
“permissioned” networks, where only a limited group of participants has the ability to
access, verify and add transactions in the chain of records. Detractors of this option
warn that it goes against Nakamoto’s original idea, since it allows intermediaries, such
as banks and governments, to perpetuate control.
How blockchain ecosystems can be classified
Classification of blockchain networks is twofold. First, we classify the networks as
public or private based on the accessibility to data. Public blockchain ecosystems
provide users no restriction to the blocks of information, while in private networks
reading is limited to certain participants. Second, we divide them into permissionless or
permissioned based on their legitimacy to generate and add new blocks to the chain.
The permissionless blockchains enable all participants to generate transactions and to
create new blocks that are validated by some participants in exchange of
cryptocurrencies or digital assets (tokens) native to the network. They are decentralized
open networks and a famous example is the Bitcoin platform. The latter are generally
developed by private entities, frequently for internal use, and participants need the
network administrator’s permissions to interact with the protocol. They are centralized
and controlled by an entity or a group of entities who concentrate the competence to
grant permissions and to verify the process.
Given these possible characteristics, we could divide blockchain into three fundamental
types:
• Public Blockchain: a public Blockchain is a network that anyone can access, can
create blocks and can participate in the consensus or validation process. As we have
already explained, the trusted provider in these public networks is mining, a
combination of economic incentives and cryptographic verification using mechanisms
such as "Work of Proof" (WoP) or "Work of Stake" (WoS), the latter being more
efficient in terms of energy and computational power (Dispenza, Garcia, & Molecke,
2017). These mechanisms are based on the principle that the capability of validation is
proportional to the amount of economic resources they can provide. These block chains
are generally considered "totally decentralized". Bitcoin, Ethereum, Litecoin, Namecoin
are examples of public networks.
• Consortium Blockchain: A Consortium Blockchain is a chain of blocks where the
consensus process is controlled by a set of pre-selected nodes; for example, one could
imagine a consortium of 15 organizations, each of which operates a node and 10 must
sign for the block to be valid. Access may be public or restricted to the participants.
These block chains can be considered "partially decentralized".
• Private Blockchain: a totally private Blockchain is a string of blocks where write
permissions are centralized in an organization. Access permissions can be public or
arbitrarily restricted. Possible applications include administration of databases or
internal auditing, therefore public reading may not be necessary in many cases.
Hyperledger is one of the projects that has given most support to create private cross-
sectional blocks. Hyperledger is made up of dozens of associate members who intend to
develop a common and universal platform for private blockchains. Companies such as
IBM, Intel, Cisco, JP Morgan, Wells Fargo, State Street, the London Stock Exchange
Group or Accenture are part of this conglomerate.
Recent increase of private ecosystems suggest henceforward there will be many public
Blockchains and millions of private Blockchains designed for specific markets. All of
them will vary in protocols using a common blockchain technology. This is comparable
to the universe of operating systems: Android and GNU / Linux share a small part of
their code, the core, however they are considered different operating systems. Their
libraries are different, thusly applications of both systems are developed distinctively
and incompatibly. Similarly, each blockchain will have a different consensus
mechanism, specific intelligent contract2 language and unique characteristics.
Terminology
The terms introduced by this technology are usually three: Blockchain, Distributed
Ledger Technology (DLT) and Bitcoin Technology, for being the impelling force.
Blockchain can refer to both the entire technology and the implementing platforms.
Follow blockchain with the word "technology" is adequate to refer to the technology in
a broad context, as this is a term that is often used in public channels. There is some
controversy whether or not we name 'Blockchain' to private platforms. However, this
use is not limiting, since many banks use the term to refer to their tests and, in general,
it is the commonly adopted by most developers and users.
2
Intelligent contracts are similar to traditional contracts as constitute enforceable agreements, however in
this case the enforcement is automatized. Digital code executes an action if a requirements are fulfilled.
Blockchain technology is a "distributed Ledger Technology". Usually used, however, in
the field of private development far away from Bitcoin3 as cryptocurrency. This term
lacks ambiguity since it is only capable of referring to the underlying technology.
Finally, Bitcoin Technology is the most ambiguous of all the three, it can refer to the
DLT, the underlying technology of Bitcoin or the protocols to development all
cryptocurrencies. We discourage the use of this term.
Cryptocurrencies and tokens
The birth of Bitcoin accelerated the expansion of an ecosystem of digital currencies and
tokens, all of them considered cryptocurrencies even though not all fall within the
formal definition of "currency". A currency represents technically (1) a unit of account,
(2) a reserve of value and (3) a mean of exchange. Because this ecosystem was
originated from Bitcoin currency, all are considered cryptocurrencies although most are
strictly not.
Digital currency is, as the name states, a currency or a means of payment, while a token
incorporates wider functionalities. Although the distinction might appear obvious, in
practice the line between currencies and tokens becomes blur and misleading.
Traditionally the concept of ‘token’ entitles multiple uses, from a coin to a voucher and
even a representation of a feeling. Probably most people relate tokens to some plastic
discs used in private events, such as concerts, in exchange for goods and services. Some
white papers and crypto developers would refer to Bitcoin as a token and inversely
would name a token as cryptocurrency, as they used token as a common noun. As the
cryptographic technology has progressed the distinction has become clearer and now we
can consider the following distinction: (1) cryptocurrencies, including Bitcoin and
Altcoins, as of means of payment and (2) tokens or "crypto-values" which integrate
additional functions.
3
This term is not present in the Nakamoto’s Bitcoin paper.
Most altcoins are a variant of Bitcoin, built using Bitcoin open source with some
changes. However, there are also other platforms that have created their own chain of
blocks and their own protocols generating a native currency. Examples of these
cryptocurrencies include Ethereum, Litecoin, Dash, Ripple, Omni, Nxt, Waves and
Counterparty. Bitcoin mining requires a great computing power, which implies high
costs for the miners are dedicated to this task. The algorithm created for the Litecoin
allows almost any computer system to perform mining, without the need for large
investments in hardware. On the other hand, altcoin Dash increases the anonymity of
those who participate in the network and improves the speed of transactions. One more
difference between the various cryptocurrencies in relation to Bitcoin, in a non-technical
sphere, is that of the purpose of the digital currency. The Ripple altcoin emerged to
serve as an intermediary for all transactions of value units, that is, it is designed to
connect different payment systems. The targeted niche is the currency exchange, which
is a function not integrated in Bitcoin.
Tokens, on the other hand, are an asset or a value that runs on the blockchain network.
In this case, the most frequent platforms are Ethereum or Wave. Tokens can basically
represent any asset that is fungible and negotiable: from participations in business
projects to means of payment. An example of tokens are the Energy Efficiency Coins
(EEcoin). This is a case which, as mentioned above, can lead to confusion. Although the
word "coin" appears in the name, it does not refer to a currency but to a token through
which one can participate in a blockchain ecosystem of renewable energies by voting
and proposing new projects. The owners of tokens have the right to vote, and can trade
with them, but do not have the rights of a shareholder, although it may seem
comparable. The most common function of tokens is to raise funds for specific projects,
something that is closer to ‘crowdfunding’ than to IPOs. Although similarly to IPOs,
some token holders can be rewarded with participation in benefits, or use these tokens
to buy products and services of the organization.
Tokens are generated through a simple process using a templated on the blockchain
provider. This simplicity and the lack of regulations has enhanced the use of this crypto
assets across companies as a source of funding. Companies create and sell these tokens
to fund a project in exchange of future and diversified returns for the buyer. This
process is called "Initial Coin Offering" (ICO) and we extend on it further in the article.
3. Impact on business environment
The future of business development depends on coalescing of productive entities,
digitalization based on new technologies and possibly, democratization of value
creation. Digitization is the basis of the so-called "Intelligent Industry", represented by
the IoT, (Internet of Things), the Machine to Machine (M2M) communication, the
Cloud, Big Data, Machine learning, etc.
Blockchain has emerged to join and complement the existing technological ecosystem.
This chain of blocks provides companies with a new universe of communication tools,
interaction and trust. New industrial applications require an increasing degree of
security and protection of rights and privacy. Proof of existence and traceability gain
importance and relying on temporary records and data integrity can be a crucial
requirement. Therefore Blockchain has the potential to change the way in which the
digitized company approaches the future, with greater security and data quality.
The main advantages of this technology are:
• No intermediation: It is possible the exchange of assets between two parties
without the supervision of third parties, reducing risks considerably.
• Security: Blockchain can resist malicious attacks due to the distributed network
system, thusly information is not concentrated in a central database.
• Transparency: The data under Blockchain are globally available, verifiable and
transmitted in real time.
• User control: Users can control all their transactions and information.
• Immutability: Each transaction is immutable; it cannot be eliminated or
modified.
• Simplification of the accounting system: By adding each transaction to a simple
public accounting, we reduce the complexity of multiple accounting.
• Efficient transactions: Blockchain provides greater security, speed and
efficiency. This productivity reduces overhead costs and unnecessary
intermediary costs by requiring less monitoring and control.
The impact of this technological application cover all the areas of a business from
accounting, to supply chain, innovation, financing and even customer loyalty.
Accounting and auditing
It would not be new that innovation changes accounting and consequently, business
development. In the beginning, accounting was based on single-entry records.
Development of trade proved this system obsolete. Around year 1400 in the north of
Italy a new accounting technique arose, later known as double entry accounting. It was a
great step in the development of modern business and economics. This technological
advance allowed access and monitoring of financial information to any interested party
beyond the owner. It may seem an irrelevant fact, but Werner Sombart, a German
sociologist who died in 1941, argued that the double accounting entry marked the birth
of capitalism. After 500 years without major changes, accounting has become once
again obsolete (The End of Accounting and the Path Forward for Investors and
Managers, 2016).
The accounting profession was expectant for a change and some consider the change
has come hand in hand with this revolutionary technology. If the double entry rescued
the accounting information from the merchant's head, the chain of blocks frees it from
the confines of an organization. By definition, Blockchain is a distributed ledger
technology (DLT). The fact that the digital signature is cryptographic gives the registry
a powerful probative force and in practice eliminates the accounting problem of the
veracity or data. This problem is solved by sharing the records: each of the nodes in the
system has an original copy. Which leads to two pairs of double inputs connected by the
central list of receipts; three tickets for each transaction (Dai & Vasarhelyi, 2017).
Distributed ledger represents a huge challenge for accounting beyond the triple entry
and greater visibility for financial data. The ability of blockchain to record multiple
transactions in real time is incredibly powerful. This power is amplified when intelligent
contracts add to the equation. Intelligent contracts run on top of the blockchain and have
the capability to automate business processes, such as payments and monitoring
systems. For example you could issue a purchase order against that contract, invoices
against that purchase order, payments against those invoices, etc. The issuance of each
document and transaction will be automatically executed if requirements are fulfilled,
tracking any problems that arise along the way. A unique code identifies each purchase
order or invoice in the chain that cluster in a single informative block all the
independent pieces.
A ledger that easily displays a complete chain of transactions not only provides
excellent audit records, but more importantly allows all parties to have real time
updates. Each time the blockchain is updated with a new record, the parties to the
transaction learn the update immediately.
Supply chain
Supply chain is crucial in trade and business. The scale and complexity of these
processes leads to high transaction costs, frequent misalignments and manual errors.
Complete "chains of custody", which prove the origins of each product or material, are
still fragmented in the organizations and are vulnerable to fraud and error, even among
certified companies. Blockchain-based applications have the potential to improve
supply chains by providing infrastructure for registering, certifying and tracking at low
cost the goods transferred between distant parties, which are connected through a supply
chain but do not necessarily trust each other . All products are uniquely identified
through records transferred from their origin to their final destination through
blockchain. Each transaction is verified and marked with time in an encrypted but
transparent process giving visibility to the parties involved as suppliers, carriers or
buyers. The terms of each transaction remain irrevocable and immutable, open to
inspection for all or for authorized auditors. Here also smart contracts could be
implemented to automatically execute payments and other procedures. There are
already companies that are using this technology in their supply chain. Everledger
allows companies and buyers to trace the provenance of diamonds from mines to
jewelries and combat insurance fraud or documentation. The social company
Provenance has developed a real-time data platform that gathers and verifies the origin
of an asset by assigning it a 'digital passport' that can be traced along the entire supply
chain until it arrives at its destination. The giant Wal-Mart is testing Blockchain for
food safety. It is expected that an accurate and updated register based on Blockchain can
help identify the product, the shipment and the supplier, for example when an outbreak
occurs, and in this way obtain details about how and where the food was grown and
who inspected it.
New business opportunities
Many are the companies that see in cryptocurrencies utilities that go beyond the simple
means of payment. Chanticleer Holdings Inc., parent company of several fast food
franchises in the United States (BGR, Little Big Burger and American Burger, Just
Fresh and some Hooters restaurants), will use blockchain technology to implement a
loyalty reward program for their customers. The client would receive native
cryptocurrencies called Merits, which could be exchanged with other customers or used
to consume their products and services. It transforms the traditional reward system
trespassing more control to the consumer.
One drawback of this reward system is its fragmentation and segmentation that leads to
inefficiencies and rigidities. Both cryptocurrencies and traditional loyalty points
represent a debt for companies and therefore increase their liabilities. The solution to
this problem is to replace private loyalty systems with universal systems. Elements coin
is a cryptocurrency based on open source accepted by several organizations and for
universal use. Elements coins can be exchanged for fiduciary money and other digital
currencies reducing the debt of the companies and increasing the control of the users. It
should also be noted that these users will have all the information about their
transactions and the organizations will have the data of their respective interactions with
consumers. The potential of this information in the hands of the platforms is
inexhaustible.
Funding
Companies have exploited the potential of cryptocurrencies beyond means of payment
and financing is onwards profiteering from it. Beyond the euphoria aroused by Bitcoin,
companies perceive this technology more flexible and faster than traditional means to
fund their business projects, especially due to the lack of regulating controls.
The Initial Coin Offering, also known as ICO is a fundraising mechanism in which new
business projects are financed through the sale of cryptographic tokens in exchange for
money or digital currency (Venegas, 2017). The creation of tokens is a simple process
using templates on Blockchain platforms, such as Ethereum, and self-executing
intelligent contracts that do not require any third party to operate. The tokens are created
and distributed to the public through an ICO to finance the development of a specific
project.
ICOs have been compared with two traditional forms of financing: (1) the Initial Public
Offering (IPO) in which investors buy shares from a company, and (2) the
crowdfunding model where, as in the ICO, the financing is linked to a specific project.
In both cases, the differences are significant and related to the lack regulation and
investor protection.
The main difference between the ICO model and IPO is regulatory oversight. In an IPO,
companies must include a legal document stating their purpose, in addition to meeting
certain standards of transparency. Second, a company can only issue the shares if it
meets a series of requirements, such as a minimum profit or a good history. Neither of
these two conditions are necessary in the ICOs. Third, the shares grant ownership over
the future profits of the company, the tokens do not grant ownership over the project to
which they are linked. There are many ways that token owners can get future benefits,
and that depends on how the currency is structured. Some currencies generate value by
having a share in the future income of the projects, while others have the value of their
use within the ecosystem; the greater the use, the greater its value. Finally, the duration
of the offer is longer in the IPOs, and access to investors is limited, while in the ICOs it
is open to anyone. These are important differences that an investor should take into
account before acquiring tokens (ver Crypto ICO vs. Stock IPO: What is the difference?
(2017).
ICOs are more similar to crowdfunding, in fact they may be considered the
crowdfunding 2.0. However their differences are still significant. When a product is
introduced into crowdfunding platforms like Indiegogo, investors and buyers know
exactly what to expect when the project ends. For example, when the Electric
Skateboard-Driven Board or the Pebble Smart Watch started their crowdfunding
campaigns, investors could tell immediately if the product was worth a certain amount
of money by comparing the products with others on the market. On the other hand, it is
practically impossible to predict the outcome of an ICO, especially if users are not fully
aware of what they can expect. The ICOs themselves are not based on any market value
in the real world, which makes it difficult to assess them. The "product" associated with
this crowdfunding 2.0 is the token itself. The good management of the company may
raise the value tokens providing capital gains to its owner in the cryptographic market.
Similarly, poor management can collapse the value of the token to zero. Maliciousness
can also be in place; there is no legal deterrent preventing the company form
disappearing with the funds. Many are those who warn of the dangers of investing in
tokens. Despite these warnings this market is growing exponentially. The reason is
simple: the higher the risk, the higher the profit (and the higher the loss). The simplicity
to generate the tokens as well as the lack of regulation and the high expectations of
investors around a phenomenon highly associated with Bitcoin has also triggered the
issuance of these ICO. Some might describe ICOs as an opportunity to raise an
unjustified and possibly fraudulent amount of capital, while others argue that it is an
innovation in the traditional model of risk financing. Some of these ICOs have been
successful, but others have been fraudulent, or excessively opaque, leading their buyers
to millions of losses (Zetzsche, Ross P. Buckley1, & Föhr, 2017).
The SEC's decision may have provided some clarity about the status of utility versus
security tokens; however, there is still work to be done in the legal field. For now, and
until additional legal limits are imposed, companies will continue to take advantage of
this new phenomenon. In September 2017, China threatened to declare the ICOs illegal.
The People's Bank of China warned that it would strictly punish the new offers and that
it would penalize the legal infractions of the completed ones. The regulator ordered the
companies to return the funds collected, although not specify how the money should be
returned to the investors.
4. New types of Organization: DAO
A DAO is a Decentralized Autonomous Organization. This digital entity’s objective is
to codify the rules and decision-making apparatus of an organization, eliminating the
need for documents and people in governance, creating a structure with decentralized
control. It was originally proposed by Vitalik Buterin in (2014), who would later
become the co-founder of Ethereum. This organization is created with computer code.
An entity that only exists in the blockchain and is controlled directly by the owners
(holders of tokens), with no need for centralized management (Jentzsch, 2017). The
DAO is a complex intelligent contract based on autonomous source code, which
automates all functions within an organization, and its guidelines can only be modified
if a predetermined percentage of the members agree. It promotes community
participation. Token holders entail the decision making power due to the lack of
directors, managers or employees. The DAO purpose is to allow individuals to generate,
propose and decide on business projects democratically.
The operative runs as follows. Code developers write the smart contracts that will run
the organization. There is an initial funding period, in which people add funds to the
DAO by purchasing tokens that represent ownership – this is called a crowdsale, or an
initial coin offering (ICO) – to give it the resources it needs. When the funding period is
over, the DAO begins to operate. Token holders can make proposals to the DAO on
how to spend the money, and the members who have bought in can vote to approve
these proposals. The requirements to participate in a DAO are scarce, we can merely
reduce them to have internet connection. Although some countries, such as the US,
highly protect their investors and token buyers need to comply with certain general
requirements, most countries lack this protection. DAO destitute of directors and
employees, and may not have a specific business objective. Simplicity in decisions,
anonymity, security and cost reduction are the main foundations. Advocates of these
types of organizations claim that they encourage innovation and professionalism by
basing decisions on the value of projects and not on personal interests and power
struggles.
Some examples of DAO are SuperDAO or Solar DAO. SuperDAO project aims to
create disruptive products and services through the virtual cooperation of innovators
without geographic limitations through open source software. Solar DAO on the other
hand is delimited to a specific objective. Operates as an investment fund to build
photovoltaic solar plants selling tokens to users, which can get dividends4 or can trade
with them. Through intelligent contracts payments are made automatically without
revealing the identity of the owner of the token (Solodukha, Solar DAO (White Paper),
2017).
5. Conclusions and debate
Year 2017 undeniably has been the year of cryptocurrencies, especially Bitcoin.
However, many voices claim this euphoria will decline and Blockchain will be the
genuine revolution. Interestingly, many companies have revalued by including some
4
Solar DAO white paper states: ‘Solar DAOtoken ownership will allow users to: 1. Invest in solar plants
worldwide efficiently by circumventing issues related to ownership, audits and selection of contractors 2.
Take part in PV plant construction, starting from as low as $1 3. Own assets (tokens) safely and
anonymously 4. Receive dividends from the investments made and profit from the value increase of
tokens 5. Sell tokens on the exchange market as needed
innovation related to blockchain or cryptocurrencies. For example, Chanticleer shares
soared 50% after the announcement of its blockchain rewards program, and its market
capitalization rose from 8 million to 12 million dollars. Recently, the shares of Long
Island Iced Tea (a manufacturer of iced tea) were revalued more than 500% after having
changed their name to Long Blockchain Corp. Something similar happened to some
companies of Israel dedicated to the mining of precious metals, energy solar, and
tobacco respectively, after having announced its integration into the blockchain
ecosystem.
However, there are reasons to be cautious. The trust between the participants depends
on the confidence in the blockchain technology, but this is not exempt of vulnerabilities,
including accidental errors or malicious attacks to the applications running over the
network (DApp or smart contracts). Advocates of Blockchain enact their inviolability
however no one is exempt from failures. One of the first DAO initiatives was hacked
and 30 million dollars were taken (see https://www.coindesk.com/understanding-dao-
hack-journalists). The DAO launched on 30th April, 2016, with a 28-day funding
window was hacked on June 18th. The hacker managed to drain more than 3.6m ether
into a “child DAO5” that has the same structure as The DAO. The price of ether
dropped from over $20 to under $13. This smart contract breach gave rise to an
ideological debate that fractured the Ethereum community into two parts. On one side
advocated to accept the breach doing nothing to violate the original guidelines of code
immutability ("code is law"). On the other hand, supporters of recovering the ethers
proposed to retract the chain to the block prior to the hack. Although the error was on
the smart contract, not in the blockchain code, the declared inviolability is partly
compromised. Finally, Ethereum’s founders and other developers decided to roll back
the code, incepting to two parallel networks (see Figure 4). Both blockchains still
prevail; the network that preserve the code was named Ethereum Classic (ETC), and the
new chain was simply called Ethereum (ETH).
5
Child DAO is splitted from the parent DAO
Figure 3. Platform split: Ethereum (red) and Ethereum Classic (blue)
Ethereum decision to modify the chain also violates another foundation of blockchain:
the code immutability. While it is not possible for hackers to modify the code since they
cannot access all the nodes simultaneously, it does appear possible for blockchain
platforms.
From a more conceptual approach, those who perceive this technology as a mean to
democratize value creation, limiting intermediation, may be disappointed. A first
attempt to democratize business relations was collaborative economy, unfortunately this
ecosystem is beginning to show signs of failure in its initial objective. Instead of
eliminating or reducing oligopolistic intermediaries, they are being replaced by giants
like Uber, which do not necessarily improve the initial situation. Blockchain has been
proposed as decisive solution to this problem. A system not only decentralized, but
distributed, in which intermediaries are no longer necessary and the rules of the game
are not marked by the arbitrary decision of an interested body. The idea is valid, but
who guarantees that this option will not present the same errors as its predecessor.
Banking sector has been the first objective of this disintermediation plan, initiated since
the financial crisis of 2007-2008. In reaction, this sector is using its own blockchain
technology to perpetuate its dominance in financial transactions. Fintech is the way in
which technology is applied to finance. In August 2017, for example, Barclays, Credit
Suisse, Canadian Imperial Bank of Commerce (CIBC), HSBC, Banco MUFG and State
Street Bank, six of the largest financial institutions in the world, came together to create
a digital currency based on the blockchain technology. Resistance does not only occur
in the financial sector. Platforms like Hyperledger create private chains adapted to the
needs of organizations and not vice versa. Closed networks, with permits and controlled
by a group of participants that do not differ greatly from the current concept of
intermediation.
On the other hand, although Blockchain promises a world in which the intermediaries
we know are not necessary, they may still be possible. Since the inception of the
internet, travel agencies are not necessary; anyone can book flights, hotels and complete
holiday packages needless of these agencies, however agencies still play a role.
Technological peer-to-peer capability does not imply having the knowledge or the time
required to execute transactions. These costs may encourage the use of intermediaries in
spite of not being necessary. Even in the case of eliminating former intermediaries,
these would probably be replaced by new ones. Possible candidates for becoming the
new oligopolistic intermediates are the blockchain platforms, such as Ethereum or
Hyperledger who, as Uber, may not necessarily improve the situation.
As a final reflection, it is worth noticing that despite blockchain's failure to
revolutionize the economy and society, it will have a substantial impact in many areas
and it is necessary to be prepared for the challenges and opportunities presented.
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