BRIEWorkingPaper2016-1

JuriMattila

THEBLOCKCHAINPHENOMENON

TheDisruptivePotentialof

DistributedConsensusArchitectures

JuriMattilaisaResearcherattheResearchInstituteoftheFinnishEconomy(ETLA).

ThispaperhasbeenpublishedsimultaneouslyasanETLAworkingpaper.

BERKELEY ROUNDTABLE ON THE INTERNATIONAL ECONOMY (BRIE) UNIVERSITY OF CALIFORNIA, BERKELEY

2234 Piedmont Avenue, Berkeley, CA 94720-2322 Phone: 510-642-3067 Fax: 510-643-6617 brie@socrates.berkeley.edu http://brie.berkeley.edu/BRIE/

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TableofContents

1INTRODUCTION.........................................................................................................................................................3

2UNDERSTANDINGTHETECHNOLOGY...........................................................................................................5

2.1Whyallthefuss?.................................................................................................................................................5

2.2Blockchainterminology..................................................................................................................................6

2.3Thecarrot,thestick,andthedatabasedemocracy.............................................................................7

2.4Permissionedandpermissionlessblockchainarchitectures.........................................................8

2.5Genericandspecificblockchainarchitectures......................................................................................9

2.6Thechallengesoftheblockchainecosystem......................................................................................10

3APPLICATIONSANDUSECASES.....................................................................................................................11

3.1Financialinstrumentsandassetregistries..........................................................................................11

3.2Nanopayments.................................................................................................................................................12

3.3Identitymanagementandonlinereputation......................................................................................14

3.4Supplychainrecordsandproduct-centricdata................................................................................15

3.5Smartcontracts................................................................................................................................................16

3.6InternetofThings...........................................................................................................................................17

3.7Votingsystems.................................................................................................................................................18

3.8Decentralizedautonomousorganizations...........................................................................................19

4IMPLICATIONS........................................................................................................................................................21

4.1Digitaltrustredefined..................................................................................................................................21

4.2Thetrendofdisintermediation................................................................................................................21

4.3Democratizationofthesupplychain.....................................................................................................22

4.4Ashifttowardsanautomationeconomy..............................................................................................22

4.5Reconfigurationofregulatorycapacity.................................................................................................23

Appendix1.Examplesofconsensusmechanisms........................................................................................25

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1INTRODUCTION

In November 2008, a mysterious white paper appeared on the Internet in all quietness.Written under the pseudonym Satoshi Nakamoto, the paper described a new method forcreating a fully distributed digital currency system by cryptographically chaining blocks ofdatatogether.Formanyyears,thetechnologybehindthatsystemwentlargelyunnoticedbythegeneralpublic.Today,however,sevenandahalfyearslater,thatinnovationisheraldedasthe next paradigm shift in digital networks, opening doors to an uncharted cyberspace ofdisintermediatedtrustanddistributedconsensusplatforms.

While a lot ofhypehasbeengeneratedaroundblockchain technology, there are also thosewho have taken a more skeptical view on the phenomenon. At one extreme end of thespectrum there are those who say that blockchain technology will render nationalgovernmentsandtheircurrenciesobsolete,bringingaboutaneweraof libertarianfreedomandempowerment.Attheotherextremepeoplearepredictingthecompleteself-destructionofthetechnologyasaconsequenceofitsowninfeasibility.

Therealsoseemtobenotabledifferencesinwhatpeopleperceiveblockchaintechnologytobe in the first place. While Bitcoin puritans would only see the term explicitly used inreferencetotheinfamouscryptocurrencyitself,somewouldprefertonevereventhinkaboutBitcoin when discussing blockchain technology. Others find the whole division absurd,pointingoutthatblockchainisnothingmorethanadatastructureandthatsuchbroaduseofthetermmissesitsmarkentirely.

Whoeverisright,onethingisquiteclear:theterminologyaroundthewholephenomenonisstillheavilyinflux.Caughtinthemiddleofitall,itcanbedifficulttoformaclearpictureonblockchaintechnologyandthephenomenonthatsurroundsit.Asaresultofallthehypeandexcitement, thedevelopmentof theblockchain ecosystem is oftenperceived toprogress sorapidly that in order to keep up, there is often a tendency to try to dive in too deep tooquickly.Understandably,thebigpicturecanremainblurryasaresult.

This report was written with the simple goal of providing the reader with a morecomprehensive understanding onwhat blockchain technology is, what its possibilities andlimitationsare,andwhatitspotentiallargersocietalimplicationsmaybe.Itaimstoprovidethe reader with a holistic understanding of the key concepts and basic principles, thusequipping themwith the toolsand the framework tounderstand theongoingdiscussion, tocriticallyevaluatedifferentviewpoints,andtodelvedeeperinaconstructedmanner.

In order to keep the descriptions as simple as possible, some technical details have beensimplifiedtomakewayforaclearerbigpicture.Inplaces,sometechnicalcommentarieshavebeenincludedinthefootnotesbutthoseprimarilylookingforadetailedtechnicaldescriptionwillmostlikelybemoresatisfiedwithothersourcesofinformation.

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The technical information presented in this report is mostly based on unstructureddiscussionswithrepresentativesfromcompaniessuchasIBM,BitPay,Blockstream,Vaultoro,ColuandBitreserveinBarcelonainOctober2015;withrepresentativesfromGoogle,21IncandStellarinSanFranciscoinFebruary2016;withrepresentativesfromErisIndustriesandAscribe in Berlin in March 2016; and with representatives from PrasosOy (Bittiraha.fi,Coinmotion,Denarium)andRobinHoodMinorAssetManagementCooperativeinFinlandinMarch-April2016.

ThispaperhasbeendraftedasapartoftheBRIE-ETLAresearchcollaborationof2015-2018andithasalsobeenpublishedsimultaneouslyasanETLAworkingpaper.Theauthorwouldlike to thankemeritusprofessor JohnZysman fromtheUniversityofCaliforniaatBerkeley,professor Martin Kenney from the University of California at Davis, BRIE research fellowJonathanMurray,TimoSeppäläfromtheResearchInstituteoftheFinnishEconomyandAaltoUniversity for their insightfuldiscussionsandcommentarieswhilewriting this report. Theauthor would also like to express his gratitude to all the participants of the BRIE-ETLAroundtablediscussionsattheClaremontHotelinBerkeleyinFebruary2016.

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2UNDERSTANDINGTHETECHNOLOGY

2.1Whyallthefuss?

Indigitalnetworks,dataisusuallytransmittedbycopyingitfromoneplacetoanother.Oneofthekeyproblemsinthisrespectishowtoverifythattheinformationreceivedfromthenetworkisauthenticandup-to-date.Whilethisisnotaparticularlydifficultproblemtosolveinitself,sofarallthesolutionshaverequiredplacingtrustinsomeone.Inmanycases,takingthewordofatrustedauthorityfortheauthenticityofdataisperfectlyfine,butinsomecasesitisreallynot.Moreover, evenwhen it is fine, constantlyhaving to resort to an intermediary is oftenexpensive,anditwouldbealotcheaperifwesimplydidnothaveto.

Thereasonwhyblockchaintechnologyisconsideredsodisruptiveisthatithastheabilitytosolve this problem of authenticity without the inclusion of any trusted intermediaries. Itallows anyone to verify the authenticity of data independently, without having to takesomeone else’s word for it, irrespective of whom or where that data came from in thenetwork.

To understand the full scope of the potential implications of this change, one only has toconsiderthefactthatmostofusrelyontrustedintermediatorsinourdailylivesmosteveryday, in one formor another.Whether it is locking yourhousewith keysmadeby the locallocksmith,trustinganonlinevendorwithyourpersonalinformation,orevenhavingfaithinthat the products you purchase have been tested for safety, we all depend on trustedintermediatorsinwaysthatwedon’tnecessarilyconsiderproblematic,butwouldgladlygetridofinaheartbeatifprovidedwiththeopportunity.

Overall, blockchain technology is disrupting society in two fronts. Firstly, it is providingdisintermediated, censorship-resistant and tamper-proof digital platforms of distributedtrust, open for all to freely innovate and to transact on. In doing so, blockchain technologyintroduces new elements into the discussion on the platform economy and the related keyquestions:howisvaluecreatedaroundplatforms,whocapturesthevalueandwhoownstheplatformsthemselves.1

Secondly,forenterprise-andindustry-levelsystems,itisprovidingefficiencygainsontopofexisting structures by removing the constant need for actively intermediated data-synchronizationandconcurrencycontrol.

Duetothisdualeffect,blockchaintechnologyhasthepotentialtoimpactallsectorsandlayersofsociety,inamultitudeofcombinedways.Whetheritiswithcompletelynovelsolutionstointeractingovertheinternetorwithincreasedefficienciesinpre-existingindustrialsystems,therearebenefitstoreapinallplayingfields—andthosewhoneglecttodosomayjustendupfindingthemselvesatadisadvantage. 1Kenney–Zysman2016.

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2.2Blockchainterminology

Thedefinitionofthetermblockchainisfarfromclear.2ThewordblockchainitselfmostlikelytracesbacktoSatoshiNakamoto’soriginalBitcoinwhitepaperfrom20083.Whilethereisnospecificmentionof thewordblockchain in thepaper, it describes a technology componentunderlying the cryptocurrency as a series of datablocks that are cryptographically chainedtogether.Whilemostof the componentsdescribed in thepaperhaveexisted since the80’sand the90’s, the author’s contributionwas to apply them in an innovativeway, combiningthemintoonefunctionalcryptocurrencysystem.

Usingthisetymology,strictlyspeakingblockchainisnothingmorethanameredatastructurewith distributed multiversion concurrency control. When the term first became popular,however, there was only one practical application of this data structure in existence: theBitcoincryptocurrency.Duetothelackofanypre-existingarchitecture,Bitcoin,bynecessity,constitutedtheentiretechnologystackofthedistributedconsensusarchitecture.

Lateron,companiessuchasEthereum,ErisandFilamentstartedlookingbeyondBitcoinandfocusing specifically on individual layers of the technology stack (see table 1). As aconsequence, the stack quickly became fragmented along with the nomenclature, and theterminologyofblockchainwasextended todescribeamultitudeofdifferentstructuresatavarietyofdifferentlevelsofthestack.

Table1.Acoarsedepictionofthe“blockchaintechnologystack”4

Layer Exampleofablockchain-relatedproduct/servicesituatedinthelayer

Applicationlayer UjoMusic

Platformlayer ErisIndustries’smartcontractapplicationplatform

Processinglayer Ethereumvirtualmachine

Data/Protocollayer TheBitcoinblockchain

Networklayer FilamentTap

Hardwarelayer BitFuryminingchips

2Systemswithsomewhatsimilarcryptographic functionsaresometimesused forotherpurposes thatarenotusuallyassociatedwithblockchaintechnology.Conversely,notalldistributeddatabasesnecessarilymakeuseofthekindsofcryptographicfunctionsthatusuallyareassociatedwithblockchains.3Nakamoto2008.4Pon2016.

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As thephenomenonof distributed consensus architecturesprogressed, theuse of the termblockchaininreferencetoitonasocietallevelalsogrewmorepopular.Expressionssuchastheblockchaineconomyandblockchainrevolutionbecamemorecommonplace.Muchlikewithcloudor bigdata in recent years, the term blockchain is now quickly becoming a vacuousbuzzword, and it is specifically due to this lack of clear terminology that the blockchainphenomenonoverallcanbeveryconfusingtotrytounderstand.

Duetothelackofamoredescriptiveestablishednomenclatureatthistime5,thisreportusesthe term blockchain technology somewhat broadly, mostly in reference to the entiretechnologystackofdistributedconsensusarchitectures.

2.3Thecarrot,thestick,andthedatabasedemocracy

While the terminology around the blockchain phenomenon is ambiguous at best, the coreconcept behind the technology itself is, in fact, quite simple.When a database needs to bemodified by multiple parties at the same time in an overlapping manner, either theirmodifications have to be somehow consolidated together, or multiple differently modifiedversions of the same database will emerge. For some databases, such as software coderepositories,multipleversionsposenoproblems,aslongasthedifferentversionsaretrackedaccordingly.Otherdatabases,suchasfinancialledgers,however,relyonmaintainingonlyoneabsoluteversionoftheirmodificationhistoryandcontent.

The traditional approach to ensure that only onemodification history persists has been tointroduce a central authority who exercises concurrency control over the entire database.Whilethismethodsolvestheproblemofoverlappingconcurrentmodifications,itintroducesa whole new set of derivative problems in the process. For example, a central authorityintroducescostsandhastobetrustedtobehavehonestly.

Blockchain technology enables amore effectiveway to solve the concurrencyproblem in acompletely distributed manner, without the caveats of a centralized solution: Instead ofhavingacentralauthoritythatmaintainsadatabaseandguardsitsauthenticity,acopyoftheentiredatabaseisdistributedtoanopencloudforeverywillingparticipanttoindependentlymaintain. The copyholders then follow a predetermined set of databasemanagement rulesand compare their versions together through a continuous process of voting6. The version

5Thetermdistributedledgerhasalsobeensuggestedbysometoclarifytheambiguousblockchainterminology.Whilesucha termcouldbeuseful insomeways, itpresupposesanemphasisontrackingassets incontrast totracking processes. Furthermore, the proposed term does not properly acknowledge the presence of adistributed consensus mechanism which — many would argue — is at least as significant a part of theblockchainphenomenonastheblockchaindatastructureitself.6Intechnicalvernacular,thevotingprocessistraditionallycalledminingandtheparticipantsornodesinvolvedare referred to as miners. This is due to the fact that in the first blockchain application, the Bitcoincryptocurrency,theoutputspeedatwhichthevotingrewardsincreasetheBitcoinmoneysupplywasdesignedtomimicthespeedatwhichtheminingofgoldincreasestheglobalgoldsupply.

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thatgetsthemostvotesfromthenetworkisacceptedasauthentic,andtheprocessrepeatsindefinitely.

Toavoidmendacityamongsttheparticipants,aclever incentivestructure iswovenintothevotingprocess:Votingwiththemajority—thatis,fortheversionofthedatabasethatintimeendsupbeingacceptedbythenetworkasauthentic—isrewarded,whilevotingagainstthemajority rule is punished. This produces a game-theoretical equilibrium where all theparticipants are best off trying to anticipate each other’s choices and try to vote for theversionofthedatabasethatwilleventuallybeacceptedasauthentic.7

In otherwords, instead of a central authority keeping everything in sync and dictating themodificationhistoryofthedatabase,withblockchaintechnologyeveryparticipantgetsasayin what they think the true course of events has been. It is a newway of organizing andmanagingdatabases ina leaderlessdemocracyofdevices, incentivized towork together foronesharedconsensusview.

2.4Permissionedandpermissionlessblockchainarchitectures

Lookingat theentire technology stackofdistributed consensusarchitectures, each layer inthe stack can be constructed in multiple different ways, some of which have mutuallyexclusive properties. Therefore, it is impossible to give an exhaustive answer to what thecharacteristics of blockchain technology are, in such a meaning of the term. It is possible,however,tocharacterizewhatkindsofdifferentblockchainarchitecturestherecanbe.

A rudimentarydivision that isoftenmadebetweendifferentkindsofblockchains is thatofpermissioned and permissionless blockchains. So far, this report has mainly described thecharacteristicsofpermissionlessblockchains.Suchblockchainsarecompletelyopenaccesstoeveryone andnopermission is required fromany authority to become a participant in thenetwork. Participants areunknown to eachother and trust emerges fromgame-theoreticalincentives.

The ideabehindpermissioned ledgers isnomore complicated: If all theparticipants in thenetwork are known and can be trusted to vote honestly, there is no need to introduce theartificialincentivestoensurethatco-operationwilltakeplace.Tofacilitatethepossibilityofanegativeoutcome,theseincentivestructuresofteninvolvespendingphysicalresources,suchas computing power which translates into wasted electricity. On an aggregate level, thisexpenditurecanquicklybecomequitesignificant.Thus,byonlypermittingtrustedmemberstoparticipate in thevotingprocess, theoperationof thenetworkcanbemade faster,moreflexible andmost importantly, muchmore efficient— but at the cost of reduced security,immutabilityandcensorship-resistance.

7Severaldifferentvotingsystems,orconsensusmechanisms,havebeendeveloped,eachoneofthemwithitsownuniquefeaturesandintricacies.Foramoredetailedcomparison,seeappendix1.

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Moresophisticatedconsensusalgorithmsareconstantlybeingdeveloped,butatleastforthetimebeing,oneof the intrinsicpropertiesofblockchainapplications is that in theirdesign,therearealwaysinevitabletrade-offstomake(seetable2).

Table2.Trade-offsbetweendifferenttypesofblockchainarchitectures(simplified)

Permissioned Permissionless

Fast ☑ ☐

Energy-efficient ☑ ☐

Easytoscale ☑ ☐

Censorship-resistant ☐ ☑

Tamper-proof ☐ ☑

2.5Genericandspecificblockchainarchitectures

Another dimension by which to characterize blockchain architectures is whether they areoptimizedforaspecifictask,suchastrackingassetsandtransferringvalue,oramoregeneralpurpose,suchasstoringalgorithmiccodeandrunningcustomizedlogicalprocesses.Roughly,the division is somewhat analogous to the difference between a Swiss army knife and aspecificspecialpurposetool.Thefirst ismoreversatileandallowsmorefunctions,butifallthat isneededisasimplefunctiontobeperformedwell, thenaspecialpurposedesignmayjustbethesensiblechoice.

Blockchainplatformsdesignedforageneralpurpose,suchasEthereumandEris,allowuserstowritetheirownprogramstobestoredontheblockchainandautomaticallyexecutedinadistributedmanner.Theyserveasprogrammableconsensusengines,readytobeutilizedforwhateverpurposetheuserswishtobendthem.Specialpurposedesigns,however,aremuchmore limited in this respect and usually do not allow users to deviate very far from theiroriginallydesigneduses(seetable3).

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Table3.Examplesofdifferentblockchainarchitectures8

Generalpurpose(Optimizedforlogic)

Permissionless

Ethereum Eris

Permissioned

Bitcoin Hyperledger

Specialpurpose(Optimizedforassets)

2.6Thechallengesoftheblockchainecosystem

Whenprojecting the future growthof the blockchain ecosystem, it is often argued that thetechnicalcapabilitiesofblockchain-baseddistributedplatformsareinmanywayssuperiorincomparison tomore conventional platform solutions.When it comes to speculating on thetechnologystandardsofthefuture,however,theessentialquestionisthatofacriticalmass.Inorder to become a thriving technology, technical superiority alone does not suffice. Theadequate presence of three factors is also required in the blockchain ecosphere: demand,competition,andknow-how.

According toblockchain technologydevelopers, thereare roughlya thousandcompanies intheworldfocusingonblockchain-relatedinnovationsatthemoment.Onlyasmallfractionofthesecompaniesareworkingonactualblockchaintechnologydevelopment.Atthispoint,itisstilluncertainwhethertheknowledgeandtheunderstandingonthistechnologywillspreadenoughtoattractsufficientnumbersofcustomers,entrepreneursanddeveloperstoreachthecritical mass of a stable mainstream ecosystem. Furthermore, many other factors, such aschangesinregulationanddisruptivedevelopments incompetingtechnologiescanaffecttheattractioninunpredictableways.

In terms of individual distributed platforms, it is important to bear in mind that, like theecosystem, they too live and die by network effects. In has been pointed out in platformdiscussion that fosteringnetworkeffects is adelicatebalancingact, andbuilding successfulplatforms is difficult at the best of times.9Therefore, it is unclear at this point whethernetworkeffectscanbesufficientlynurturedindistributedplatformsingeneral,especiallyinan aggressive competition environmentwhere centralized platform companies are activelyfosteringtheirownnetworkeffectsthroughconstant,carefullythoughtoutstrategicdecision-making.

8AdoptedfromErisIndustries2016.9Hagiu2014.

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3APPLICATIONSANDUSECASES

3.1Financialinstruments,assetregistriesandmarketplaces

As it has alreadybeen established, blockchain technology canbeused to create immutableand censorship-resistant distributed records of any content. One very useful way to applysuch a technology is for records of ownership. These records can contain ownershipinformation about any asset to which a unique identifier of some kind can be issued,regardlessofwhethertheassetitselfisofdigitalorphysicalnature.

Blockchain technology allows records of ownership to be constructed in such a way thatanyonecanmakeadditionstothedatabasebyadheringtoapredefinedruleset.Thisallowstherecordofownershiptobeextendedintoapaymenttransactionnetworkforcurrency,oramarketplaceforanyotherfinancialassetforthatmatter.

Blockchain-based value transfer and storage systems have certain technical benefitscomparedtoconventionalsystems.Forprivateindividuals,theycanbringincreasedsecurity,more privacy and better control over their personal financial assets.10To businesses,blockchain technology enables lower payment processing fees, accepting payments fromanywhereintheworld,andreducedoreradicatedriskofchargebackfraud.

Blockchaintechnologycan,however,alsoimprovetheefficiencyoftheexistingstructuresofvalue transferbetweenpaymentprocessors, suchasbanksand credit card companies.Oneway such improvements can come about is the reduction of the settlement time betweenbanksfromseveralbankingdaysdowntoanumberofminutes,orevenseconds.

Case:ColouredCoinswithColu

Colu isadigitalasset issuanceandmanagementservicebuiltontopoftheBitcoinblockchain.Theserviceallowstheissuanceofdigitalassetsthroughaprocesscalledcolouring.Inthisprocess,acertainsmallunitofbitcoin ismarkedandusedasa tokenofownership for the issuedasset.By thensending thesmall tokenthroughtheBitcoinnetwork,theownershipoftheattachedasset itselfcanalsobeverifiablyandsecurelytransferred,aseasilyassendingane-mail.

10It should be pointed out that these benefits only apply if the individual is behaving responsiblywith theirdigital assets.Over thepast fewyears, therehavebeenmanycasespresented in themediawherebitcoinsorsome other cryptocurrency has been stolen from a user’s account.While cryptocurrency paymentswould beextremelydifficult to falsifyand theblockchainsystem in itself isveryrigorous,unsafepasswordscanstillbecracked,justaswithanysystem.Justaswithphysicalcash,wheretheanti-counterfeitsecurityfeaturesonbanknotes cannot protect theusers against theirmoneynot being lockedupproperly, the tamper-proof nature ofblockchainscannothelpthoseusingweakpasswordstosecuretheiraccounts.

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Case:Stellar&Oradian–MicrofinanceintegrationinNigeria

The multitude of microfinance institutions in Nigeria is immense, with the number of individual branchofficesextending to tensof thousands.Formerly, thesebranchofficeshave lackedanypracticalmeans tomake transactions between each other. Therefore, the vast rural population of Nigerians not eligible forconventionalbankingserviceshavehadtorelyonphysicaldeliveriesofcashtosendmoneyfromonebranchoffice to another. Needless to say, speed, cost and security posemassive problems for those needing toengageinsuchtransactions.Stellar is an open-source platform that allows users to create financial products and services amongstthemselves using blockchain architecture. Allowing 300,000 transactions for the cost of a single penny,Stellar has taken on the challenge of providing integratedmicrofinance services all across Nigeria. SinceFebruary2016,Stellarhasbeenrunninganation-widetestnetworkinco-operationwiththemicrofinancingsoftwareproviderOradian,coveringatotalof200branchofficesandreaching300,000endusers.Over90%ofthecurrentcustomersarefemale, implyingthatthefull-scaleintegrationofmicrofinanceservicescouldbeasignificantfactorintheeconomicempowermentofwomeninthedevelopingworld.

Case:OpenBazaar–Adistributedfreemarketplace

OpenBazaar is a blockchain-based, fully distributed e-commerce platform that enables totally freetransactingbetweenanywillingpartiesdirectlyamongstthemselves.SincetheusersofOpenBazaarproducethetradingplatformamongstthemselvesasadistributednetworkwithoutanyintemediators,therearenotransactionfeesortradingrestrictionsofanykind.Inotherwords,nopartyhasthepowertocensorthebuyingandsellingthattakesplaceonthenetwork,ortofreezetheassociatedpayments,ifthetransactionsaresettledincryptocurrency.Thetransactingpartiesarefreetodiscloseasmuchoraslittleaboutthemselvestoeachotherastheywant,andtheyarefreetotransact directly without any outsider involvement whatsoever. If so desired and agreed, however, thepartiescanhireanymoderatorof their liking tooversee their tradeand to resolveanypotentialdisputesthatmayarise.Insuchacase,thebuyer,thesellerandthemoderatorallhavetheirowncryptographickey,twoofwhicharerequiredtoexecutethecontract.

3.2Nanopayments

Anotherinterestingprospectofblockchain-basedvaluetransfersystemsisthepossibilityofmaking very small transactions, potentially as tiny as a fraction of a penny, economicallyviable. Inconventionalpaymenttransactionsystems,therearefixedcostsandtechnologicallimits involvedwhich so far have rendered such transactionsmore or less unfeasible on alargescale.

Nanopaymentscanenablecompletelynewbusinessmodelsforonlinecontentcreatorswherecustomerscouldbechargedfornewsarticles,videosandothersuchcontentonadirectpay-per-viewbasis.Thiscouldhaveanotable impactontheshort-sightedcontentcreationlogic

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currently exploitedby somanyonlinemediahouses. Insteadof creating click-baitingnewsheadlines just toattractmoreviews for theadbannersonthewebsite,companiescouldbemore accurately rewarded for creating insightful and meaningful content that the readerstrulyenjoy,irrespectiveofhowmanyadbannersareshownandhowmanyclicksthewebsitegenerates.

Due to theversatileprogrammabilityof cryptocurrencies, other less intuitiveuse cases canalso be presented for blockchain-based nanopayments. For example, tiny, automatedtransactions could be utilized as an e-mail spam filter that would be very difficult tocircumvent.Bysettinganano-scalepricetagonsendingane-mailmessage,thecostwouldbeinsignificantly small to any normal use of e-mail, but it would quickly grow to prohibitiveproportionswhenattemptingtosendmillionsofspame-mails.

Somehavearguedthatthewholeconceptofmicropaymentsisinherentlyflawedbecausethecognitivetransactioncostsofoperatinginanenvironmentrequiringconstantmicropaymentswouldbetoohigh.Thebenefitofusingblockchaintechnologyinthisrespectisthatitallowsthepayments tobe automated to amuchhigherdegree thanpreviouslyhasbeenpossible,thereforeallowinglowercognitivetransactioncostsandmoreconvenientusability.

Case:ChangeTip

ChangeTipisacryptocurrency-basedmicropaymentsplatformwhichallowsattachingrealmonetaryvaluetoonline social interaction. The idea is that instead of simply pressing a like-button to express appreciationtowardsablogpost,forexample,ChangeTipallowspeopletosendtinytipsonanysocialmediaserviceinrealtime,justaseasilyaspressingalike-button.Bysignificantlyloweringthethresholdofrewardingcontentandsmallservices,suchasprovidingaquickanswertosomeone’squestiononthesocialmedia,smalltipsofindividualcentscouldbecomeascommonandcasualas“likes”. Insuchascenario,thetipsreceivedfromactivesocialmediaparticipationcouldamounttoafreebeverageattheendoftheday,forexample,orevenanotablepartofthedailyincomeforsomeonemorepopular.TheconceptofChangeTiphasraisedsomecriticismastowhetherpeopleactuallywanttoslappricetagsontheirsocial interaction.Whilethiscriticismmaywellbefounded,thefundamental ideabehindtheservicecouldhavewiderimplicationsonhowweperceiveandvaluatethedigitaleconomy.Currently,thereisalotof work and content creation happening online which doesn’t show up in any financial metrics of theeconomyatall.Largely, this isduetothedecouplednatureofdigitalgoods/servicesfromtheirrespectivecash flows, but one factor in the problem has been that there is no objectivemeasure for the value ofgratuitoussocialmediainteraction.Blockchain-basedmicro-andnanopaymentscould,intheory,provideamarket-driven solution to such valuationproblems, thus providing improvedmetrics and amoredetailedpictureofthenewformsofeconomicactivityinthe21stcentury.

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3.3Identitymanagementandonlinereputation

The immutable and distributed nature of blockchain databases can also be utilized foridentification and reputation management. The common problem with the digitalidentificationmethodscurrentlyavailableisthattheymostlyrelyonatrustedintermediatorto verify the authenticity of an identity. This introduces service fees and gives theintermediatorallthepowertodecidewhichserviceprovidersareallowedtomakeuseoftheverifiedidentity.

Moreover, in Finland, for example, digital identification services have mainly become anestablished domain of banks and other financial institutions. As such, they have legalrequirements, aswell as their own economic interests, to know their customers to amuchhigherdegree thanwouldbe required to simplyestablishaverified identity.Consequently,anyonewilling to identify themselves online, is forced to give outmuchmore informationabouttheirsourcesofincomeandfinancialsituationthanisactuallynecessary.

Blockchaintechnologybringsimprovementstothecontemporarydigital identityservicesintwofronts.Firstly, itremovestheneedtogothroughatrustedthirdparty,thuseliminatingthe service fees involved. It also nullifies any artificial requirements to disclose privateinformationaboutoneselfincontextswhereitisnotrelevanttothetaskathand.

Secondly,blockchaintechnologymakesdigitalidentitiesmoreubiquitousinthattheycanbefreelyintegratedtoanyservicewheretheidentityholderandthecounterpartytogetherwishto do so. This makes online reputation much more pervasive and meaningful, potentiallyleadingtoadigitalenvironmentwherecompletestrangersaresignificantlyeasiertotrustduetotheirdocumentedreputation.

Case:Bitnation

Bitnationcalls itselfa“governance2.0”service.Poweredbyblockchaintechnology,theorganizationseekstoprovideallthesameservicesastraditionalgovernmentsbutinagloballydistributedmanner.Inadditionto validated identities,Bitnation currentlyoffersnotarization,dispute settlement, and someother relatedservices.SinceDecember2015,BitnationhasbeencollaboratingwiththeEstoniangovernmenttoofferpublicnotaryservices toEstoniane-Residents.Bysigning inwith theirelectronic IDs,Estoniane-Residents fromalloverthe world can now officially notarize birth certificates, marriage arrangements, testaments, businesscontracts,landtitles,oranyothersuchdocumentsthroughBitnation’sservice.DuringtherecentEuropeanrefugeecrisis,Bitnationhasalsobeenrunningarefugeeemergencyresponseprogram,providingrefugeeswithauthenticatedidentificationdocumentsthatcanhelpinreunitingfamilies,debitcardsthataredirectlylinkedtoaccountsofdonatedcryptocurrency,andothersuchimmediatefirst-handservices.

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3.4Supplychainrecordsandproduct-centricdata

Whencustomersarelookingtobuyproducts,theyarecurrentlyverylimitedintheirabilitytoevaluate theoriginsof thematerialsusedor theethicalaspectsofhowproductshavebeenmanufactured. What’s more, even companies themselves cannot always keep track of thelegitimacy of their complex supplier networks. Blockchain technology has the potential tobringmassiveimprovementstothisbyprovidingcompaniesandconsumerswithaccessintodetailedandimmutablesupplychainrecords,onthelevelofindividualproducts.

Asapracticalexample,acustomerwantingtopurchaseafrozenmealoffishcurrycouldscanaQRcodeontheitemtoseewheretheingredientscamefrom,howmuchwaspaidtoeachproducer andwhether ornot theproduct hasbeenmaintainedwithin theproper sub-zerotemperaturerangethroughoutitslogisticaljourney.Notonlywouldthissignificantlyenhanceproductsafety,but itwouldalsoempowerconsumerstovotewiththeirwalletsmuchmoreefficientlytoweedoutbadactors.

Another twist of essentially the same idea could be applied in industry. Instead of all thecompaniesinthesupplychainmaintainingtheirownindividualproductionmodelsandlocalcopies of the product data, all that information could be stored in a distributed blockchaindatabaseandtiedtothecorrespondingproductsandcomponents.Thisway,allthedifferentfileversionscouldnot falloutofsyncandbecomeobsolete,andall theproductdatawouldalways be verifiable as authentic. As a result, losses resulting from adhering to incorrectproductionmodelscouldsignificantlybereducedleadingtomoreefficientproduction.

Case:Everledger–Adistributeddiamondcertificationdatabase

Everledger is a company that specializes in trackingdiamondsusing laser-inscribed serial numbers, digitalthumbprintsofattributes,andadistributedblockchaindatabase.Thankstoprovidinganeffectivemethodofkeeping track of the origins, themovements, the ownership trail, as well as any other events and newsarticlesinvolvingcertainspecificdiamonds,abuyeroranauthoritycomingacrossapreciousstonecaneasilyverifywhetherithasbeeninvolvedinatheft,afraudoranyotherkindofunethicalactivity.RecordslikeEverledgercouldalsobeutilizedinothercomplementaryways.Theycouldactas informationrepositoriesforvariouskindsofsmartcontractsthatinvolvetransportingphysicalgoods.This, in turn,couldbringsignificantclarity into thevalueaddedtaxsystem inEurope, forexample,whereonlinevendorsarerequiredtochargetheVATaccordingtoeachbuyer’scountryofresidenceindividually.

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3.5Smartcontracts

Theideaofsmartcontractsisthatbyformulatingcontractualarrangementsbetweenpartiesintocomputercodeformatandstoringthemintoablockchain,contractscanbemadetamper-proof,self-executingandautomaticallyenforceable.Byreducingtheneedforroutinehumanintervention, the entire contractual process can thus be made less risky and more cost-efficient.

In order to convert a conventional paper contract into a smart contract form, it must bepossible to represent thearrangementasa logical flowchartof “ifX,thenY,elseZ” typesofdependencies. Contracts, however, often involve a degree of ambiguity as to whether aspecified condition has been adequatelymet or not.While there are various solutions thathave been proposed to this problem (such as utilizing distributed prediction markets ormulti-signature encryption keys), the truly interesting question is whether entirely newautomated contractual techniques will emerge which, at least in some cases, allow suchambiguitiestobeavertedcompletely.

Thepossibleusecasesofsmartcontractsarevirtuallyendless,extendingfrome-commercetoautonomous machine-to-machine transactions, and from pre-contracted budgets toautomatedaccess control.One examplewouldbe an automated lease contract on a vehiclethatwould revoke theuseraccess to theasset if theproperpaymentshavenotbeenmadeaccordingly.

Case:UjoMusic–Adecentralizedmusicplatform

Thesettlingtimes inmoderndaybankingaresometimesconsideredexcessivelyslow,oftentakingseveralbankingdaystoclear.Inthemusicindustry,however,thetimethatartistshavetowaitforroyaltiesfortheirwork isusuallymeasured inyears.UjoMusic isaservicewhichusestheblockchain-basedsmartcontractsplatformEthereumtobringmusic licensing to the21st century.Ujo’s serviceallowsartists to record theirwork into a blockchain as a smart contract which specifies the shares that each contributor gets of therevenue. Once a person downloads the song and pays for it in crypto-currency, the payment is instantlychannelledtoallthecontributorsthroughthesmartcontractinrealtime.Ujo Music also introduces new capabilities that the current archaic licensing framework of the musicindustry does not allow. For example, throughUjoMusic, an artistwishing to remix an existing song candownload just the isolatedvocal trackbyagreeing to the contractual terms specifiedby the singer in thesmart contract. For example, the singermight have stipulated that the vocals are available for any non-commercial use for 50 euros, and for any commercial use for 25% of the remixed song’s total revenue.Anyone agreeing to the predefined terms of the smart contract can immediately acquire the pieces theyneedtostartremixing,withouthavingtocontactrecord labels,studiosoreventheartists themselves.Anacceptanceoftermsofthesmartcontractwillsuffice,andtheroyaltiesfromanyrevenuethatthederivativeworkgenerateswillbechannelledtotheoriginalsingerinrealtime,justlikewiththeoriginalworkitself.

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3.6InternetofThings

Therearemanyproposedplatformsandstandardsinexistencetodaythatcouldfunctionasabasis of a ubiquitous network of smart systems, commonly referred to as the ‘Internet ofThings’. Most of these platforms and standards, however, are based on a centralizedarchitecture, to one degree or another. While centralized systems are often cheaper andeasiertoconstruct,theymightnotbewhatisbestfortheInternetofThingsasawhole.11

Understandably, companies are usually reluctant to submit into operatingwithin technicalframeworksthatarecontrolledbyothercompanies. Ingeneral, thismakesa lotofsense,ofcourse,asgettinglockedintosomeoneelse’splatformusuallymeansbecomingtheunderdogin terms of value capture potential. Therefore, companies would rather create their owncompany-specificorconsortium-basedsystems.12

If thearchitectureof theentire InternetofThings consistedof countless such company-orconsortium-levelplatforms,theinteroperabilitybetweenallthedifferentplatformsbubblingintoandoutofexistencewouldpresentahugechallengetoseamlesslarge-scalefunctionality.Conversely,ifasmallnumberofplatformsmanagedtofosterenoughnetworkeffectstogrowinto universal IoTplatforms, such centralized solutions could easily be turned into verticalsilos, or so-called walled gardens. In other words, the company in control of the platformcouldbydesignpurposefullyreduceinteroperabilitywithotherplatformsinordertoenforceastrongercustomerlock-intoitsowndomainofproductsandservices.13

So, one could argue that building network-of-systems-level IoT platforms with strongnetworkeffects isdifficultbecauseof thereare inherentlyconflicting interestsbetween theplatformparticipantsandtheplatformproviders.Blockchaintechnologycouldprovideawaytocircumventthisproblembyofferinganeutralterritorywhereallparticipantscanoperateonasharedplatform,oncompletelyequalfooting.Insteadoftheplatformproviderbeingthedominantplayertothepowerofwhomallothersmustsubmit,blockchaintechnologycouldenable all the participants to produce an IoT platform together in a distributed manner,withouthavingtotrusteachotherinalmostanycapacity.

11Mattila–Seppälä2015.12Seppälä–Mattila2016.13Filament2015.

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Case:The21BitcoinComputer

21 Inc isa company specializing inembeddedcomputerhardwarewithnative support for cryptocurrencytransactions.Afterraising$121millionofventurecapitallastyear,21Inchaslaunchedadeveloperversionof the 21 Bitcoin Computer – a portable cryptocurrencymicropayment serverwith an integratedminingchip.Thedevicehasnativeprotocolsupportforvariouscryptocurrency-relatedfunctions,sothatbysimplyadding one line of code into its computer program, the device can, for example, be told to execute acryptocurrencypayment,ortowaituntilapaymentismadetoitsaccountbeforecontinuingitsprogram.The company’s vision is to eventually incorporate a mining chip into every digital device, so thatcryptocurrencyminingcapacitywouldultimatelyconstituteonefundamentalsystemresourceincomputersalongside theCPUperformance,amountofbandwidth,memorycapacity,andharddisk space.Witheachdevice’s stockof cryptocurrency constantly replenishing through theprocessof embeddedmining, digitalvalue transactions could be conveniently automated between devices by writing them directly into thecomputerprogramofvirtuallyanydevice.Inessence,21 Inc’sconceptwouldallow for IoTdevices to transactdirectlyamongst themselves,withouttheneed for any centralizedbackgroundarchitecture.Whileenabling cost-savingsand increasednetworkrobustness, the 21 Bitcoin Computer could in time also allow devices to autonomously exchange otherresources thanmere data, such as computing power, bandwidth, storage space, or even electricity, thusbringingusonestepclosertothefeasibilityofIoT.

3.7Votingsystems

Onlinevoting systems canbeproblematic tobuildbecauseof the complex requirementsofneutrality in such systems. To ensure a fair election, online voting systems must remainanonymous yet auditable, as well as tamper-proof but unintermediated. Blockchaintechnologyisveryappealinginthisregardbecausefromatechnicalstandpoint,ithastherareabilitytotickalltherightboxes.

Therearemanypossibleways to createablockchain-basedvoting systembut the simplestdescriptionisthat,inessence,theyworkmuchthesamewayasacryptocurrency.Themaindifferencehereisthatinsteadoftransferringtokensofmonetaryvaluebetweenaccounts,thetokens transferred in the network are used to describe individual votes transferred intoballots.

Due to the fact that blockchains can be designed to be public yet anonymous, anyone caneasily verify the voting outcome and also check that their own vote has been taken intoaccount accordingly, while still maintaining ballot secrecy. Blockchain technology canthereforehelptoreducecorruptioninpoliticalsystemsandactasasafeguardagainstriggedelections.

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3.8Decentralizedautonomousorganizations

Togiveanideaofthewiderunexploredpotentialofblockchaintechnology,oneofthemoreexotic ideas is to create so-called decentralized autonomous organizations, or DAOs. Theargument is that by combining cryptocurrency with self-executing smart contracts, it ispossible tocreateanetworkofautomatednodesthatoperate togetherasasystemwithoutany externalhumanguidance, according to an incorruptibleprotocol specified in computercodeandenforcedautomaticallyontheblockchain.

Onewaytoconceptualizedecentralizedautonomousorganizationsistothinkofthemastheopposite case of robotic systems (see table 4). In robotic systems, humans are used toorganize machines operations while in decentralized autonomous organizations, machinesareusedtoorganizehumanoperations.

Decentralized autonomous organizations could in time be assigned the role of manyorganizations in today’s society. Especially in situations where the purpose of theorganizationistoprovidegoodsandservicestoitsowners,asisthecasewithco-operatives,decentralizedautonomousorganizationsprovideinterestingfutureprospects.

Case:Neureal–Adistributedartificialintelligenceplatform

Neureal is a project utilizing blockchain technology to create an open distributed platform for artificialintelligence algorithms. The idea is that the nodes of the network run various AI algorithms that makepredictionsonanydesiredinputdatafromtheoutsideworld.Anywillingparticipantisfreetoaddtheirownnode with their own AI algorithm into the network. The most accurate predictions are rewarded withcryptocurrencywhich over time leads to an evolutionary development towardsmore accurate powers ofprediction.Thenodes in theNeurealnetworkcan independentlypurchasepredictions fromeachother toutilizeasapartof theirownanalytics. Thismeans that thenodescanautonomouslyarrange themselvesintoahierarchicalstructure,greatlyresemblingthemechanicsofadeeplearningmachineinthisrespect.Currently,Neurealisstillinaveryearlyphaseofitsdevelopment.Intime,however,suchblockchain-basedneuralnetworkscouldtheoreticallyleadtothecommoditizationofartificialintelligencealgorithmsentirely.Insuchascenario,anyonewouldbeabletoparticipate inthealgorithmiceconomyandto innovateas itsfullyempoweredmember.It iswellpossiblethatnothingmightevercomeoutofNeureal.Morethananything,however, it isagoodillustrationofthefactthatnotalldisruptionsandusecasesofblockchaintechnologyhaveyetbeencharted,noraretheyintuitivelyclearatthefirstthought.

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Table4.Therelationshipbetweendifferentkindsofautomatedsystems.14

Humansontheedges Automationontheedges

Humansinthecenter Humanorganizations Roboticsystems

Automationinthecenter Decentralizedautonomousorganizations(DAOs)

Fullyautomatedsystemsandsystemsofsystems

14AdoptedfromButerin2014.

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4IMPLICATIONS

4.1Digitaltrustredefined

Oneofthefundamentaldisruptionsthatblockchaintechnologyiscausingisthatitcompletelyredefines how trust is perceived in a digital environment. In essence, blockchains haveintroducedacompletelynewtypeofdigitaltrustwhichmanifestsitselfinafullydistributedway without anyone having to trust any single member of the network. The only trustrequired is in that,onaverage, theparticipantsof thenetworkarebehavinghonestly—ormoretothepoint,thatthemajorityoftheentirenetworkisnotcolludingagainsttheothersinacoordinatedmanner.

Byremovingsinglepointsoffailurewheredishonestywouldbedetrimentaltotheintegrityofinformation,blockchaintechnologyhasopenedadoortoamoredemocratizedspaceofsocialand economic activity. As we transition from a cyberspace where trusting unknowncounterparties ishard intoadigitalworldwhere transactingwithstrangers iseasy,wecanexpecttoseenewtrendsofmoredirectanddecentralizedeconomicactivityinallfrontiers.

4.2Thetrendofdisintermediation

In our modern society, the role of many intermediaries can be essentially reduced to onething: facilitating trustbetweenparties. Inadigitalenvironment, it isoftendifficult to trustthatprivateindividualsarewhotheysaytheyare,andthattheywilldowhattheypromise.Bigcompanies,however,standtolosemoreingoodwilldamagesthantheystandtogainfrombreachingacontractwithacustomer.Asthisismorethancanbesaidofunknownindividualsonline, companies have built businesses around intermediating trades by lending theirtrustworthinesstothecause–butforaprice.15

Byofferingatechnicalsolutionfordigitalinteractionwheretrustingcounterpartiesissimplynot necessary, blockchain technology can render intermediators, or at least their currentfunctions, obsolete. As a consequence, the businessmechanics and value creation logics ofintermediationplatformsmaybeinforashockwheretrust,orthelackthereof,isnotenoughinitselftoensurecustomerlock-inanymore.

15Mattila–Seppälä2016.

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4.3Democratizationofthesupplychain

Anothereffectpotentiallyresultingfromthedigitaltrustanddisintermediationtrendsisthereconfigurationof thebalanceofpower insupplychainnetworks.Upuntil thepresentday,decisions relating to the supply chainof aproducthavemainly fallenwithin thedomainofcompanies.Evenifcustomerswereabletohavesomeideaofwhatkindsofrawmaterialsandlabourinputswentintotheproducts,theywouldseldomhaveanyvisibilityintothedivisionof costsandprofits in thosesupplychains—not tomentionanydecisivepoweroversuchmatters.

Duetotheincreasedvisibilityintosupplychainnetworksenabledbyblockchaintechnology,customers are able to demand much more detailed information about their products andservices. With blockchain applications, consumers could even specify minimum andmaximumpricesthattheyarewillingtopayforeachingredientandlabourinputindividuallyandthenscanforproductsthatmeettheirspecifiedcriteria.

Alternatively,takingthingsonestepfurther,consumerscouldevenutilizesmartcontractstocustomizetheentireproductionprocesstomatchtheirownconsumerpreferences.Inotherwords,insteadofchoosingastandardproductfromavendor’scatalogue,theconsumercouldtransact with the producers and manufacturers directly. By doing so, the customer couldarrangeeachstep inthesupplychaintotheirownliking,usingspecifiedrawmaterialsandsuppliersforaproductproducedexactlyasthecustomerwantsit.Smartcontractscouldevenallowconsumerstoautomatetheoptimizationofalltheparameters,sothatifamoreoptimalcontract for a certain production phase is offered, it is automatically accepted andincorporatedintothechainofproduction.

4.4Ashifttowardsanautomationeconomy

Self-executingsmartcontractsconstituteabigpartof thedisruptivepotentialofblockchaintechnology.Whiletheywillundoubtedlyreducetransactioncostsbetweenhumans,theirtruedisruptive potential lies with machine-to-human and machine-to-machine contracts.Combinedwithmicro-payments,machinetransactionscouldenablecompletelynewkindsofbusiness models. For example, autonomous distributed markets could help to allocateproductionresourcesmuchmoreefficientlybetweenindividualproductsandcomponentsonanautomated,constantlyadjustingadhocbasis.Individualcomponentscouldautonomouslyaccumulatewealthinordertocovertheirownmaintenanceandrecyclingcosts.16

16Mattila–Seppälä2015.

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4.5Reconfigurationofregulatorycapacity

The legal conventions of a given era often reflect what is technologically possible in thatparticular time period. As blockchain technology disrupts societal systems, it alsoreconfigurestheregulatorycapabilitiesthatregulatingauthoritieshaveinthosesystems.

For example, since it has not been previously possible to transfer value over the Internetwithoutmediationfromatrustedthirdparty,thesemediatorshaveprovidedanaturalchokepoint for financial regulation. By introducing direct legal requirements and obligations forpaymentprocessors,regulatorshavebeenabletogoverntheentire fieldofelectronicvaluetransactions indirectly. The same holds true in many other fields of society just alike.Whereverintermediatorshavebeennecessarytofacilitateonlineinteraction,regulationhasoftenbecomeshapedbythisfact.

Due to its disintermediating effect, blockchain technologymaywell render someof the oldregulatorystrategiesobsolete.However,italsointroducessomenoveltechnologicalabilitiesthat can be useful for entirely new regulatory approaches. The increasing significance ofcomputer code in governing economic behaviour in society means that the possibility ofaffecting behaviour by regulating computer code through standards, for example, is alsoincreased.

Furthermore, other regulatory benefits can also be pointed out, such as increasedtransparency and automatization. For example, with the help of smart contracts, customtariffsandtaxesrelatedto international tradecouldbeautomatedtoamuchhigherdegreethan today. By tapping into asset tracking databases, such as Everledger, themovement ofgoodsintoandoutofthecountrycouldbeautomaticallydetectedandusedasaneventtriggerforautomatedtaxpaymentsanddeductions.

Theshift in regulatorycapabilities towardsamore technological centreofgravitymayalsohavean impactonwhatkindof regulatory competence is requiredof legislators andothergovernmentofficialsinthefuture.

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References

Buterin,Vitalik(2014)DAOs,DACs,DAsandMore:AnIncompleteTerminologyGuide.<https://blog.ethereum.org/2014/05/06/daos-dacs-das-and-more-an-incomplete-terminology-guide/>Accessed14thApril2016.

ErisIndustries(2016)WhatisaBlockchain?<https://docs.erisindustries.com/explainers/blockchains/>Accessed14thApril2016.

Filament(2015)ADeclarationofDeviceIndependence.<https://medium.com/@FilamentHQ/a-declaration-of-device-independence-b6f83e8b6441#.flo8gr95x>Accessed14thApril2016.

Hagiu,Andrei(2014)StrategicDecisionsforMultisidedPlatforms.MITSloanManagementReview,Vol55(2),pp71–80.

Kenney,Martin–Zysman,John(2016)TheRiseofthePlatformEconomy.IssuesinScienceandTechnology32(3),p.61–69.

Mattila,Juri–Seppälä,Timo(2015)BlockchainsasaPathtoaNetworkofSystems–AnEmergingNewTrendoftheDigitalPlatformsinIndustryandSociety.ETLAReports45.<http://www.etla.fi/julkaisut/blockchains-as-a-path-to-a-network-of-systems-an-emerging-new-trend-of-the-digital-platforms-in-industry-and-society/>Accessed14thApril2016.

Mattila,Juri–Seppälä,Timo(2016b)DigitalTrust,Platforms,andPolicy.ETLABrief42.<http://www.etla.fi/julkaisut/digital-trust-platforms-and-policy/>Accessed14thApril2016.

Nakamoto,Satoshi(2008)Bitcoin:APeer-to-PeerElectronicCashSystem.<https://bitcoin.org/bitcoin.pdf>Accessed14thApril2016.

Pon,Bruce(2016)Blockchainwillusherintheeraofdecentralisedcomputing.<https://www.linkedin.com/pulse/blockchain-usher-era-decentralised-computing-bruce-pon>Accessed14thApril2016.

Seppälä,Timo–Mattila,Juri(2016)UbiquitousNetworkofSystems.BRIEResearchNote1/2016.<http://www.etla.fi/julkaisut/ubiquitous-network-of-systems/>Accessed14thApril2016.

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Appendix1.Examplesofconsensusmechanisms.

Consensus mechanism

Scarce voting resource

Benefits Draw-backs Examples

Proof-of-work CPU power (i.e. electricity)

Censorship-resistant and tamper-proof, strong immutability of record

Physical resource consumption (electricity), difficult to scale

Bitcoin, Litecoin

Proof-of-stake Ownership of scarce tokens within the database

Energy-efficient, fast, easy to scale

Nothing-at-stake problem (casting a vote doesn’t cost anything, which allows voting for different versions of the blockchain simultaneously)

NXT

Delegated proof-of-stake

Ownership of scarce tokens + peer reputation (elections for delegates)

Allegedly more efficient than PoS

Voter apathy in elections can leads to excessive centralization and reduced robustness

BitShares

Proof-of-activity (PoW/PoS-hybrid)

CPU power + ownership of scarce tokens

Combine some of the benefits of PoW and PoS

Still have some of the draw-backs of PoW and PoS

PeerCoin

Proof-of-burn Destruction of scarce tokens within the database

Gives the benefits of proof-of-stake without any of its draw-backs

Difficult to build network effects and to implement before the blockchain is very mature

Counterparty

Proof-of-validation Security deposit of scarce tokens subject to burn if voting dishonestly

Gives the benefits of proof-of-stake without almost any of its draw-backs

Nothing-at-stake problem still persists over long periods of time

Tendermint

Proof-of-capacity / Proof-of-storage

Free storage capacity (PoC) / Stored random data (PoS)

Energy-efficiency, speed

Physical resource consumption (wasted hard drive space) Nothing-at-stake problem exists, can morph into PoW

BurstCoin

Proof-of-importance Participation in the economy (scarce tokens + transactional activity + peer reputation)

Tokens less likely to become concentrated to the point of crippling the entire system

Vulnerable to Sybil attacks, nothing-at-stake problem present on some level

NEM

Ripple protocol consensus algorithm

Peer reputation (Unique Node List)

Path-dependent consensus (fast, scalable and provable in state)

Unique Node Lists need to be actively maintained, network structure needs to be actively monitored

Ripple

Stellar consensus protocol

Peer reputation (Quorum vote)

Solves the nothing-at-stake problem without PoW

Initial tokens need to be manually disseminated

Stellar