1. Blockchain Governance: Opportunities and Challenges
Rachid Meziani, PhD
Fintech - Kuwait: October 2018

2. Positioning Blockchain Governance models and challenges
Agenda
Positioning Blockchain
Governance models and challenges
How does it help finance?
Summary

3. The Technological Revolution

4. Anything that you can conceive of as a supply chain, blockchain can vastly improve its efficiency - it doesn't matter if its people, numbers, data, money" Ginni Rometty, CEO IBM
The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.” Don & Alex Tapscott, authors Blockchain Revolution (2016)

5. Moving toward the Internet of value

6. Blockchain History

7. 10% de GDP will be stored in blockchain by 2027
Source: Gartner, World Economic Forum

8. Blockchain in numbers
$600 billion: The size of the entire cryptocurrency market by the end of source: CoinMarketCap
$2.1 billion: Global spending on blockchain solutions in source: IDC
42.8 percent: The expansion of the blockchain space every year to source: Netscribes prediction
13 percent: Senior IT leaders who have clear and current plans to implement blockchain source:DG Connect research.

9. – Business Networks benefit from connectivity
Participants are customers, suppliers, banks, partners
Cross geography & regulatory boundary
– Wealth is generated by the flow of
goods & services across business
network in transactions and contracts
– Markets are central to this process:
Public (fruit market, car auction), or
Private (supply chain financing, bonds)

10. Ledger is THE system of record for a business
Ledger is THE system of record for a business. Business will have multiple ledgers for multiple business networks in which they participate.
– Transaction – an asset transfer onto or off the ledger
John gives a car to Anthony (simple)
– Contract – conditions for transaction to occur
If Anthony pays John money, then car passes from John to Anthony (simple)
If car won't start, funds do not pass to John (as decided by third party arbitrator) (more complex)

11. Blockchain ...

12. Problem ... Inefficient, expensive, vulnerable

13. A shared, replicated, permissioned ledger ...
With consensus, provenance, immutability and finality

14. Requirement for blockchain for business ...

15. Records all transactions across business network
Shared between participants
Participants have own copy through replication
Permissioned, so participants see only appropriate transactions
THE shared system of record

16. Business rules associated with the transaction
Verifiable, signed
Encoded in programming language
Example:
Defines contractual conditions under which a bond transfer occurs

17. The ledger is shared, but participants require privacy
Participants need:
Appropriate confidentiality between subsets of participants
Identity not linked to a transaction
Transactions need to be authenticated
Cryptography central to these processes

18. The ledger is a trusted source of information
Participants endorse transactions
Business network decides who will endorse transactions
Endorsed transactions are added to the ledger with appropriate confidentiality
Assets have a verifiable audit trail
Transactions cannot be modified, inserted or deleted
Achieved through consensus, provenance, immutability and finality

19. Essentials of Blockchain
Transactions are added to the ledger as new blocks on a chain
Copies are replicated by each transaction agent or validator
Transactions' validators operate through consensus mechanism = self-policing, verifiable, trustable
Validation resilient to malicious attacks
System is consistent and failure tolerant

20. The benefits of blockchain The great unknowns
Increased transparency
Accurate risk tracking
Permanent ledger system
Reduced operating costs
Complex technology
Regulatory implications
Implementation challenges
Competing platforms

21. How does it work? Nolan Bauerle
Nolan Bauerle

22. Integrity of data on a proof-of-work blockchain
proof-of-work scheme makes altering historical data in a blockchain prohibitively costly, since a potential thief or forger would have to alter not only the transaction record they wished to divert, but also all subsequent blocks up to the current one.
source: IEEE Spectrum

23. Governance of blockchains is often cited as a critical issue as the technology achieves wider use in different industries.

24. Enterprise Governance is a balance between Performance and Conformity

25. purposes of corporate governance against the basic properties of blockchain technology
Transparency
Accountability
Responsibility
Fairness
Properties of Blockchain
Shared distributed ledgers
Irreversibility of records
Peer-to-Peer communication
Smart contracts

26. Blockchain has the potential to link corporations, industries, and governments
but the technology is still in its relative infancy, and must overcome the barriers of incumbent legacy systems

27. Current Challenges to Blockchain Governance
Scalability: How big can you grow without sacrificing efficiency?
Privacy: How secure is secure?
Interoperability: Will your blockchain play nicely with other blockchains?

28. How Blockchain Governance Help?
Privacy
Provides a framework for adaptability, so projects
can act quickly when inevitable problems and security issues come up.
Speed
Lowers scalability obstacles by allowing blockchains to function faster
Standards
Provides organizations with a foundation for shared standards, so they can explore opportunities for interoperability without sacrificing the privacy of their data.

29. Types of Blockchains Federated
Operates under the leadership of a group
Access is limited to only members of the group
Due to limited membership, they are faster, can scale higher, and offer more transaction privacy
Distant cousin of intranets of 1990s
Federated

30. Permissionless / Private
Access might be public or restricted, but only a few users are given permission to view and verify transactions
Ideal for database management or auditing services, where data privacy is an issue
Compliance can be automated, as the organization has control over the code

31. Permissionless / Public
Open-source and available to the public
Transactions are transparent to anyone on the network with a block viewer, but anonymous.
The ultimate democracy – this fully distributed ledger disrupts current business models by removing the middleman
Minimal costs involved: no need to maintain servers or system admins

32. Hybrid
A public blockchain, which hosts a private network with restricted participation
The private network generates blocks of hashed data stored on the public blockchain, but without sacrificing data privacy
Flexible control over what data is kept private and what is shared on the public ledger
Hybrid blockchains offer the benefits of decentralisation and scalability, without requiring consensus from every single node on the network

33. Governance Models Address the roles of three key players
Nodes
Miners
Nodes are the powerful computers that host copies of the ledger, and must validate each transaction.
Nodes protect the integrity of the blockchain by allowing the ledger to remain decentralized, making it resilient to hacks
Miners are powerful nodes who group transactions into blocks and add them to the blockchain.
Because of the hardware and the expertise involved miners are compensated for each block they successfully add to the chain.

34. Governance Models Delegated Proof of Stake
All nodes vote to elect a limited number of nodes who they trust to validate transactions on their behalf.
These elected nodes - or Witnesses - function like elected of officials, and have the power to validate a transaction on behalf of others.
Voting is ongoing, and Elected Nodes can be replaced any time if other users deem them untrustworthy.

35. Decentralized Autonomous Organizations (DAO)
A DAO is an Organization that runs itself.
Each member has an equal stake, so corporate corruption can be minimized
DAOs use Smart Contracts to auto-complete several business decisions without human
interference

36. How Blockchain can help finance?
“What the internet did for communications, blockchain will do for trusted transactions.”– Ginni Rometty, CEO of IBM
1) Simplified Cross-Border Payments:
Everex Wallet
RippleNet

37. How Blockchain can help finance?
2) Fraud & Cyber Crime Reduction:
45% of financial intermediaries suffer from fraud and cybercrime every year
3) Less Reliance on Cash :
Blockchain technology - Compliance regulations = blockchain-based digital currencies for notes and coins
Bank of England and the central bank of Norway, are already discussing discontinuing use of notes and coins entirely

38. How Blockchain can help Finance?
4) Easy KYC (Know Your Customer):
Financial institutions spend $60 million to $500 million per year to keep up with Know your Customer (KYC) - Thomson Reuters

39. How Blockchain can help Finance
5) Easier and Cost Effective Payments:
Enable higher security and lower costs for banks to process payment between organizations and their clients and even between banks themselves
blockchain would eliminate the need for a lot of intermediaries

40. How Blockchain can help Finance
Traditional Contracts
Smart Contracts
6) Remove Intermediaries with Smart Contracts :
Bank of America Merrill Lynch, Citi, Credit Suisse and J.P. Morgan
Healthcare
Agriculture

41. How Blockchain can help Finance?
7) Seamless Identity Management :
Users can choose how to identify themselves and who will be informed
Users register their identity on the blockchain, but can re-use that identification for other services
identity is safe inside a digital network and creates a seamless access

42. Summary
Internet foundations were laid in the 1960s, but it wasn’t until the 1990s when it became mainstream.
Building governance structures for blockchain applications is still in the very early stages, but has a striking amount of potential.
If blockchain technology can overcome its scalability issues with dynamic governance systems, the potential applications are limitless.