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Blockchain Supply Chain

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Blockchain: all assets digitized and registered to blockchains; instantaneously transactable on a global basis

Blockchain Supply Chain: all assets exist in digital inventories, tradeable (pledgeable, financeable) and more importantly, findable, in the global digital network economy

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Blockchain Supply Chain

  1. 1. Blockchain Supply Chain Melanie Swan Philosophy, Purdue University melanie@BlockchainStudies.orgOvation 2018 27 July 2018, Plymouth MA USA Slides: http://slideshare.net/LaBlogga
  2. 2. 27 Jul 2018 Blockchain 1 Melanie Swan, Technology Theorist  Philosophy Department, Purdue University, Indiana USA  Top enabling technologies of the 21st century  Blockchain, Deep Learning, and Synthetic Biology  Founder, Institute for Blockchain Studies  Singularity University Instructor; Institute for Ethics and Emerging Technology Affiliate Scholar; EDGE Essayist; FQXi Advisor Traditional Markets Background Economics and Financial Theory Leadership New Economies research group Source: http://www.melanieswan.com, http://blockchainstudies.org https://www.facebook.com/groups/NewEconomies
  3. 3. 27 Jul 2018 Blockchain Blockchain 2 Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491  To inspire us to build this world Disclaimer: no substantial cryptocurrency, ICO, or smart contract ownership or advising
  4. 4. 27 Jul 2018 Blockchain 3 Blockchain Supply Chain thesis Blockchain: all assets digitized and registered to blockchains; instantaneously transactable on a global basis Blockchain Supply Chain: all assets exist in digital inventories, tradeable (pledgeable, financeable) and more importantly, findable, in the global digital network economy
  5. 5. 27 Jul 2018 Blockchain 4 “Better horse” Blockchain’s “New Technology” progression “Horseless carriage” “Car” 3.0 2.0 1.0 New species of technology: Invent new possibilities that did not exist before Better internet: the payments layer the internet never had Applications: Real-time payments and monetary transactions (immediate transfer) Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491 invent new possibilities that did not exist before Basic Advanced Future Internet with value transfer and smart contracts Applications: Financial contracts (mortgage, insurance); legal contracts; government documents; voting Large-scale Collaboration Technology: superseding previous social collaboration technologies: corporations, governments, and open-source communities Applications: automated fleet management, big health data, asynchronous space communication
  6. 6. 27 Jul 2018 Blockchain Collaboration Optimization Problem 5 Source: Coase. (1937). The Nature of the Firm. Penrose (1959). The Theory of the Growth of the Firm. Takagi, S. forthcoming. Does Blockchain Decentralize Everything? In Blockchain Economics (World Scientific)  Organizational Economics  The problem of “the firm” (optimal size at which to organize activity) in the context of the supply chain (how to organize activity in the global supply chain)  What are the right collaboration models in a global supply chain digital network economy with open business models?  The firm (Coase, 1937)  Organization gains scale economies and reduces risk by foregoing opportunism  Individuals gain smoother incomes and benefit from shared decision-making
  7. 7. 27 Jul 2018 Blockchain What drives blockchain adoption by industry?  Two factors leading financial services implementation 6 FinTech, RegTech Supply Chain HealthTech Financial Services No XML for logging health attributes and matching cost-outcome accountability TradeTech Healthcare No XML for widgetsXML for finance: interest, principal, prepayment, ARM/FRM ARM: Adjustable-rate mortgage; FRM: Fixed-rate mortgage 2. Standard Transaction Language High Low 1. Product Fungibility
  8. 8. 27 Jul 2018 Blockchain Supply Chain Everything is a Liquidity Problem 7 Source: Swan. forthcoming. Theory of Blockchain Digital Contracting. In Blockchain Economics (World Scientific) re: Information Costs: Allen et al. (2017). Blockchain TradeTech. APEC Study Centres Consortium Conference, May 2018  Buyers-Sellers  Deep learning matches Purchasers-Suppliers  Goods more fungible than requirements-features find  Deep learning pattern recognition system  Lack of trustworthy product Information  Attribute information: quality, characteristics, provenance, and chain of custody is blockchain-modulated for all goods  Lack of global digital contracting structures  Digital product inventories, blockchain-based credit histories, vendor payment channels, always-on trade finance network  Fundamental level of organization: item not invoice
  9. 9. 27 Jul 2018 Blockchain 8 1. Blockchain-registered digitized assets  Ownership confirmed, ready for transfer, instantaneous global transactability, pre-validated digitally-registered assets 2. Financing Implications  Digital assets can be pledged as collateral in on-demand financing with any party (without having to form a vendor- supplier relationship) in enterprise payment channels  Invoice factoring, inventory, sales order, purchase order 3. Business Process Implications  Automated business logic via smart contracts  Shared business processes in enterprise blockchain networks  Shared record-keeping in an era of digital ledgers  Integrated ledgers (accounting and legal processes) Procurement Blockchain Sources: http://www.europeanfinancialreview.com/?p=21755, http://timreview.ca/article/1109
  10. 10. 27 Jul 2018 Blockchain In the Digital Network Economy… 9 Source: Swan. forthcoming. Theory of Blockchain Digital Contracting. In Blockchain Economics (World Scientific) re: Information Costs: Allen et al. (2017). Blockchain TradeTech. APEC Study Centres Consortium Conference, May 2018  The firm becomes an ecology  Developer community, AppStore revenue sharing model  User community (new product/feature demand development)  The supply chain becomes a real-time global market  Blockchain provides the new economic infrastructure  Digital assets registered to blockchains (real-time transactable)  New forms of contracting & financing (automated invoice factoring)  Single shared business processes, integrated record-keeping  Information: trusted attribute information about the quality, characteristics, provenance, and chain of custody of goods
  11. 11. 27 Jul 2018 Blockchain objectives. 10 1. what is blockchain. 2. technical overview. 3. business use cases. 4. implications for procurement.
  12. 12. 27 Jul 2018 Blockchain basics. 11
  13. 13. 27 Jul 2018 Blockchain internet content. 12 information. email. voice. video. money.
  14. 14. 27 Jul 2018 Blockchain 13 Conceptual Definition: Blockchain is a software protocol; just as SMTP is a protocol for sending email, blockchain is a protocol for sending money Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491 What is Blockchain/Distributed Ledger Tech?
  15. 15. 27 Jul 2018 Blockchain Blockchain Technology: What is it? 14  Blockchain technology is the secure distributed ledger software that underlies cryptocurrencies like Bitcoin  “Internet of Money” leapfrog technology; Skype is an app allowing phone calls via Internet without POTS; Bitcoin is an app allowing money transfer via Internet without banks; ‘decentralized Paypal’ Internet (decentralized network) Blockchain Bitcoin Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491 Application Layer Protocol Layer Infrastructure Layer SMTP Email VoIP Phone calls OSI Protocol Stack:
  16. 16. 27 Jul 2018 Blockchain Adoption 15 Source: http://www.digital-marketing-course.org/growth-of-global-internet-users/, https://wearesocial-net.s3.amazonaws.com/uk/wp- content/uploads/sites/2/2017/01/Slide007.png  Information Internet  20-40 years (50% online, killer app: corporate email)  Money Internet  Early stages (2050-2075); could be longer due to sensitivity of assets and money; shorter due to in-place network infrastructure  More profound impact: computationally-based society has less need for traditional brick-and-mortar institutional footprint Growth in Global Internet users 1995-2015
  17. 17. 27 Jul 2018 Blockchain novel features. 16 general-purpose technology that is simultaneously transparent and private.
  18. 18. 27 Jul 2018 Blockchain blockchain. 17 software. secure cryptographic transfer. internet.
  19. 19. 27 Jul 2018 Blockchain killer apps. 18 secure transfer of value, of… money & securities. property. contracts. identity credentials.
  20. 20. 27 Jul 2018 Blockchain 19 public chains. private chains. trustless. mined. p2p software. trusted. not-mined. enterprise software.
  21. 21. 27 Jul 2018 Blockchain How does Bitcoin work? Use eWallet app to submit transaction 20 Source: https://www.youtube.com/watch?v=t5JGQXCTe3c Scan recipient’s address and submit transaction $ appears in recipient’s eWallet Wallet has keys not money Creates PKI Signature address pairs A new PKI signature for each transaction
  22. 22. 27 Jul 2018 Blockchain P2P network confirms & records transaction 21 Source: https://www.youtube.com/watch?v=t5JGQXCTe3c Transaction computationally confirmed Ledger account balances updated Peer nodes maintain distributed ledger Transactions submitted to a pool and miners assemble new batch (block) of transactions each 10 min Each block includes a cryptographic hash of the last block, chaining the blocks, hence “Blockchain”
  23. 23. 27 Jul 2018 Blockchain consensus algorithms. 22 mining and
  24. 24. 27 Jul 2018 Blockchain consensus algorithms. 23  Heart of blockchain systems  Blockchain is automated software, no central authority  Need a way for distributed peer-to-peer nodes in the network to agree about updates to the ledger per executed transactions  Public blockchains are trustless  Transactions are executed using “cryptographic proof instead of trust” (Nakamoto, 2008)
  25. 25. 27 Jul 2018 Blockchain consensus algorithms. 24  Public Blockchains  POW: Proof of Work (Bitcoin)  POS: Proof of Stake (Nxt, Qtum, Reddcoin)  Next-gen (scale to Visa-class processing): Practical Byzantine Fault Tolerance (PBFT) (DFINITY, Algorand)  Private blockchains  Enterprise consensus algorithms Source: dos Santos, forthcoming, Consensus Algorithms: A Matter of Complexity?, in Blockchain Economics (World Scientific)
  26. 26. 27 Jul 2018 Blockchain consensus algorithms. 25  Enterprise Blockchains Source: dos Santos, forthcoming, Consensus Algorithms: A Matter of Complexity?, in Blockchain Economics (World Scientific)
  27. 27. 27 Jul 2018 Blockchain What is Bitcoin mining? 26  Mining is the accounting function to record transactions, fee-based ($103,000/block)  Mining clients (ASICs) “find new blocks”  Mining software constantly makes nonce guesses per specified cryptographic parameters  At the rate of 2^32 (4 billion) hashes (guesses)/second  One machine at random guesses a solution  Winning machine confirms and records the transactions, and collects the rewards  All nodes confirm the transactions and append the new block to their copy of the distributed ledger  “Wasteful” effort deters malicious players Sample code: Run the software yourself: Fast because ASICs represent the hashing algorithm as hardware
  28. 28. 27 Jul 2018 Blockchain bitcoin mining. 27 Proof of Work: secure but expensive.
  29. 29. 27 Jul 2018 Blockchain How changes to the Software are made  Blockchain is automated software  No centralized authority  Open source software community like Linux  Developers propose changes  BIP (Bitcoin Improvement Proposals)  BIP-0199, https://github.com/bitcoin/bips  Voting process among 5 constituencies  Developers, miners, exchanges, wallets, merchants  Watch support for initiatives in real-time online 28 Segregated Witness: move non-critical “witness” data off the blockchain; BIP: Bitcoin Improvement Proposal Source: http://www.coindesk.com/data/bitcoin-number-transactions-per-block (https://coin.dance/blocks)
  30. 30. 27 Jul 2018 Blockchain hype vs value-creation. 29
  31. 31. 27 Jul 2018 Blockchain 30 $2.1 billion 2018 global blockchain spend (IDC). ($9.2 billion in 2021) $3.86 trillion IT spend 2018 (Gartner) (digital transformation, blockchain, IoT, ML, and AI) 57% global corporations (Juniper). $325 billion USD asset class. 1551 cryptocurrencies. 1722 token projects. Sources: https://www.cnbc.com/2017/07/31/blockchain-technology-considered-by-57-percent-of-big-corporations-study.html, https://coinmarketcap.com/all/views/all/, https://www.stateofthedapps.com/, https://www.blockchaintechnology-news.com/2018/01/26/idc-global-blockchain-hit-9-2-billion-2021/
  32. 32. 27 Jul 2018 Blockchain 31 Source: http://futurememes.blogspot.com/2016/10/blockchain-fintech-programmable-risk.html Stock Transaction Real Estate Purchase/Sale Health Insurance Billing 2. Steps that can be automated with blockchain 1. Steps with human decision-making Energy Contract International Trade Shipment  Business process reengineering  Any complex transaction has two kinds of activities  Usability: Apple-type design for user experience Blockchain Automation Economy
  33. 33. 27 Jul 2018 Blockchain When to use Blockchain Technology 32  Blockchain is enterprise software  Solid business use case  How does a decentralized solution improve over a centralized one?  Ideal use case:  Many parties in the value chain  Intensity of information and monetary exchange Use Case Example: Factom: Health insurance claims billing (overlay to Bitcoin blockchain) • Automated claims billing, validation, payment, and settlement • Multi-party value chain: patient, service provider, billing agent, insurance company, payor, government, collections
  34. 34. 27 Jul 2018 Blockchain When to use Blockchain Technology 33  Do multiple parties need access to the same data?  Do multiple parties need to write to the data store?  Do all parties need assurance that the data is valid and has not been tampered with?  Do you rely on a costly intermediary or a complex, unreliable process to reconcile the transactions of multiple parties?  Available solutions  What are the available solutions?  Is there no system available today that meets the requirement?  Are there good reasons not to have a centralized system? Source: https://www.basware.com/en-us/blog/september-2017/blockchain-whats-myth-whats-reality
  35. 35. 27 Jul 2018 Blockchain Blockchain: Middleware in Enterprise IT Stack 34  Cloud solutions like docker containers  Azure, Ariba, Basware  Interface to web/CRM and ERP/GL/AR/AP  Interface to data analytics  Machine learning for real-time fraud detection Source: https://www.computerworld.com/article/3084674/cloud-computing/with-microsofts-project-bletchley-companies-can-add- middleware-to-blockchains.html
  36. 36. 27 Jul 2018 Blockchain sample apps. 35
  37. 37. 27 Jul 2018 Blockchain 36 Source: http://www.amazon.com/Bitcoin-Blueprint-New-World-Currency/dp/1491920491 Blockchain: Fintech and beyond AssetsImmediate cash transfer Applications Payments Money Remittance Financial instruments Unified ledger Mortgages, loans Titling: house, auto Inventory Commercial trade Payments Financial Services Logistics & Supply Chain Energy, IoT Healthcare Government Humanitarian Non-profit Industry adoption Time Complexity Stocks, bonds Goods transfer Assurance, provenance Identity Driver’s License Passport, Visa Contracts Registries Marriage licenses Public Documents Birth/death registries BoL, Forfeiting Insurance Cash Smart Assets Smart Contracts
  38. 38. 27 Jul 2018 Blockchain 37  Secure information exchange  Asset confirmation and transfer  Automated coordination  Example: fleet management of drones, autonomous driving, robotics, clinical trial patients, cellular therapeutics  Blockchain: automated, secure coordination system with remuneration and tracking Key Blockchain Functionality Source: Swan, M. Philosophy of Social Robotics: Abundance Economics. Sociorobotics, 2016. http://www.melanieswan.com/documents/SocialRobotics.pdf.
  39. 39. 27 Jul 2018 Blockchain change. 38 Source: https://www.coindesk.com/bankers-tout-trade-finance-sweet-spot-blockchain/ “We expect to see a reduction of 70 percent to 80 percent in costs on supply chain management by using blockchain.“ - Amit Varma, CTO, Citibank, June 2018 Blockchain Summit, London, June 2018
  40. 40. 27 Jul 2018 Blockchain 39 financial services. quantified risk: 2.5 yr payback (securities clearing 3-days to 2-days).
  41. 41. 27 Jul 2018 Blockchain 40 food safety. chain of custody.
  42. 42. 27 Jul 2018 Blockchain 41 vaccine and cold storage tracking.  Standard blockchain-registered IoT attributes  Temperature, pressure, geo-location, custody
  43. 43. 27 Jul 2018 Blockchain 42  Traceability system for materials and products bringing verified information from supply chain to the point of sale  Used by 200 suppliers  Using IoT, mobile, and blockchain  Example  Smart tags used to track fish caught by fishermen with verified social sustainability claims Source: Provenance (NL) sustainability.
  44. 44. 27 Jul 2018 Blockchain 43  Concept: global inventories of high-value items: jewels, controlled substances  Mechanism: registered with digital certificate  Diamond supply chain projects:  Everledger (2015)  Records and tracks the immutable provenance of an asset with blockchain, IoT, smart contracts  TrustChain Initiative (2018)  IBM, precious metals refiner Asahi Refining, jewelry retailer Helzberg Diamonds, precious metals supplier LeachGarner, jewelry manufacturer The Richline Group, and independent verification service UL Source: https://diamonds.everledger.io/; https://cointelegraph.com/news/ibm-and-jewelry-industry-leaders-to-use-blockchain-to- trace-origin-of-diamonds high-value tracking.
  45. 45. 27 Jul 2018 Blockchain 44 birth registry, QR code resumes. MIT Digital Certificates (diplomas); Criminal Records
  46. 46. 27 Jul 2018 Blockchain Global Trade: Maersk  15.8% of the world's global shipping fleet traffic ($236bn value, 628 ships)  On average, 30 people/organizations involved in the shipment of a product using a shipping container  Over 200 separate interactions, each requiring a new set of documents  Pilot project (Hyperledger) for blockchain-based supply chain management  Relocating empty containers to available nearby ships 45 Source: https://www.coindesk.com/worlds-largest-shipping-company-tracking-cargo-blockchain/
  47. 47. 27 Jul 2018 Blockchain 46 anti-counterfeiting.
  48. 48. 27 Jul 2018 Blockchain 47 blockchain-streamlined supply chain.  Single shared business logic in blockchain cloud  Credentials and private views (regulators) issued to multiple parties in the value chain
  49. 49. 27 Jul 2018 Blockchain 48 enterprise blockchains.  General  IBM Hyperledger Fabric  Ethereum Private Network  R3 Corda (HPC)  Symbiont  Supply Chain  IBM Hyperledger Fabric  Ethereum Private Network  SKUChain (POPcodes)  Provenance (sourcing, custody)  Sweetbridge (collateralization) HPC: HP high-performance computing
  50. 50. 27 Jul 2018 Blockchain 49 enterprise platform comparison. Source: https://medium.com/@philippsandner/comparison-of-ethereum-hyperledger-fabric-and-corda-21c1bb9442f6, https://www.accenture.com/t20171116T081243Z__w__/sg-en/_acnmedia/PDF-66/Accenture-Project-Ubin-Phase-2.pdf
  51. 51. 27 Jul 2018 Blockchain 50 blockchains in space. Jan. 13, 2018 - NASA has awarded a grant to the University of Akron for research into data analysis and other topics related to space exploration. The allocation will help a team led by associate professor Jin Wei to pioneer a resilient networking system based in part on the Ethereum blockchain.
  52. 52. 27 Jul 2018 Blockchain blockchain economics. 51
  53. 53. 27 Jul 2018 Blockchain Blockchain Economics 52 Source: Swan, M. Forthcoming. Blockchain Economics Networks. Palgrave Macmillan.
  54. 54. 27 Jul 2018 Blockchain Blockchain Economics  New economic model’s distinguishing aspects 1. Open platform business model  vs. proprietary platform (GOOG, FB, NFLX) 2. Initial Coin Offerings as a novel and official financing method for projects 3. Token-based money supply 53 Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan. Two-way network effects (Metcalfe’s Law (n2 ))
  55. 55. 27 Jul 2018 Blockchain 54 participation. earn money. access resources. vote on decisions. tokens = “money +”. functions of money. store of value. medium of exchange. unit of account. +
  56. 56. 27 Jul 2018 Blockchain participation. 55 information internet: static information social internet: engage with content token internet: participate in the community economy
  57. 57. 27 Jul 2018 Blockchain Evolution of Financing Models Supply Chain becomes Demand Chain 56 1. IPO 2. Crowdfunding 3. ICO Equity ownership Product Token & Platform  ICO: fundraising method, more liquid than equity  Conceived as project finance / capital-budgeting solution  Future: securitized customer demand (from social networks) Source: Blockchain Consumer Apps: https://cryptoinsider.21mil.com/blockchain-consumer-apps-next-generation-social-networks- aka-strategic-advice-facebook/; Doc Searls, personal Vendor RFPs; Casey Financing Model Pre-sell access to: 4. Securitized Demand Product Development Future
  58. 58. 27 Jul 2018 Blockchain 57 internet money. enterprise software. economic collaboration infrastructure. blockchain.
  59. 59. 27 Jul 2018 Blockchain 58 Source: http://www.europeanfinancialreview.com/?p=21755 financing.
  60. 60. 27 Jul 2018 Blockchain 59 net settlement. payment channels. digital credit systems. Source: http://timreview.ca/article/1109 rethink financing.
  61. 61. 27 Jul 2018 Blockchain Payment Channels: the concept 60  Contractually-obligated relationship  3-step economic contract executed over time 1. Party A opens a payment channel with Party B and posts a pre-paid escrow balance, Party B signs a full refund 2. Party A consumes against the escrow credit over the given time period (activity is tracked) 3. At the end of the period, cumulative activity is booked in one net transaction to close the contract  Lightning Network - Bitcoin  Raiden - Ethereum Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels
  62. 62. 27 Jul 2018 Blockchain 1. Unilateral Payment Channel 61 Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling Opening Transaction: Broadcast to Network Interim Transactions: Signed between Wallets (both parties agree and are obligated; not Broadcast to Network) USD $50 Alice opens $50 “Monthly Payment Channel” with Starbucks Closing Transaction: Broadcast to Network Alice consumes coffee and Starbucks adjusts the refund balance from the initial deposit USD $5 4/1/18 4/30/18 1 2 Close “Monthly Payment Channel”: Starbucks broadcasts last refund amount to network Starbucks Coffee USD $50 USD $45 Starbucks acknowledges with unbroadcast refund of $50 4/2/18 USD $5 3 4/3/18 USD $5 4 4/4/18 USD $40 USD $35 USD $35 30
  63. 63. 27 Jul 2018 Blockchain 2. Bilateral Payment Channel 62 Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling SBUX Balance Sheet Assets Cash $1.2bn Liabilities Stored Value Cards $1.2bn Opening Transaction: Broadcast to Network Interim Transactions: Signed between Wallets (not Broadcast to Network) 1 BTC Open “Monthly Expense” payment channel: create a new address, each fund with 1 BTC Closing Transaction: Broadcast to Network 1 BTC Each pays for expenses from the shared address during the month 1.2 BTC 0.8 BTC 4/1/18 4/30/18 1 2 3 Close “Monthly Expense” payment channel: net settle the balance returned to each Roommate Expense Sharing
  64. 64. 27 Jul 2018 Blockchain 3. Community Payment Channel 63 Source: https://solarpowerrocks.com/solar-basics/how-much-electricity-does-a-solar-panel-produce Opening Transaction: Broadcast to Network Interim Transactions: Daily production and consumption measured as signed transactions between Wallets A, B, C, D ante up monthly dues to the address to open this month’s “Community Payment Channel” Closing Transaction: Broadcast to Network Energy Produced 4/1/18 4/30/18 2 Close this month’s “Community Payment Channel” with net amount returned to A, B, C, D 0.8 kWh CSC: Community Solar Coin Token: ante-up expenses, vote, governance re: how price per kWh, smart contract lookups to pricing oracle; additional capital calls during the month if necessary 4/2/18 4/3/183 Etc. 30 Sustainable Energy Production 1 CSC 1 CSCA B C D 1 CSC 1 CSC Energy Consumed 1.2 kWhA A Energy Produced 1.1 kWh Energy Consumed 0.6 kWhB B Energy Produced 1.3 kWh Energy Consumed 0.7 kWhC C Energy Produced 1.0 kWh Energy Consumed 1.1 kWhD D 1 A B C D 1 CSC 0.8 CSC 1.2 CSC1.1 CSC
  65. 65. 27 Jul 2018 Blockchain Transactive Grid, President St, Brooklyn NY  Decentralized DIY energy markets  Blockchain-based microgrid  Community:  Five net-producing homes generating energy through solar power  Five net-consuming homes interested in buying excess energy from neighbors  Benefits: no billing components, no infrastructure losses, no accounting losses in the system  Ability for producers to sell or donate excess 64 Source: https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york
  66. 66. 27 Jul 2018 Blockchain 65 risk.
  67. 67. 27 Jul 2018 Blockchain reduce risk. 66 blockchain-registered digital assets. instantaneous transactability. real-time balance sheets. shared business processes. single ledger. Sources: http://www.europeanfinancialreview.com/?p=21755, http://timreview.ca/article/1109
  68. 68. 27 Jul 2018 Blockchain Programmable Risk Black Swan Smart Contracts  Insurance automatically priced into smart contracts via big data  User-selected High-Medium-Low programmable risk dropdown feature of smart contracts  Financial options (put/call) used to control/manufacture exposure  Convexity (Fig. 1): control down-side risk, upside gain, anti-fragile (robust)  Concavity: undesirable risk profile  Taleb: map event probabilities as s-curve (Fig. 2) in medicine, etc.  Convex-linear-concave profile 67 Sources: Swan, M. Submitted. Programmable Risk: Black Swan Smart Contracts, IEEE; Taleb, Medicine: https://arxiv.org/ftp/arxiv/papers/1208/1208.1189.pdf Figure 1 Figure 2
  69. 69. 27 Jul 2018 Blockchain smart contracts. 68 Launched: Nov 2017 500,000 sold, total: USD$40 million Source: http://fortune.com/2018/02/13/cryptokitties-ethereum-ios-launch-china-ether cryptokitties.
  70. 70. 27 Jul 2018 Blockchain inclusion. 69 banking & credit. land registry. identity. electricity. vaccines & medicine. Source: https://www.unicef.org.au/blog/unicef-in-action/april-2017/photos-vaccines-reach-most-remote-places-earth Digital health wallet
  71. 71. 27 Jul 2018 Blockchain 70 regulation and competitive advantage.
  72. 72. 27 Jul 2018 Blockchain government as service provider. 71 old model. eResidency. eBusiness services. Exclusivity: One default economic and political sovereign birth regime. new model. Source: https://www.consultancy.eu/news/933/estonia-has-35000-e-residents-most-are-finnish-russian-and-Ukrainian, https://blog.leapin.eu/e-residency-all-the-numbers-you-wanted-to-know-statistics-9ccc1bee75 Plurality: Entering a world of plurality in economic and political systems >35,000 Estonia e-Residents (May 2018)
  73. 73. 27 Jul 2018 Blockchain 72 risks.
  74. 74. 27 Jul 2018 Blockchain risks. tech: scalability. political: regulation. social: adoption and collusion. Rapid Adoption Unfavorable Regulation Favorable Regulation Slow Adoption Future Scenarios 73 near-term
  75. 75. 27 Jul 2018 Blockchain risks. tech: advance. 74 longer-term  Blockchain (blockchain deep learning smart networks) is the vanguard of computing  Could define next- generation computing architectures, quantum (expensive error-correction) or otherwise  “End of Moore’s law” not a worry due to new architectures, lithography techniques
  76. 76. 27 Jul 2018 Blockchain implications for procurement. 75
  77. 77. 27 Jul 2018 Blockchain 76  Bitcoin Blockchain  Real-time payments  Ethereum  Smart contracts, DApp platform (distributed applications)  Ripple  Real-time cross-border bank transfer and live credit network  Factom (overlay to Bitcoin blockchain)  Health insurance claims billing  Clinical Trials blockchain  Smart contract consent, privacy, data interop, off-chain EMR Industry-specific Blockchains EMR: Electronic Medical Record
  78. 78. 27 Jul 2018 Blockchain Procurement: Sourcing and Purchasing 77 Source: http://www.tendersinfo.com/blogs/what-is-the-difference-between-procurement-purchasing-and-sourcing/
  79. 79. 27 Jul 2018 Blockchain 78  Sourcing and Purchasing  Real-time exchange  High through-put  Global access  Validated histories  Digital identity  Transaction confirmation  Document management  Integration  ERP, GL/AR/AP/Payroll  CRM systems  Multi-platform mobile app/web front-ends Procurement Blockchain requirements EMR: Electronic Medical Record
  80. 80. 27 Jul 2018 Blockchain 79 1. Blockchain-registered digitized assets  Ownership confirmed, ready for transfer, instantaneous global transactability, pre-validated digitally-registered assets 2. Financing Implications  Digital assets can be pledged as collateral in on-demand financing with any party (without having to form a vendor- supplier relationship) in enterprise payment channels  Invoice factoring, inventory, sales order, purchase order 3. Business Process Implications  Automated business logic via smart contracts  Shared business processes in enterprise blockchain networks  Shared record-keeping in an era of digital ledgers  Integrated ledgers (accounting and legal processes) Procurement Blockchain Sources: http://www.europeanfinancialreview.com/?p=21755, http://timreview.ca/article/1109
  81. 81. 27 Jul 2018 Blockchain  Findings: Financiers, accountants, and SMEs thought blockchain-based credit histories could prevent fraud, minimize the administrative costs of providing credit, and improve the financing opportunities available to SMEs Study of Stakeholders in SME Financing 80 Source: Kayal et al., forthcoming, Financing Small & Medium Enterprises with Blockchain: an exploratory research of stakeholders' attitudes, in Blockchain Economics (World Scientific) Risk Factors contributing to potential Fraud (1) The smaller the business entity, the higher the risk (2) Lack of credit history between the business entity and the financier (3) Financing a foreign business carries a higher risk than a local one Blockchain-based Credit Histories to reduce Risk of Fraud Proposal for Blockchain-based Inventory Financing Process
  82. 82. 27 Jul 2018 Blockchain objectives. 81 1. what is blockchain. 2. technical overview. 3. business use cases. 4. implications for procurement. conclusion
  83. 83. 27 Jul 2018 Blockchain 82 internet money. enterprise software. economic collaboration infrastructure. blockchain.
  84. 84. 27 Jul 2018 Blockchain supply chain blockchain. 83 software for secure internet-based transfer of assets and information. business process reengineering technology.
  85. 85. 27 Jul 2018 Blockchain 84 Blockchain Supply Chain thesis Blockchain: all assets digitized and registered to blockchains; instantaneously transactable on a global basis Blockchain Supply Chain: all assets exist in digital inventories, tradeable (pledgeable, financeable) and more importantly, findable, in the global digital network economy
  86. 86. 27 Jul 2018 Blockchain Procurement leading the path ahead 85  Procurement already automating the efficiencies associated with sourcing and purchasing  Global reach, sophisticated business, technologically- intense solutions, real-time exchange  Challenge is to envision and continue leading the modernizing way forward with strategic acuity
  87. 87. Blockchain Supply Chain Melanie Swan Philosophy, Purdue University melanie@BlockchainStudies.orgOvation 2018 27 July 2018, Plymouth MA USA Slides: http://slideshare.net/LaBlogga
  88. 88. 27 Jul 2018 Blockchain Institute for Blockchain Studies Blockchain Research Program  Theoretical research  Apply quantitative methods from physics (renormalization/path integrals), complexity science (entropy), and deep learning to blockchain analysis  Applied research  Economics: algorithmic trust, a network mechanism that moderates credit availability and facilitates blockchain markets to Nash equilibria more quickly than classical markets  Payment channels, debt, net-settled capital, programmable risk, integrated business ledgers, blockchain health economics  Social theory  Smart City Cryptopolis and Blockchain Enlightenment  Automation Economy flourishing of human, algorithm, machine  Advanced conceptual research  Blocktime, BCI cloudminds, Brain as a DAC, biocryptoeconomy 87 Source: Swan, M. Forthcoming. Blockchain Economic Networks. Palgrave Macmillan. Blockchain Economics Swan et al. (World Scientific, 2019)
  89. 89. 27 Jul 2018 Blockchain 88 payment channels.
  90. 90. 27 Jul 2018 Blockchain Payment Channel motivation and projects  Motivation  Micropayments for video bandwidth consumption where piecemeal transactions do not make sense  Blockchain scalability (offload tx)  Send payments across p2p network  Projects  Bitcoin: Lightning Network  Time/signature lock parameters: CheckLockTimeVerify, CheckSequenceVerify  Current ~$350 max (4% Btc) for Lightning Payment channels  Ethereum: Raiden, Plasma 89 Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels
  91. 91. 27 Jul 2018 Blockchain 1. Unilateral Payment Channel 90 Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling Opening Transaction: Broadcast to Network Interim Transactions: Signed between Wallets (both parties agree and are obligated; not Broadcast to Network) USD $50 Alice opens $50 “Monthly Payment Channel” with Starbucks Closing Transaction: Broadcast to Network Alice consumes coffee and Starbucks adjusts the refund balance from the initial deposit USD $5 4/1/18 4/30/18 1 2 Close “Monthly Payment Channel”: Starbucks broadcasts last refund amount to network Starbucks Coffee USD $50 USD $45 Starbucks acknowledges with unbroadcast refund of $50 4/2/18 USD $5 3 4/3/18 USD $5 4 4/4/18 USD $40 USD $35 USD $35 30
  92. 92. 27 Jul 2018 Blockchain 1. Unilateral Payment Channels  Starbucks Example 1. Customer opens $50 monthly payment channel with Starbucks 2. Daily coffee consumed is tracked and booked against the $50 credit 3. Activity is netted at the end of the month. Contracts close and roll over at regular intervals. Either party may close the channel early, trigger net settlement  SBUX: payment channel prototype  Loyalty program (cards & apps): 41% purchases, $1.2 bn obligations 91 SBUX Balance Sheet Assets Cash $1.2bn Liabilities Stored Value Cards $1.2bn Source: https://www.slideshare.net/lablogga/blockchain-economics-payment-channels
  93. 93. 27 Jul 2018 Blockchain 2. Bilateral Payment Channel 92 Source: Extended from https://www.investinblockchain.com/lightning-network-bitcoin-scaling SBUX Balance Sheet Assets Cash $1.2bn Liabilities Stored Value Cards $1.2bn Opening Transaction: Broadcast to Network Interim Transactions: Signed between Wallets (not Broadcast to Network) 1 BTC Open “Monthly Expense” payment channel: create a new address, each fund with 1 BTC Closing Transaction: Broadcast to Network 1 BTC Each pays for expenses from the shared address during the month 1.2 BTC 0.8 BTC 4/1/18 4/30/18 1 2 3 Close “Monthly Expense” payment channel: net settle the balance returned to each Roommate Expense Sharing
  94. 94. 27 Jul 2018 Blockchain 3. Community Payment Channel 93 Source: https://solarpowerrocks.com/solar-basics/how-much-electricity-does-a-solar-panel-produce Opening Transaction: Broadcast to Network Interim Transactions: Daily production and consumption measured as signed transactions between Wallets A, B, C, D ante up monthly dues to the address to open this month’s “Community Payment Channel” Closing Transaction: Broadcast to Network Energy Produced 4/1/18 4/30/18 2 Close this month’s “Community Payment Channel” with net amount returned to A, B, C, D 0.8 kWh CSC: Community Solar Coin Token: ante-up expenses, vote, governance re: how price per kWh, smart contract lookups to pricing oracle; additional capital calls during the month if necessary 4/2/18 4/3/183 Etc. 30 Sustainable Energy Production 1 CSC 1 CSCA B C D 1 CSC 1 CSC Energy Consumed 1.2 kWhA A Energy Produced 1.1 kWh Energy Consumed 0.6 kWhB B Energy Produced 1.3 kWh Energy Consumed 0.7 kWhC C Energy Produced 1.0 kWh Energy Consumed 1.1 kWhD D 1 A B C D 1 CSC 0.8 CSC 1.2 CSC1.1 CSC
  95. 95. 27 Jul 2018 Blockchain Transactive Grid, President St, Brooklyn NY  Decentralized DIY energy markets  Blockchain-based microgrid  Community:  Five net-producing homes generating energy through solar power  Five net-consuming homes interested in buying excess energy from neighbors  Benefits: no billing components, no infrastructure losses, no accounting losses in the system  Ability for producers to sell or donate excess 94 Source: https://www.newscientist.com/article/2079334-blockchain-based-microgrid-gives-power-to-consumers-in-new-york
  96. 96. 27 Jul 2018 Blockchain 4. Multi-resource Community Payment Channel 95 Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains Opening Transaction: Broadcast to Network Interim Transactions: Daily production and consumption measured as signed transactions between Wallets A, B, C ante up monthly dues to the address to open this month’s “Community Payment Channel” Closing Transaction: Broadcast to Network Energy Produced 4/1/18 4/30/18 2 Close this month’s “Community Payment Channel” with net amount returned to A, B, C 0.8 kWh CSC: Community Coin Token: ante-up expenses, voting, governance, decision-making re: resource pricing; additional capital calls; dispute resolution mechanism 4/2/18 4/3/183 Etc. 30 Sustainable Community 1 CSC 1 CSCA B C 1 CSC Energy Consumed 1.2 kWhA Greens Produced 3 units Greens Consumed 1 unit B Bandwidth Produced 10 units Bandwidth Consumed 3 units 1 A B C 1 CSC 0.8 CSC 1.1 CSC B C 1.2 kWh A C C A B 2 units 1 unit
  97. 97. 27 Jul 2018 Blockchain Uber for Microgreens Who’s harvesting today? 96 Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains; Swan, M. 2017. Technological Unemployment, In Surviving the Machine Age. Springer. LocalGreens Kale – SuperGreens Citizen’s sense of duty to serve the republic Civic Duty Civic Collaboration Greek Statesman Self-directed Cryptocitizen Optional peer infrastructure provision: Cryptocitizen’s sense of meaning and purpose in participating in community sustainability Identity Crisis: who are we in the Automation Economy, Technological Unemployment, and the Future of Work?
  98. 98. 27 Jul 2018 Blockchain 5. Small Group Payment Channel  Local bar: Lynn, Chris, Bartender  Lynn has $10 tab with bartender, has consumed $6  Chris has $10 tab with bartender, has consumed $5  Lynn and Chris play pool, Chris owes Lynn $5  Current method (gross settlement): each party settles with each other (3 tx, $16 gross flow)  New method (net settlement): (2 tx, $11 gross flow)  Already see implication if less money transfers, more is available 97 Source: Andreas Antonopoulos Bartender A/R Lynn $6 Chris $5 Lynn A/R Chris $5 Bar $6 A/P $1 Chris Bar $5 A/P $10 Lynn $5 $11 Current Method Tx1 $6-Lynn Tx2 $5-Chris Tx3 $5-Lynn Payment Channel Tx1 $10 C-to-B Tx2 $1 L-to-B
  99. 99. 27 Jul 2018 Blockchain 6. MyMonthlyExpense Payment Channel  My monthly expenses example  De facto payment channel  Inflows into bank account:  Paycheck direct deposit  Outflows from bank account:  Auto-pay bills (fixed and variable)  Formalized into a multi-party payment contract netting salary against expenses, any remainder to Schwab investment account  Implication: settling net basis frees capital  Consider business entities on a net basis 98 Source: https://www.psmarketresearch.com/market-analysis/personal-robot-market My monthly expenses Salary (direct deposit) DR CR $xx Expenses (auto-pay) Rent (fixed amount) Car payment (fixed) Utilities (variable) Discretionary (variable) $xx $xx $xx $xx Net savings (variable) $xx $xx My apartment building Expected inflows DR CR $xx Expected outflows Fixed Variable Net $xx $xx $xx My small business Expected inflows DR CR $xx Expected outflows Fixed Variable Net $xx $xx $xx
  100. 100. 27 Jul 2018 Blockchain 7. MySupplyChain Payment Graph Economy  Blockchains: only sub-registers of the cash account (Alice, Bob, HSBC, etc.), not a full suite of general ledger accounts  Property registries use cash-acct ledger structure  Property registries where UTXOs are assets  Birth/death registry: one credit tx, one debit tx  Supply chain finance: for supply chain net settling, need integrated account ledgers  Single set of books with multiple views: by supply chain (new) + by entity (existing)  Revenue (WMT); COGS (Deere, Adidas) 99 Source: https://www.psmarketresearch.com/market-analysis/personal-robot-market My supply chain Sales Inventory COGS Manufacturing Raw Materials Cash Alice Bob Carol Ralph HSBC DR CR $xx $xx $xx $xx $xx Payments trajectory Goods trajectory Orthogonal trajectories, different incentives, behavior
  101. 101. 27 Jul 2018 Blockchain Payment Channel implications  New forms of Digital Credit Systems  Contractually-obligated payment relationships  Booked as periodic net activity  Net settlement  Digitized payment system for resource consumption that settles based on net payments instead of gross transfers  Peer-provided banking services enabled 100
  102. 102. 27 Jul 2018 Blockchain Securities as a Service 101 Source: Blockchain Fintech: Programmable Risk and Securities as a Service, http://futurememes.blogspot.com/2016/10/blockchain-fintech-programmable-risk.html CD, DVD Streaming Music and Video Services Entertainment as a Service Asset Service Auto, Home Uber, Lyft, Gett, Juno, Via; Airbnb, VRBO HomeAway Transportation, Domicile as a Service Securities Securities as a Service  Securities a Service  Now have to own because uncertain future value of assets  Access to the consumable benefits of the asset without owning  Works if trust consumable assets will have future availability  Need the cash flow the asset provides, not the asset itself Consumable benefits of securities: cash flow, appreciation Payments as a Service
  103. 103. 27 Jul 2018 Blockchain Net settlement: Municipal finance example 102 Source: https://www.slideshare.net/lablogga/the-crypto-enlightenment-social-theory-of-blockchains State ContractorTaxpayer Bond State ContractorTaxpayer Current Method: 15-year IDB Future Method: Smart Contract Smart Contract monthly payments
  104. 104. 27 Jul 2018 Blockchain Net settlement: Municipal finance example 103 Source: http://www.cabq.gov/economicdevelopment/business-owners/services-programs/bonds 15-year IDB Bond Investor + - State + - Contractor + + Taxpayer - - Contractor + - State ++ Taxpayer + - - 2 1 • State borrows full amount in bond offering • State chooses contractor and pays contract in installments • Contractor receives installment payments from State • Taxpayers pay tax payments to State • State pays interest to bond holders and repays principal at maturity Future Method: Smart Contract Municipal Project Current Method: 15-year IDB • State selects contractor and supervises project • Smart contract monthly payments: taxpayers to contractor
  105. 105. 27 Jul 2018 Blockchain network futures. 104
  106. 106. 27 Jul 2018 Blockchain future-class tech. 105 blockchain networks are a new class of global computational infrastructure.
  107. 107. 27 Jul 2018 Blockchain Context of the Blockchain Revolution 106 Source: Expanded from Mark Sigal, http://radar.oreilly.com/2011/10/post-pc-revolution.html I. Transfer Information II. Transfer Value 6 7 2020s 2030s Simple networks Smart networks  Blockchain is fundamentally the next phase of the Internet, not just Fintech, could impact every industry  Two fundamental eras of network computing
  108. 108. 27 Jul 2018 Blockchain smart networks. 107  Future of AI: intelligence “baked in” to smart networks  Blockchains to confirm authenticity and transfer value  Deep Learning algorithms for predictive identification  Attribute information : quality, characteristics, provenance
  109. 109. 27 Jul 2018 Blockchain deep learning chains. 108  Autonomous Driving & Drone Delivery, Social Robotics  Deep Learning (CNNs): identify what things are  Blockchain: secure automation technology  Track arbitrarily-many units, audit, upgrade  Legal liability, accountability, remuneration
  110. 110. 27 Jul 2018 Blockchain fleet management. 109 secure automated Smart city: 3D port, international trade, planning and logistics, supply chain management Aerial logistics highway (50m virtual tunnel at 150m altitude): autonomous drone delivery, law enforcement surveillance, biopathogen and epidemic sensors Source: Suarez, D. (2017). Change Agent. Pp. 79-80.
  111. 111. 27 Jul 2018 Blockchain data. 110 big data ≠ smart data. clean, standardized, interoperable. Source: http://www.oyster-ims.com/media/resources/dealing-information-growth-dark-data-six-practical-steps 40 EB 2020e
  112. 112. 27 Jul 2018 Blockchain scale. 111 Source: https://www.illumina.com/science/technology/next-generation-sequencing.html Population: 7.5 bn people worldwide big health data.
  113. 113. 27 Jul 2018 Blockchain 112 technological unemployment. human-machine collaboration. automation economy.
  114. 114. 27 Jul 2018 Blockchain Problem Diagnosis Ineffective Supply Chain Market Dynamics 113  Ineffective meeting of Supply and Demand:  Reduced liquidity due to search problem  Purchasers and suppliers cannot find each other  Reduced fungibility due to matching problem  Greater requirements-features match is possible  Reduced liquidity due to lack of information  Attribute information: quality, characteristics, provenance, chain of custody of goods  Market information: price, volume, aggregate activity  Reduced liquidity due to lack of global digital network of contracting, financing, and enforcement structures Information-rich Feature-rich Agent-rich Simultaneously, market exploding to become: Solution-rich Harder to find signal in the noise Source: Swan. forthcoming. Theory of Blockchain Digital Contracting. In Blockchain Economics (World Scientific)
  115. 115. 27 Jul 2018 Blockchain 114 Blockchain Supply Chain thesis The future of the supply chain concerns three factors: (1) Findability and fungibility of goods (a human-machine collaboration problem) (2) Cost of attribute discovery (an information theoretic search problem) (3) Vendor payment channels (a digital asset contracting problem)

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