Blockchain gained international attention with the success of Bitcoin and has been described as the technology with the greatest potential to change our everyday life since the Internet. But what exactly is blockchain and how can companies use it to leverage their business? The case study of this month focuses on the benefits and drawbacks of the blockchain technology and how it might be employed to your company.

 

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What is blockchain and how is it related to Bitcoin?

Blockchain is the cryptographic technology that underlies Bitcoin. Bitcoin is a cryptocurrency, which is characterized by using a decentralized and cross border control system – as opposed to centralized electronic money and central banking systems and networks.

Blockchain has been called one of the most disruptive technologies and OECD has pointed out the importance of blockchain for future research politics!

The most successful blockchain to date is the Bitcoin. The virtual currency Bitcoin differs from traditional currencies in the sense that it is generated by using highly sophisticated math calculations and intense mining as opposed to traditional currency, which is basically printed clean cotton paper, and controlled by the state involving a ton of monetary politics.

Bitcoin as a system - In essence, people download software and provide the Bitcoin-network with hardware. Bitcoins are generated through a “value for money” system; and an extremely intensive mining technology is the foundation. “Miners” use special software to solve math problems and are issued a certain number of Bitcoins in exchange. This provides a smart way to issue the currency and also creates an incentive for more people to mine.

In 2008, the pseudonymized Satoshi Nakamoto created Bitcoin with the purpose of creating a purely peer-to-peer version of electronic cash. To work as cash, Bitcoin had to be able to change hands without being diverted into the wrong account. Furthermore, it had to be incapable of being spent twice by the same person. Because the aim was to create a decentralized system, no trusted third party - such as banks - could be involved. The decentralization was the key to exercise through the use of a blockchain, which replaces the trusted third party.

In short: A blockchain simplified is a database that contains the delivery or payment history of every single document/transaction/Bitcoin in circulation and provides proof of who owns what at any given point in time. The continuously growing lists of records (blocks), which technically are secured by simplified design and a high fault tolerance, are contained and secured and cannot be deleted. The blocks are related and connected in a single line system, containing important transaction data from the previous block.

“Blockchain technology is about eliminating the need for a trusted third party in a situation where a number of parties have to agree on the content of a database. For Bitcoin, this meant eliminating the need for a central banking system that kept track of transactions”, says Jonas Lindstrøm, Security Architect at Alexandra Instituttet and blockchain-expert. “But it is not without cost. The technique is quite complicated, all data is public, and there is a large additional consumption of resources compared to classic, centralized solutions.”

Thus, it can be difficult to determine the cost of implementing blockchain technology, according to Jonas Lindstrøm: "It is unclear to me exactly how extensive the extra cost is. When designing blockchain systems, important questions to consider are how much extra will it cost us compared to a traditional, centralized solution? How difficult is it, and will it be worth it?”

However, private blockchains, of which many companies already see opportunities today, have a smaller consumption of resources, as less mining is necessary. That fact makes it even more exciting to follow the life-line of blockchain development!

 

Interesting facts

In October 2013, the price for a Bitcoin was USD 180, in December 2013 the price for a Bitcoin topped at USD 980 for one Bitcoin. Since then the value of Bitcoins has decreased a bit followed by an increase, and during 2016 the rate has varied between USD 400 and USD 950 per Bitcoin. By ultimo 2017, the value of one single Bitcoin was close to USD 20,000. In late June 2018, the price was roughly USD 6.000. Whatever reason it is surely a tough ride to engage your company pension plan involving Bitcoins!

Anyone, however, can mine Bitcoins by contributing computing power to the network, but mining is not as easy as you would think! Your Lenovo Ultrabook does certainly not cover the capacity needed. To go ahead you need high-power ASIC (application-specific integrated circuits) hardware that can run the mining calculations even faster and more efficiently to have any hope of making money on mining.

A new calculation from Bitcoin analyst Alex de Vries says those mining operations are using a stupendous amount of energy. At current levels, de Vries estimates that Bitcoin mining uses at least 2.6 GW of power per year, and that could grow to as much as 7.7 GW by the end of this year, collectively an astounding half a percent of the entire world’s electricity consumption!

Besides the enormous energy cost, another challenge with the use of blockchain consists in the fact that due to their complexity, blockchain transactions can take longer to process compared to traditional systems. For instance, Bitcoin transactions can take hours to finalize. Others argue that lack of regulatory oversight creates a volatile market environment.

Many people mistakenly believe Bitcoin is an encrypted system, but nothing in Bitcoin is encrypted, so the issue about individual and personal protection is still to be considered.

The above issues are just a few examples, and many more must be addressed and solved for anyone looking at the future value of using blockchain.

Despite the many challenges, Bitcoin has survived so far! And the system and technology, blockchain, is surely here to stay!

 

Blockchain – What could be in it for you and your company?

A blockchain (also known as DLT - Distributed Ledger Technology) is a database distributed between different participants in a way that makes it possible for the participants to maintain it, but not necessarily trust each other. Several, for instance Danish groups and companies, are seriously looking in to the perspectives of using blockchain as a carrier of secured processes and documentation.

Blockchains are not necessarily more effective than other forms of databases, but they are unique in the sense that they can be distributed among participants without the participants having to trust each other or a third party. This entails that blockchain can be used among competitors and/or to create transparency to external parties.

The blockchain technology can provide you an alternative to current practices if you work with partners (or competitors) where trust is required, and the trust is based on a third party or if you would like your handling of data to be transparent to external parties. When using blockchain technology, neither the data nor the registration in the network can be changed, and all parties have access to the same information.

Smart contracts

Like regular computer programmes that can store data, some types of blockchain can store special programmes. These programmes are called “smart contracts” and allow the transfer of digital information/documents/money between one or more parties when certain requirements are fulfilled. The execution of these programs is handled by mechanisms like the ones that control how and when new blocks can be added in the blockchain. The “smart contracts” are protected by the attached blockchain, which makes it impossible to revoke or change them once they are completed.

An area where employment of blockchain can be especially interesting is in general IoT (Internet of Things).

Below are some other examples of areas and business models based on blockchains:

  • The financial industry
  • The shipping industry
  • Fintech (Financial Technology)
  • Traceability systems
  • Voting purposes
  • Processing transactions (as above mentioned)
  • Medical record management
  • Smart grid and green transition
  • Smart contract platforms
  • Identity cards – Universal digital passports
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    Example of private blockchain use: The shipping industry

    With these insights in mind, can blockchain technology prove to be a better alternative to traditional databases? Jonas Lindstrøm concludes:

    ““Some of the best advice I have come across is the following: If it is an option for you to use a traditional database, do it. This is what the people who develop blockchain solutions say. But blockchain technology provides unique opportunities and can be potentially value creating in situations where for some reason it is impossible to find a trusted third party”

    To learn more, we can advise you to look up this easy-to-understand orientation video on YouTube: https://www.youtube.com/watch?v=lD9KAnkZUjU

     

    Dear reader

    The application of technology has advanced our standard of living, boosted every industry, led to the growth of businesses, created more careers, introduced faster modes of transportation, and allowed new ways of communication…

    By bringing the topic into our web announcements this month, we wanted to bring a short teaser to the fantastic topic – blockchain. Which undoubtedly is one of the world’s more significant disruptive technology inventions per se?

    A huge chunk of considerations and modifications must still be made, not the least to the extent you will like to invest in the right technology, methods and time, continuously to bring it in play in your respective groups and companies…

    Again, can you flip a Bitcoin? Yes, for sure, blockchain secure the turns…

    Good hunting and good fun doing it!

    Per Kaalby, Partner

     

    For further information, please contact:

    Per Kaalby, Partner, Flensby & Partners
    +45 24 24 55 79 or This email address is being protected from spambots. You need JavaScript enabled to view it.

    Our Monthly Case Studies:

  • Monthly Case Study - March 2018
  • Monthly Case Study - February 2018
  • Monthly Case Study - January 2018
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    References

    The article is composed of various articles and statements from The Economist, Alexandra Instituttet, Altinget, IDA, and Forbes.