becoming a public blockchain network infra provider

Becoming a public

blockchain network

infra providerA perspective for Telcos

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Key messages of this document

Blockchain based technology is rising and maturing

(irrespective of the “bitcoin noise”) …

… leading to real world applications running on

blockchain today using a variety of protocols …

… giving rise to a concrete opportunity for Telcos:

become a protocol network validator node

Becoming a public blockchain network infra provider

3

We just exited the blockchain winter into a resurgence in blockchain interest and prospect


Source: Google trend; Glassnode; Delta Partners analysis

Public and private interest saw a depression in Blockchain until recent resurgence since 2020

The renewed interest correlates with an increased amount of blockchain based smart contracts executing

Blockchain winter0

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Peaked interest in 2018 Resurgence

of interest

Blockchain interest via Google search per month(relative score to peak = 100, Jan’16 – Apr’21)

Daily number of external contract calls on Ethereum(thousands)

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Successful use cases

motives businesses

Competition embraces

collaboration

Uncertainty drives

crypto investment

Tech enablers reduce

friction

Early adopters have realized true ROI,

motivating developers and

businesses(i.e., TradeLens, IBM Food

Trust, We.Trade)

Competitors are embracing

decentralization by collaborating to

build critical mass for network effect

Increased uncertainty in

monetary policies amidst a pandemic drove a pursuit of alternative value security in crypto

Major tech enablers (i.e., AWS, Azure, IBM)

participation is reducing technology

friction

The resurgence of blockchain comes as use cases and business values become more grounded


Source: Delta Partners analysis

Snowball effect as blockchain trust and participation grow

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Collaboration is embraced to gain critical mass for the blockchain network effect



Value of a blockchain use case grows exponentially with the size of its network

• Started in 2013 by Maersk to – Reduce administrative costs of handling shipping containers– Digitize shipping documents for paperless trade

• In 2016, Blockchain was introduced by IBM, Maersk’s technology partner, as a enabling technology

• Dec’20 – reported to manage 2M events per day with 175 unique organization and growing

• In 2016, IBM and Walmart launched the PoC for a blockchain based food tracking

• Frank Yiannas suggested that IBM launch and manage the platform to encourage competitors to join the ecosystem, a critical part of food tracking

• Time to trace was reduced from 7 days to 2.2 secs• Dec’20 – reported to have 280 members, 40M transaction, and 25k

SKUs

• Open-source collaborative effort to advance cross-industry blockchain technologies hosted by The Linux Foundation established in 2015

• Includes finance, banking, IoT, supply chains, healthcare, manufacturing, technology and more

• Adopts 5 frameworks: Indy, Fabric, Iroha, Sawtooth and Burrow• 2020 – 16 projects in progress and 200+ members

1Businesses were at first reluctant to relinquish control and to trust competitors – preferring to be the host of their own blockchain platform

3Competitors are slowly embracing the fundamental decentralization framework of blockchain

Maersk set an example as the big competitor to embrace collaboration by creating a customer advisor board with competitors for more inclusion and transparency

2

6

The blockchain ecosystem has become increasingly comprehensive and mature


1. Proof of Work, 2. Proof of Stake, 3. Practical Byzantine Fault Tolerance, 4. Delegated Proof of Stake, 5. Proof of Elapsed Time

NON-EXHAUSTIVE

Infrastructure• Blockchain as a Service• Node operators

Service Layer• Operations enabler for

applications and connection

Application Layer• User interface & business

logic for various use cases

Blo

ck

ch

ain

Pro

toc

ol

Transaction record (distributed ledger)

Consensus Rules(cryptograph)

P2P Network

Cryptocurrency Banking Supply Chain Property Record Voting

Multi-signature Trackers Oracles Wallet Digital asset

Digital Identity

Smart Contracts

Event Manager

App server

Distributed database

Side chain Multi chain Off chain

PoW1 PoS2 PBFT3 DPoS4 PoET5

Nodes Mining Token

Network Compute Storage

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Blockchain has an opportunity to transform the internet infrastructure as we know it into web 3.0



Web 1.01990-2000s

Web 2.02010-2020s

Web 3.02020s and beyond

Concept

Readable internet with flat data Writable WWW with interactive data Executable WWW with dynamic applications, interactive services and machine to machine

Va

lue

cre

ate

d

1990 2025

$1.1 trillion* $5.9 trillion

?

Interaction Desktop Browser Mobile Wearable, voice and IoT devices

Computation Server Server Peer-to-Peer Network

Hosting Mainframe / situated server Web Server / cloud computing Distributed CDNs (swarm/IPFS)

Service Layer Static HTML HTTP API Smart Contract

Storage Structured database (SQL) Unstructured database (big data) Distributed storage blockchain

Key challenge Unscalable + unidirectionalCentral points create monopolies and security risks + users lose control over data

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Blockchain has 3 fundamental application categories which trigger “blockchain transactions”



APPLICATION

DESCRIPTION

EXAMPLES

REPLACE TRADITIONAL MONEY

1PROOF OF ASSET

OWNERSHIP2

ENABLE BUSINESS APPLICATIONS / APPS

3

• Crypto tokens are put on a blockchain and represent a “monetary” value

• Tokens can both be traded on crypto exchanges or transferred P2P

• Cryptocurrencies can both be government led (Digital Yuan) or fully independent (Bitcoin)

• The currency can be pegged to an underlying asset (USDT) or fully independent (Bitcoin)

• Tokens reflect the ownership of an underlying asset

• Assets can include equity, ownership in a company, real estate, cars, art, entertainment media, etc.

• The token can merely be a proof of ownership, or contain the very asset (e.g., art NFTs)

• Blockchain redefines how applications are run and go from centralized app architecture to a decentralized P2P app (Dapp)

• Dapp run on smart contracts and distributed ledger

• Applications can include: track&trace, asset provenance, decentralised finance, settlement, identify management, decentralised data tracking, etc.

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At the center of blockchain transactions stands the validator node, whose economical model is based

on a closed loop “economy” with the blockchain protocol token as the currency



Token protocol(e.g., Ethereum, Solana, Polkadot, Chainlink)

Validator

Blockchain protocol users

StakersValidator Leader

Token inflation Issuance = protocol creates and distributes new tokens to the validator community based on predefined parameters (% staked, protocol age, uptime of validators, etc.) to 1) incentivize validator nodes to come online, 2) offer inflation protection

Protocol Token Flow

Token Exchange(e.g., Binance, Coinbase)

Token exchanges trade tokens of the underlying protocol; Protocol to offer supply to exchange

User of apps that run on the blockchain protocol buy token to pay for usage of the protocol = rewards the validator nodes

Protocol user pay token to the lead validator (“gas fees”)

Stakers are token holders that pool their tokens with validator nodes (or intermediaries) to gain inflation rewards. Validators can hold tokens directly themselves

Validator can exchange their token for other tokens or fiat

Generalization as the economic model of every protocol can differ

Destroying of tokens if validator node violates rule (e.g., downtime,

incorrect validation, etc.)

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Zoom-in - Token Inflation Issuance is a core economical reward system in the “Tokenomics”


Source: Ethereum and Solana protocol documentation, Delta Partners analysis

ETH2.0 SolanaProtocol

0%

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35%

- 200,000 400,000

Gross annual validator node returnsR

ew

ard

yie

ld

Number of network validator nodes

The relative yield reduces with increased validator nodes

ETH stands at around 150k validators implying a yield of around 8%

ETH2.0 requires a minimum of 32 ETH staked to be able to operate a validator node

Gross annual validator node returns

0%

1%

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4%

5%

6%

7%

8%

9%

- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Re

wa

rd y

ield

Years of Solana protocol active

Standard

inflation

model

The yield reduces with protocol maturity to end up to the end-state inflation of 1.5%

Yield model

sensitivities

• % of validators in the network• % of validators online• % of validators participating

• Protocol age• Validator uptime• % Solana tokens staked

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Zoom-in - Token price increase – with rising utility of the underlying tokens and increased staking, the

supply of tokens is reducing adding to the price increases of these tokens



-

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ETH/USDT ADA/USDT BNB/USDT LINK/USDT

Selected Protocol Prices – rebased to 100 in Jan-19

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Detailed models are required to fully understand the potential yield of a validator node



Costs structure differs depending on type of architecture (Hardware vs. Cloud), hardware specs (e.g., AWS instance used), electricity costs, bandwidth costs

Sensitivities on network assumptions

Sensitivities on cost structure of validating

Variables that impact the general economics of Ethereum: overall network uptime, network power uptime, # slashing events, Ethereum pricing, etc.

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Crypto miners/validators have become sizable and profitable companies


Source: Company financial reports, Delta Partners

Riot Blockchain HIVE Blockchain TechnologiesCompany

Token focus Bitcoin & Litecoin Ethereum and Bitcoin

Market capUSD 2-4bn in last months

(high volatile)USD 1-2bn in last months

(highly volatile)

Quarterly Financial performance(USDm)

1.2 2.39 1.94 2.465.29

23.2

-2.9 -3

-9.8

-0.7

5.6

10.4

4Q19 1Q20 2Q20 3Q20 4Q20 1Q21

Revenues EBITDA

Annualised revenues run rate of USD 100m

53.1

6.6

13 13.7

4.9 4.43.5

11.1

19.8

4Q19 1Q20 2Q20 3Q20 4Q20

Revenues EBITDA

EBITDA exceed revenue due to revaluation of crypto assets on the balance sheet

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Telcos have a unique opportunity (and duty) to become blockchain validator nodes


Why should Telcos become validator nodes Description

• Support the public, decentralized network infrastructure as an evolution from core fibre/DC models

• Ensure decentralization is protected against the rising centralization of blockchain on AWS/ Azure clouds

• Financially sweat existing data center infrastructure by operating proprietary network validator node

• Create cost and competitive advantages compared to other validator nodes by:

– Benefiting from cheaper bandwidth costs

– Procurement advantages for hardware costs

– Economy of scale benefits for electricity

2

• With DeFi rising, traditional banks and institutions are joining blockchain networks

• Telcos have a window of opportunity to productize nodes and offer staking-as-a-service

• Launching nodes soon will allow to benefit from higher network inflation rewards

3

• Use the validation node business as a stepping stone project to develop expertise in blockchain to expand in:

– Blockchain application integration in corporate clients

– Internal blockchain application adoption

– Innovation surrounding cross-telco blockchain collaboration (e.g., roaming settlement)

Duty to protect and build Web 3.0

1

Sweat / synergize infrastructure assets

Window of opportunity narrowing

Stepping stone opportunity towards full block-chain solution provider

4

15

T-Systems has ramped up its investment into becoming a public network infrastructure validator


HIGHLIGHT

22 July 2020T-Systems becomes a Chainlink node

20 April 2021Deutsche Telekom Invests in CELO, Begins Staking Tokens

14 Jan 2021T-Systems to host a node for Flow blockchain

DETAILS

• Chainlink provides oracles, i.e., verified external data that can be linked to a smart contract

• Oracles enable things like verified real-time securities or commodity prices

• Chainlink provides access to off-chain data feeds, Web APIs and traditional bank payments for Smart Contracts using a decentralized oracle network

• Deutsche Telekom has made a significant purchase of Celo’s native asset, CELO, through its Telekom Innovation Pool (TIP)

• Deutsche Telekom will be staking 100% of its CELO investment, using the telco’s infrastructure and with its own validators, and earning about 6% return in terms of staking rewards

• Flow was developed by Dapper Labs, known for CryptoKitties and NBA Top Shot with the aim of enabling NFT collectibles and crypto games

• Dapper Labs has raised $51 million in funding

Chainlink is a tokenized oracle network that provides price and events data collected from on-chain and real-world sources

Celo Networks is a blockchain payments platform, designed for mobile phones, on which remit money P2P through their mobile phone numbers

Flow network is an ultra-scalable infrastructure for decentralized apps and assets. Built for composability

BLOCKCHAIN

Gleb Dudka, Head at T-Systems MMS of crypto mining

“It is our duty as a telecom company to be a public blockchain network infrastructure provider”

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Prerequisites in the context of a telco


Ability to recognize and manage crypto assets on balance sheet

• The validator node is rewarded in the underlying protocol token which differs from traditional money:– The accounting system and auditing process need to be expanded to enter crypto assets– The volatile nature of crypto tokens implies highly volatile asset valuations on the balance sheet

• The treasury team needs to create a crypto exchange identity or appoint a broker to convert token into fiat (if desired)

1

Ability to transform KYC mindset

• Telco needs to accept the lack of classic “supplier” and “client” KYC and CRM:– “Supplier” - The token protocols are decentralised communities and have no corporate address or identity– “Clients” – users of validator nodes are merely crypto address or automated smart contract addresses

5

Dedicated Crypto Tech team

• Running a validator node requires specialised technical knowledge:– Architecture – on-premise or cloud– Validation scoping – e.g. ETH Sync Modes or ETH node type (full, light, archive)– Machine configuration requirements & operating system (Linux, windows, etc.)– Protocol client choices and configs – e.g. GoEthereum, OpenEthereum, Nethermind, Besu, etc.

4

Conform with regulation and licensing

• Validation nodes and/or custodian services linked to staking service can require licenses in countries• The regulatory team need to expand its knowledge in the crypto space or seek legal opinions with regard to licenses,

regulations and risks2

Economics and eco-system expertise

• The telco needs to ensure it chooses which protocol to support and project the performance accordingly:– Choose a protocol – Ethereum, Polkadot, Solana, Matic, Chainlink, etc.– Model the economical model for the chosen protocol in detail (inflation, transaction rewards, protocol network

assumptions, etc.)

3

Prerequisite Description

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