An Overview of Blockchain Technology: Part 2

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An Overview of Blockchain Technology: Part 2

This blog is a two-part series on blockchain, a game-changing distributed ledger technology (DLT). Part 2 focuses on smart contracts and a description of the plethora of innovations and opportunities enabled by blockchain technology in diverse fields of endeavor. (See Part 1 here.)

Blocks in a chain contain a collection of facts. In part one of this overview we focused on facts primarily as data. However, facts composing a block can contain more complex structures or contracts. For example, a fact may be a small executable program or a mini-database with associated actions to perform on its data. In such instances, each node throughout the global network would execute the mini-program or method on the database, when accessing this specific contract within the block. This facilitates the implementation of a composite or smart contract, as part of the distributed consensus enactment of the global network.

SMART CONTRACTS

Smart contracts are powerful, game-changing instruments that enable new methodologies for transactions. Consider the legal contract prevalent in our global society. It requires a middle man (e.g., bank, lawyer, ebay, Amazon) for enforcement or dispute resolution. A smart contract can be viewed as a technology-enforced contract, built upon blockchain technology. It also enables specific, automated actions that provide a service for the participants. Among two or more parties desiring to enter into contract, it facilitates a fast, accurate action (e.g., a transaction) with all the necessary data, dates, etc. included. It is a comprehensive methodology with inherent disintermediation. Furthermore, information is permanently stored and cannot be lost, including the entire history and record of the entity, data, record, etc. The Ethereum project has the most popular blockchain technology that leverages smart contracts.

IEEE Spectrum defines a smart contract as:

“Software-based agreements deployed in systems capable of automatically executing and enforcing the terms of the contracts.”

Smart contracts provide autonomy, trust, backup, safety, speed, savings, accuracy and security. Examples of smart contract uses can range from government and financial services to supply chain and healthcare. Furthermore, 12 game-changing uses include digital identity, records and land title recording.

See this smart contracts infographic.

THE OPPORTUNITY

Figure 1.  Blockchain Use Cases.  (Source:  Let's Talk Payments).

 

Blockchain technology, and the associated smart contracts, has the potential to disrupt operational capabilities in several fields of endeavor. Some of these include financial services, supply chain management, healthcare services, real estate, energy and government services. For example, government pilot projects leveraging blockchain exist in the U.S. state of Illinois, and the city of Dubai in the United Arab Emirates. An energy pilot is under development in Brooklyn, NY. The finance industry has created the R3 consortium to consider opportunities relevant for that industry. Listed below is summary of these projects:

  • Government Services. The Illinois Department of Commerce and Economic Opportunity is looking to develop several pilots based upon smart contracts and blockchain technology. Each project is free to develop its application and associated technology and there is no coordination among the projects. In contrast, Dubai plans to develop one central blockchain that will be leveraged by 25 agencies to develop pilots this year, with the intention rolling out the most successful in 2018.
  • Energy. LO3 Energy is leveraging a TransActive Grid to evaluate the viability of distributed energy generation and consumption locally. The Brooklyn microgrid is based upon the supply and demand for renewable sources and TransActive Grid blockchain technology.
  • Financial Services. R3 is a consortium of over 100 global banks and other financial institutions that has developed Corda, a permissioned (or private) distributed ledger technology (blockchain) specialized for the finance industry. It works to address issues such as government regulation and the need to know your customer (KYC). There is no associated cryptocurrency for Corda.

In addition to these examples, there are a plethora of use cases and projects ongoing or in the works worldwide. Included in Figures 1 and 2 is an overview of many of them.

 

Figure 2. Non-Financial and Financial Use Cases. (Source:  Let's Talk Payments).

SUMMARY

 Leveraging blockchain technology is a factor in the planning and strategies of numerous entities in various fields of endeavor. With smart contracts, distributed consensus, trust, security, and efficiency, it can potentially disrupt many transactional and other processes worldwide, creating $billions+ in new market opportunities. This 2-part series presented an overview of this game-changing technology.

Please see the crowdfunding campaign on iFundWomen.com to support the development of geeRemit, a global remittance mobile app based on blockchain technology.

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An Overview of Blockchain Technology: Part 1

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An Overview of Blockchain Technology: Part 1

This blog is a two-part series on blockchain, a game-changing distributed ledger technology (DLT). Part 1 is an overview of the specifics of blockchain, including a description and example of its implementation. The focus is on the blockchain technology underlying bitcoin. Part 2, to be included in a blog next week, focuses on smart contracts and a description of the plethora of innovations and opportunities enabled by blockchain technology in diverse fields of endeavor.

Blockchain technology is a game-changing, disruptive, distributed ledger technology (DLT) that has the potential to accelerate creativity and catalyze innovation. It can reform and transform the delivery of public and private services in many fields of endeavor, including financial, legal, supply-chain, consumer, business-to-business and others.

 WHAT IS A BLOCKCHAIN

Marmelab defines blockchain as:

"A ledger of facts, replicated across several computers assembled in a peer-to-peer network. Facts can be anything from monetary transactions to content signature. Members of the network are anonymous individuals called nodes. All communication inside the network takes advantage of cryptography to securely identify the sender and the receiver. When a node wants to add a fact to the ledger, a consensus forms in the network to determine where this fact should appear in the ledger; this consensus is called a block."

A blockchain DLT promotes the collaborative creation of digital distributed ledgers with properties and capabilities exceeding paper-based ledgers. It is a new technology-focused method for storing, recording and transferring digital assets.  A blockchain’s distributed ledger asset database can be shared across a global network of multiple sites, geographies and institutions. All participants, or nodes, within the network have their own identical copy of the ledger. Its entry can be updated by one, some or all parties in the network according to rules agreed by all parties, which forms a consensus. Any changes in the ledger is reflected within each node's copy within minutes or seconds, which enhances productivity and efficiency. The accuracy of the information stored in the ledger is maintained using cryptography. This is to facilitate security and a new kind of trust among a group of non-trusted peers, without the existence of a central authority.

There are several key components of a blockchain, including a peer-to-peer network, distributed data storage, computational engines (with memory) and cryptography.  The network is a collection of globally distributed nodes, with associated computational engines and storage. The nodes are used to execute the cryptographic algorithms needed for reaching a consensus, based upon the established rules. The storage contains the distributed ledger or blockchain information.

See this infographic on blockchain technology.

HOW IS A BLOCKCHAIN USED AND IMPLEMENTED?

Consider the example of a modern credit card processing transaction. There are several processing steps from the consumer, merchant, processor and banks. Each step may encounter fees, which collectively may be significant. Now imagine a similar consumer-merchant process with no middle men (e.g., merchant, processor). This then becomes person to person, or peer-to-peer. It is desirable in such circumstances to facilitate a level of trust among peers, who may not know or trust each other, and reach a consensus. This is feasible with modern cryptography.  As a result, a blockchain enables non-trusted peer-to-peer transaction processing with minimal fees and maximum efficiency.

Implementing a peer-to-peer network can be complex. For example, consider the double spend problem. Sarah has $25 which she sends to two (2) individuals; Jerry ($25) and Stephon ($25); however, Sarah only has $25. Who gets the $25? Each potential transaction (e.g., Sarah sending $25 to Jerry and Sarah sending $25 to Stephon) is considered a fact that must be ordered using a methodology that has been agreed to by all global parties or peers. While the two facts are sent out at roughly the same time, they may arrive at their destinations at different times. The first to arrive at the destination, according to the globally agreed to order, gets the $25.

Blockchains are used as the foundation technology for cryptocurrency, as well as other trusted applications. PwC defines cryptocurrency as:

"a medium of exchange, such as the US dollar, but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds"

Several blockchains exist today, many for cryptocurrencies such as bitcoin (the most popular) and ether. Blocks are a method of ordering facts in a network of non-trusted peers. Nodes, which are associated with peers, compete or mine to create the next official block in the chain. These competing nodes, denoted miners, submit their own local block in the competition. (This is synonymous to competitors rolling dice to see who gets the double six, except there are a substantially large number of competitors and the act of "rolling the dice" is each miner executing a complex cryptographic algorithm). A local block contains a collection of facts that are pending. Once a specific miner wins the competition, then it's local block becomes the next official block in the chain, and the pending facts within the block are confirmed.

The process of globally distributed miners reaching consensus on the next block may result in some conflicts. In such cases, reconciliation or resolution of the conflicts is required. This requires consensus. The blockchain network for bitcoin uses the hashcash proof-of-work (PoW) consensus algorithm to achieve distributed consensus.

The bitcoin blockchain uses the double Secure Hash Algorithm (SHA) 256. It creates a 256-bit (32 byte) hash (also called a digest or signature) of the facts, a hash of the previous block's header, and a random number. It executes two iterations of the SHA-256 algorithm. The hash is almost unique, and it is highly unlikely that any two individuals will generate the winning hash.

The winning miner's local block becomes the next block, and is added to the permanent chain of blocks to form or extend the blockchain. In addition, the winning miner gets a fixed amount of cryptocurrency as a reward. (Hence the term miners, as they are mining for cryptocurrency). The miners then repeat this process to find the next block in the chain.

See this infographic on bitcoin mining.

One pays to store facts in a blockchain. Reading facts are free, one just needs to run their own node. (Some nodes are used to simply store the blockchain ledger, while others are used to mine). Adding facts to a block costs a small fee. Mining a block brings in the money of all the fees of the facts included in the block, plus the reward if the miner wins the competition. All payments are made in the actual cryptocurrency; therefore, a blockchain generates its own money.  A 12.5 bitcoin (BTC) reward is granted to the winner for bitcoin, while a 5 ether (ETH) reward is given for the Ethereum network.

OTHER BLOCKCHAIN TECHNOLOGIES

The blockchain network for bitcoin is one of several. Notable others include Ethereum and Hyperledger, open source platforms sponsored by the Ethereum Foundation and Linux Foundation, respectively.

Several blockchain consensus protocols exist, in addition to PoW. The most notable is the Proof-of-Stake (PoS) algorithm, which operates with a finite amount of cryptocurrency created at inception. With PoS, the winner of the next official block in the chain is determined by the fraction of coins one owns in the network. Several validators or stakeholders (as opposed to miners) compete and the validator with the largest amount of cryptocurrency wins.  The Ethereum network, which currently uses PoW, plans to move to PoS in 2018.

Please see the crowdfunding campaign on iFundWomen.com to support the development of geeRemit, a global remittance mobile app based on blockchain technology.

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geeRemit: A Global Remittance Blockchain Mobile App

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geeRemit: A Global Remittance Blockchain Mobile App

SEE geeREMIT VIDEO!

 

Many people in developing countries have difficulty making ends meet. They rely on family members and friends in the west to send money home. Remittance solutions are a vital component of the financial infrastructure and an important source of income for millions of families in the world’s 140 developing countries. The World Bank has projected global remittances to reach $444B this year (see Figure), a 3.3% increase versus 2016.

Furthermore, in sub-Saharan Africa (SSA) and other developing countries, more citizens own mobile devices than bank accounts. The number of unique subscribers is expected to reach 520M by 2020. Mobile is driving innovation and digital and financial inclusion in SSA. For example, mPesa is a popular mobile money solution that is the major source of payments in Kenya. Leveraging such devices in this space is a $16B opportunity. Bringing mobile payments and global remittance together in a cost-effective and secure manner creates a multi-billion dollar opportunity in SSA and hundreds of developing countries worldwide.

Global remittance funds are used by recipients for health care, education, proper nutrition and other critical expenses. However, the typical international money transfer requires significant communication between the sender and receiver. One or both need to calculate exchange rates, synchronize amounts, collect personal details and then ensure the cash has been sent and received. In addition, the cost for sending money home can be expensive. For example, in 2016 the average global cost of sending $200 was 7.45% (or $14.90). SSA had the highest cost at 9.8% or ($19.60). Therefore, global remittance comes with high transfer and other fees, concerns about security and issues for the sender and receiver just getting to the money transfer facility.

 

The traditional remittance solution to developing countries is to leverage the services of Western Union, Moneygram or Ria. However, their services offer the highest fees. Recent partnerships, e.g., Viber and Western Union or WeChat and Western Union, enable mobile apps to play a larger role in this space. While this addresses one side of the logistical issue of reaching an establishment to initiate the money transfer, it does not address this issue for the recipient. Furthermore, money transfer fees are still high.

There are existing blockchain-based alternatives to traditional money transfer methods; e.g., Sentbe, SCI and Paybill. While these options provide some reduction in fees and increased security, they do not address the logistical issues around getting the funds to the recipient. Furthermore, the recipient does not have immediate access to the funds.

geeRemit is a mobile global remittance app that offers reduced cost, world-class security based on a game-changing blockchain technology, and mobile-to-mobile transactions. The initial geeRemit market focus is SSA; a $34B opportunity in a $444B global remittance market (see Figure). This is because SSA, particularly East Africa, is a place where mobile money is an integral part of every-day society. Also, this app offers the consumer an opportunity for the most significant reduction in transaction fees.

In summary, geeRemit offers a low-cost, logistics-free global remittance service. It is based upon blockchain, an exciting, new, secure game-changing technology. A mobile phone is used to send funds home, and the recipient receives it as mobile money directly on their phones. It resolves all location-based logistical issues, as the transactions are done via mobile phones. The money is available in a short time frame, offering the fastest, most economical and convenient service on the market. This is an attractive value proposition for customers. For more information see this geeRemit video.

Please see the crowdfunding campaign on iFundWomen.com to support the development of geeRemit, a global remittance mobile app based on blockchain technology.

Please sign up for the geeRemit News distribution for more information and future service! 

Mobile Money: An Overview

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Mobile Money: An Overview

The rapid adoption rates of mobile devices have been a catalyst for significant transformation in the financial services industry. In sub-Saharan Africa (SSA), and developing countries globally, more citizens own mobile devices than bank accounts. This enables innovative and creative methodologies for providing financial services to the unbanked. Mobile money has shown considerable promise in improving economies by moving cash. It is different from mobile banking, which is more prevalent and familiar to those living in developed countries. Mobile money is essentially a financial account, and associated services, offered by a mobile network operator (MNO), not a bank. In fact, it is separate from a bank from a user’s perspective. One may deposit and withdraw funds from a mobile money account by going to a MNO store. In addition, users may send money to another mobile money user by simply typing in the recipient’s mobile phone number on their phone. Also, many businesses accept mobile money as payment for their services.

M-Pesa, A Case Study

M-Pesa is an example of a mobile money service. It was introduced in April, 2007 in Kenya and became the world’s first broadly successful service. Within 2 years 21% of the Kenyan population and 40% of the adults were using this service[1]. Also during this time frame Safaricom, the country’s largest MNO, was processing $320M per month in person-to-person transfers, equal to 10% of Kenya’s GDP. These transfers increased to 43% of Kenya’s GDP within 6 years[2]. In addition, monthly deposit and withdrawal transactions at m-Pesa stores totaled $650M. Within 2 years Safaricom’s monthly m-Pesa revenue was $7M per month, 8% of the company’s total revenue. Within 3.5 years, over 70% of Kenyan households, and over 50% of the poor, unbanked and rural populations used the service[3].

m-Pesa has economically transformed Kenya, extended financial inclusion for nearly 20M Kenyans, and facilitated the creation of small businesses. The percentage of people living on less than $1.25 a day who use m-Pesa rose from less than 20% in 2008 to 72% by 20112. Businesses are using m-Pesa for payments (e.g., dividends, collecting payments from customers, etc.). For example, 20% of the 1M electric utility company customers pay with M-Pesa3. This enables companies to cut costs and become more efficient. In addition, citizens use m-Pesa to pay bills, purchase mobile phone credits, fund-raise for a variety of purposes (e.g., medical, education, disaster relief) and donate to charities. It also reduces risk. For example, taxi drivers can operate more safely; they do not have to carry large amounts of cash. Additional economic benefits of m-Pesa include increased savings and investment, risk spreading, and insurance[4]. In rural Kenyan households that adopted M-Pesa, incomes increased by 5-30%.

 

A Developing Market

The SSA telecommunications market is the fastest growing globally. The number of unique mobile subscribers in SSA is expected to grow at a compound annual growth rate (CAGR) of 6.2%, 2016-2020 (see infographic from the GSM Association). In addition, the mobile penetration rates will grow from 43% (420M people) in 2016 to 50% (535M people) in 2020. Further, the mobile industry’s contribution to GDP will increase from 7.7% ($110 billion) in 2016 to 8.6% ($142 billion) by 2020[5]. There exists a migration to higher speed networks and smart phones in SSA. Mobile broadband connections will increase from just over 33% of the total in 2016 to 60% by the end of the decade. This is driven by falling device prices. There will be an increase of more than 498 million new smart phone connections by 2020, resulting in an over half-billion device install base. As a result, mobile money will be the foundation for more innovative and creative mobile-app-based services in the future.

[1] Mus, I. and A. Ng’weno, “Three Keys to M-PESA’s Success:  Branding, Channel Management and Pricing”, Bill and Melinda Gates Foundation, March, 2012.

[2] Runde, D., “M-Pesa and the Rise of the Global Money Market”, forbes.com, August 12, 2015.

[3] Alexandre, C., “10 Things You Thought You Knew about M-PESA”, CGAP.com, November 22, 2010.

[4] Jack, W. and T. Suri, “The Economics of M-PESA”, MIT, August, 2010.

[5] M The Mobile Economy:  Sub-Saharan Africa”, GSM Association, 2017.