Chapter 4

Use Cases—Synergy & Final Frontiers

Understanding how a Swiss Army knife opens and closes is not nearly as captivating as watching one in action. For the average person going about their day, understanding how the internet works is last on their list of things to do compared to watching another episode of Friends or the next March Madness basketball game. This is the beauty of technology that fundamentally changes the world—what it enables becomes far more important than how the technology works. We are tool-using creatures. Kids can navigate an iPad at the age of four. A curious individual can know the temperature outside by glancing at a piece of glass and circuits. Millions of people type on little plastic shapes that darken and lighten pixels on a screen that are then perceived as letters and symbols. You make phone calls at the touch of a button without stopping and pondering just how incredible it all is. And yet somehow we navigate the digital world intuitively. Isn’t it all just a little absurd?

The use cases of blockchain are vast, ambitious, and utterly mind boggling. Valuable characteristics of a blockchain are as follows: decentralization, transparency, and immutability. We have discussed blockchain and the digital currency it enables, but what other mechanisms can be baked into the blockchain ledger itself? The most important mechanism enabled is a smart contract.

You can picture a smart contract as a vending machine (albeit a digital one). People approach the vending machine and insert currency into the machine. The machine makes it perfectly clear that if you hit “A5,” you are going to receive a bag of Cheetos. In addition, you know exactly where the destination for what you are receiving is going to be—right at the bottom of the machine. The process is clear as day, simplistic, and largely self evident.

A smart contract is just that—a vending machine hosted on the blockchain. Smart contracts have public addresses, just like anyone who owns any cryptocurrency of a particular blockchain. Anyone can interact with the digital vending machine (smart contract) by sending cryptocurrency to the public address of the smart contract. The smart contract will then execute autonomously and spit back out the digital equivalent of a bag of Cheetos based on how that particular vending machine is designed. Note that the design of smart contracts is publicly visible and, once committed to the blockchain, immutable—no one can tamper or change that particular vending machine once it’s hosted on the blockchain, just like how transactions are immutable once appended to the ledger. This is what enables so called “trustless trust” when it comes to digital contracts.

Smart contracts are where a large amount of the utility of blockchains is from—they are a perfectly neutral third party in the form of a program. Why interact with a Cheetos salesman in person if you can just use a vending machine that will guarantee the entire exchange will be fair? What smart contracts are capable of achieving are only limited by creativity and implementation. Implementation of smart contracts is tied to a simple question: How can we replace a human intermediary with the digital vending machine equivalent?

Simple Smart Contracts

Today is your first day of work. The year is 2030. Your employer asks for your public crypto wallet address. Your employer then posts a smart contract on the blockchain that interacts with the company’s wallet—designed such that the digital vending machine (smart contract) pays you two ETH (a cryptocurrency) every five days for the next two months. This smart contract is perfectly automated, out of the hands of any third party once it is posted. The HR team no longer has to worry about posting or managing this payment process once the smart contract is set up, saving time and money. In addition, as a worker you are happy because the whole process, once posted, is immutable. Your contract is locked in and guaranteed, and you no longer are in the hands of a human party.

Andrew walks up to a voting booth, and casts a ballot (digital or physical, it does not matter). After Andrew casts his ballot, a nefarious actor changes his vote. Andrew is angry, how is it possible for a vote to be changed?

The government decides to modernize. The new voting infrastructure implements a blockchain. The “voting” smart contract hosted on the blockchain would receive votes as inputs, updating the total for candidate A and candidate B. At the end of the allotted time, a single token is automatically sent to the public address that represents the winning candidate. The best part? Because transactions on a blockchain are guaranteed to be immutable, your vote can never be changed. The history and decision of each vote is etched into the history of the ledger. Cryptographically, the election is secure.

You are in your late twenties and finally decide to purchase a house. Your friend Carol has posted a smart contract on the blockchain that transfers ownership of the deed over to the buyer, along with a seller’s affidavit that will be appended to the blockchain permanently—notarizing the purchase in perpetuity in the name of the buyer. The contract is publicly visible, so you are able to make sure you want to partake in the transaction.

You decide to buy the house for the listed contract amount. You send ten Bitcoin to this smart contract, and the entire exchange between you and Carol is automatically executed. Carol receives her Bitcoin for the house, and you publicly own the property through the passing of the documents digitally through the blockchain. No lawyers, brokers, or third parties. The entire transaction was peer to peer and significantly cheaper than the current series of hoops you must jump through to buy and sell a house.

Industry Integration

While there are many hypothetical examples that we can think of that could benefit from this technology, what truly matters are the industries being directly impacted. The following is a list of the most important industries looking to implement blockchain—and, by extension, smart contracts. Sometimes the revolution is a shared ledger, and other times it is simply the use of smart contracts. The following is an impacted industry list endorsed by ConsenSys, a market leading blockchain technology company.

•Health Care

•Banking & Finance

•Digital Identity

•Energy & Sustainability

•Government and the Public Sector

•International Trade & Commodities

•Law

•Media & Entertainment

•Real Estate

•Supply Chain

•Digital Assets

This is a jaw-dropping list. Most new technologies only have the ability to impact a few industries, but blockchain, as a trusted ledger, opens up the door to horizontal integration possibilities in a variety of value chains within a wide range of industries. Horizontal integration is when integration occurs between multiple systems or companies that are on the same “layer” of the value chain.

As we begin to dive into the use cases in each category, I would encourage you to imagine the possibilities of tomorrow. For you pessimists, never forget that even the original creators of great technologies have been overly bearish and conservative in what could be.

“I think there is a world market for maybe five computers.”

—Thomas J. Watson, chairman of IBM, 1943

“We’re promised instant catalog shopping—just point and click for great deals. We’ll order airline tickets over the network, make restaurant reservations and negotiate sales contracts. Stores will become obsolete. So how come my local mall does more business in an afternoon than the entire Internet handles in a month?”

—Clifford Stoll, 1995

Figure 7: Gartner Hype Cycle

Pessimism is a natural response to innovation when the speed of progress does not meet the unbridled enthusiasm of speculation and expectation. Your job as an investor or user of blockchain technology is to find the legitimate and significant use cases only blockchain can solve. Never lose sight of the fact that blockchain is a decentralized ledger that mutually distrustful parties can trust.

Health Care

Hospitals and the health care system are notorious for slow horizontal integration. To this day, some hospitals still keep records in paper form. Sometimes, this is the only form of record keeping. Antiquated systems of record keeping leave patient data scattered across a variety of mediums and locations. No universal patient identifier exists. This leaves hospitals juggling information between each other, creating data mismatches and errors. The problem of sharing records and verifying the validity of an individual in a system is costly. Interoperability is defined as the way different health care providers are able to share, search, and query medical records.

According to Shaun Grannis (director of the Center for Biomedical Informatics):

“Statistics show that up to one in five patient records are not accurately matched even within the same health-care system. As many as half of the patient records are mismatched when data is transferred between health-care systems.”

This is utterly shocking. The customer is stuck with long phone calls and larger bills because of these types of issues—entirely unaware of this type of fundamental communication problem that exists within health care systems. Not only is it costly, it can hurt patients if wrong treatments are applied.

Information blocking, the restraint on the exchange of patient information, is the next issue. Hospitals do this because they do not want to lose patients—there exists monetary incentive for many third parties working in parallel to the hospital systems for this to be true. Ever wondered why having providers work with a variety of hospitals for a single patient is so difficult? Information blocking is a core problem.

How can blockchain solve information blocking and data mismatches? Imagine a world where all health care providers and hospitals use the same digital ledger of data. This ledger would be—you guessed it—a blockchain. This immediately solves the problem of data mismatches; everyone would be referencing the same set of data. Hospitals would benefit because of reduced labor costs of dealing with data mismatches, patients would have better health care, and communication/update of patient records would be instant and universally shared.

“ Our current health ecosystem consists of a plethora of disparate IT legacy systems that have been amassed over the years that do not communicate well with each other. Blockchain would provide the ability to replace these disparate systems with a single system that offers interoperability.”

—David Randall, Pradeep Goel, Ramzi Abujamra

Instead of hospitals, insurance companies, and third-party IT companies owning your data, you would have control over who gets access to your health data. Your private keys, which are used to sign transactions on the blockchain, would be the only way to unlock your encrypted health care data. Only through permitted use of your keys could someone alter, view, or “delete” your data. The public key that everyone is able to see and interact with would be your universal patient identifier, verified by your private key that only you have access to. This is unbelievably powerful—you would own your health care identity instead of having fragments of your identity flung between multiple different parties without your knowledge or consent.

Currently, you have to make ten to twenty calls to different doctors and providers who cross-check information records and prior conditions, all while navigating health care bureaucracy and policy. With one unified blockchain ledger, those hoops simply disappear with the horizontal integration benefits blockchain provides. You would be able to easily interact with smart contracts (picture them as apps on your phone) that are hosted on the health care blockchain and would instantly check if you are qualified for certain programs, benefits, or plans. A smart contract (vending machine) hosted on the blockchain would be able to objectively (with your permission) check your data to see if you apply to any of the previously listed health care opportunities—all without a third party involved.

A health care blockchain also enables data backups. Currently, each hospital and provider must back up its own data. With blockchain, everyone has the identical “ledger” of data, creating a valuable safety net of redundancy. In addition, the chain of records that intrinsically makes a blockchain what it is creates an immutable audit trail for everyone to view. Gone would be the days of paper record confusion or disparate digital records in conflict with each other. Disputes would be reduced to “who made this change?” as opposed to “which change is correct out of these multiple records?” The singular, universal blockchain ledger will play an integral part in the path to better health care for everyone. And to think that this only scratches the surface of all the different blockchain applications in health care!

“Blockchain distributed ledger technology can advance the biomedical and health care domains in various novel ways, and we expect many new applications to emerge soon.”

—Journal of the American Medical Informatics Association

Banking & Finance Problems

The modern-day consumer lives in a world of continuity—we want frictionless transactions. We have enough hassles currently, which is why I think we can all agree we want banking to be easy. Consumers and businesses want loans to be simple. Terms of use should be clear as day: “I don’t have time to navigate all the red tape.” For most people, a large portion of their banking experience has an acceptable amount of friction. I mean, the system does work, doesn’t it? I can swipe my card at Cub Foods, Venmo seems smooth, and paying off loans is relatively straightforward.

Unquestionably, we have grown up to accept the quirks of working with monolithic banks and companies of tremendous scale. This way of life thus begs the question: “Why are banks as large as they are? What product am I being sold? What is the cost?” This is the beauty of the bells and whistles of our finance system as we know it.

It all works.

But the reason it works is because you the consumer, investor, and trader pay hidden fees. We pay for the cost of trust and the cost of interoperability between a variety of parties that make the full nine yards of financial instruments possible. The interchange of property is where the money is earned and the cost delegated in hushed contractual terms.

“If commentators and students of the US banking system could be said to agree on any single point, it would be that the system now in place is absurdly complex and inefficient.”

—Carter Golembe

Where in particular are the costs incurred in our finance system?

“The duplicate and time-consuming post-trade processes that banks, brokerages, custodians and clearing houses undertake to reconcile multiple ledgers represent a very large cost of trust embedded in the existing system.”

—Center of Economic Policy Research

Notice costs incurred are related to the different parties reconciling their own separate ledgers. Translation: reconciling distrust between two ledgers is expensive.

Another problem everyday businesses face is generating capital through either a business loan (banking capital) or venture capital. Banks and venture capitalists turn a profit in the safest possible manner with the highest possible risk/reward obtainable. The problem with these capital loaning entities is that many businesses with brilliant ideas and potential enterprises are barred from raising capital for their business because of third-party credit verification, required track records of past successes, absurdly high interest rates, and subjective valuations impacting terms and conditions in an unfavorable manner.

On the other side of this problem are individuals who are not accredited venture capitalists. You and I are blocked from being able to invest in some of the most lucrative investments on the planet because of “investor safety red tape,” which is essentially legislation that “protects” average consumers from investing in high-risk enterprises. While this is understandable, the freedom to use your money how you want is in many ways an expression of your freedom of speech. You should have the right to invest in the same opportunities wealthy individuals have access to.

Cross-border payments are expensive and slow not only for citizens but also for banks. This is because of banks relying on “Nostro” accounts, which is essentially a bank’s account within another bank that is used for transactions between the two banks. Oftentimes, currency exchanges occur between two different currencies—introducing liquidity problems and exchange rate conflicts on top of standard liquidity problems (Bank A needs x amount of capital from Bank B, but Bank B can only provide half of what Bank A wants). Ultimately, the additional intermediation layers increase complexity, counterparty risks, and cost for all parties.

Remittance fees grew to $600 billion in 2018. Rates have stabilized around 7.5 percent—an extremely lucrative profitability point for banks. The problem for individuals is somewhere along the value chain a bank is involved, and because of Know Your Customer standards and government legislation, millions of people globally are trapped into paying high rates to simply transfer value across borders between countries.

Securities and derivatives clearing and settlement globally are executed nearly instantly. Unfortunately, the clearing and settlement of transactions can take one to three days. Worse, derivatives can take weeks to even years to settle depending on the complexity of the contract. The derivatives market is estimated to be holding over $1.2 quadrillion worth of the world’s value. That is ten times more than the total world GDP locked up in inefficient settling and transferring of value in the current securities and derivatives settlement system.

It would appear distrust is costly.

The DeFi Solution

Blockchain and finance are like bread and butter—they just make sense. So much so that a new term has been birthed: DeFi, or decentralized finance. DeFi is the ecosystem of financial applications (digital vending machines concerned with finance) that are built on top of blockchain in the form of smart contracts. Hundreds of smart contracts can interact with each other, allowing for completely automated and decentralized exchanges, derivatives markets, and tokenization platforms. DeFi is the solution to all the problems previously listed. Let us return to our very first problem of raising capital.

When new companies or networks utilize an initial coin offering, or ICO, many individual investors, who do not have the capital to be venture capitalists or bankers, suddenly have the ability to invest directly into ownership of a business or a new digital asset. An ICO is simply a smart contract (remember the vending machine analogy) that exchanges one cryptocurrency for another (although there have been plenty of USD for cryptocurrency ICOs). Anyone can raise capital by publishing their own ICO smart contract, and anyone can be a venture capitalist (without all the red tape) by sending cryptocurrency to a digital vending machine (smart contract). This solves the first two problems described—the ability to raise money as well as the ability to be your own venture capitalist without accreditation.

Nearly $5.6 billion was raised through ICOs alone in 2017, creating quite a bit of commotion in the finance world. Needless to say, blockchain’s ability to reliably funnel investment capital into startups is inspiring and will continue to be one of the primary use cases.

Solving the cross-border payment problem has already been solved with blockchain technology. Anyone with an internet connection and a cryptocurrency wallet can send their token of choice to any other public wallet in the world: no banks involved, no third parties, and no geographical restrictions. Fees are as low as ten cents for any amount of capital sent, which is to say that you could send a billion dollars’ worth of Bitcoin and the transaction fee would only cost ten cents.

A survey by Clovr found that 15.8 percent of individuals surveyed globally used cryptocurrency as opposed to traditional remittance options. This number will continue to increase as accessibility, adoption, and education increase globally surrounding cryptocurrencies. The properties of cryptocurrency enabled by a variety of blockchain protocols are trailblazing the new standard for currencies. While many would stand in the path of radical technology, history has proven humanity will choose the better product if given the choice.

“Bitcoin, and the ideas behind it, will be a disrupter to the traditional notions of currency. In the end, currency will be better for it.”

—Edmund Moy, thirty-eighth director of the United States Mint

The Ripple transaction protocol (RTXP) is attempting to unify banks around the world using blockchain—solving “Nostro” account transaction friction. Today over a hundred financial institutions are on the Ripple blockchain network, including Standard Chartered Bank, Westpac, Banco Santander, and BBVA. Using a series of private blockchains unified under one global ledger, Ripple is capable of assisting in the transfer of billions of dollars’ worth of value on a daily basis, with transactions taking less than four seconds, compared to the traditional three to five days. While Ripple is considered “centralized” by decentralized standards, it is representative of an important undertow: banks are now willing to work with blockchain projects.

“For Ripple, the global liquidity problem is measured in the trillions of dollars, I think that people are realizing that Ripple is gaining traction, we’re gaining engagement, we’re gaining more customers. So there’s been interest in that.”

—Brad Garlinghouse, CEO of Ripple

Finally, the securities and derivatives challenge is being addressed by the NASDAQ. Working in tandem with Chain and a variety of other startups, the NASDAQ is actively experimenting with new infrastructure that would be an improvement on outdated transaction frameworks.

Digital Asset Holdings is a financial technology company that builds products (built on top of blockchains) for regulated financial market infrastructure providers such as banks, exchanges, and custodians. Digital Asset Holdings is working with ASX (Australian Stock Exchange) to completely replace the current clearing and settlement infrastructure with a ledger-based solution that is permissioned in nature. In many ways, if this application can be achieved, the final frontier of settlements would be on the horizon.

“I had seen the financial crisis unfold, and I had seen the credit derivatives market get operationally ahead of itself, which resulted in systemic risk counter-party exposures. I began to believe that distributed ledgers had the capability to tackle that problem.”

—Blythe Masters, former executive at JPMorgan Chase

Digital Identity

Rarely do we notice the role of identity until it is questioned.

Identity is who you are as a unique individual, how you are represented, and how you are allowed to interact. According to a frequently-quoted study by Microsoft, online users have, on average, the following: twenty-five accounts, six and a half passwords (shared across 3.9 different sites), with an average entry of eight passwords per day. Your ability to interact with the digital world and the real world is tied to your ability to prove who you are. This is a messy process that has been smoothed over to the point of being bearable in some moments, and terribly inconvenient in others (I’m looking at you, DMV).

First, let’s break down the current process. Your physical attributes (name, age, gender, address, birthplace, biometrics, etc.) are tied to a physical document, with a stamp of approval from a sovereign authority that essentially says, “Yeah, this person now exists according to us, and this person is unique from someone else for the following reasons . . .” For Americans, this is the Social Security Number. The SSN is the basis for a swath of critical interactions. Other physical instruments such as a driver’s license or passport are created and verified based on the verification of the “key” social security number. These “layer two” documents are created are then used in a variety of interactions for either payments (such as banks needing to know who you are), permissions (can’t join the military without proper verification of who you are), and participation (this concert only allows people twenty-one and above).

Identity theft was called “crime of the new millennium” by the assistant US Attorney in 2001. The prediction stood the test of time: identity theft impacted 14,400,000 Americans in 2018, worth $1.5 billion in out-of-pocket costs alone (not accounting for the true economic loss of resolving these incidents). The first six months of 2019 had seen 3,800 publicly-disclosed breaches, not accounting for unreported hacks. A whopping 4,100,000,000 records were compromised, of which 65 percent pertained to passwords and identity. These are devastating statistics. What were the core contributors?

1.Centralized Data Management

2.Scattered Identity

3.Identity Redundancy

The Future of Identity

Imagine for a moment you walk into a store. We will call it “Century Groceries.” The first time you enter the store, you fill out a form for the manager. You are given a copy of this form. A week later, you come back to Century Groceries and are barred from entry unless you can produce the form. Frustrated, you head over to Bob’s Burgers where the same process is rinsed and repeated. Deep within the basement of Century Groceries is a stack of thousands of forms that were filled out. These forms have to be pulled out and cross-checked with a customer’s form every time one tries to walk in the door. Over at Bob’s Burgers, someone breaks into the basement and grabs the form you registered with Bob’s Burgers. They walk straight into Century Groceries because you used the same form for entry into both.

What you have here is an imperfect representation of the internet as we know it today.

The internet’s slipshod “solution” to digital identity is deeply flawed. Every website is its own stand-alone bastion of verification—all based on a flawed username/password system. The system is inconvenient, insecure, and downright tedious. We should follow a similar model to that of the real world, where core documents verify “layer two” documents that would make your life easier to navigate the digital world.

This is where blockchain enters as quite literally a “key” solution. An identity blockchain solution such as SelfKey (a $22,000,000 ICO in 2018) proposed the following series of steps as a solution. First, you create a digital wallet or have one issued to you by the government. This wallet will hold all your key digital documents on your local device. Next, a private key and public key are generated inside of the wallet. At this point in time, you are the only party that knows this particular private key. It is 100 percent unique to you as a user. It’s the digital equivalent of your thumbprint or retina. The private key is what is used to verify and authenticate a variety of third parties attempting to confirm you are in fact you. This works because the unique combination of your exact private key in combination with the public key allows third parties to verify the authenticity of the wallet and its owner without being able to know what the private key is. It’d be like if you mashed together your Social Security Number with your first and last name to produce something that could only be made by you—and was universally recognized by the rest of the world as being you.

This unique public key that represents you as a unique user is what is hosted on the blockchain. It’s the shortcut that allows you to walk into the digital equivalent of Century Groceries and immediately into Bob’s Burgers without needing to pull out forms from the basement. In fact, these stores do not even need to store or protect forms anymore!

Everyone using the digital management blockchain would share the same ledger of public keys that represent unique people with unique private keys, allowing them to seamlessly traverse the web.

The cryptography that enables the key exchanges between two parties without revealing the underlying private keys is called the Diffie-Hellman key exchange. Mathematically, this algorithm is beautiful. If you have the time, there are amazing explanations that do not include math and instead describe it using buckets of paint and color mixing. Diffie-Hellman key exchange enables PKI (Public Key Infrastructure), the foundation of the internet’s functionality.

In the future, your public key will exist on a blockchain. In combination with your private key stored in your digital wallet, you will be able to create and gather digital identity instruments into your digital wallet that will allow you to seamlessly navigate the web without needing burdensome passwords and usernames, just like the real world. Even better, in this new system, your private key and critical digital documents are not exposed or sitting in hundreds of data silos. The whole system is safer, quicker, and built on a mathematical system of trust. Minimal information is shared, and you have ultimate control over your digital identity. Personally, I look forward to the day when I don’t have to enter in a username or password on a website to verify I am in fact who I say I am on the web.

“Current identity systems are limiting Fintech innovation as well as secure and efficient service delivery in Financial Services and society more broadly. Digital identity is widely recognized as the next step in identity systems.”

—World Economic Forum

The list of blockchain use cases and applications are limitless. The synergy between our current working world with the attributes enabled by blockchain will change our society as we know it. Readily accessible digital vending machines (smart contracts) for all sorts of transactions are a replacement for many antiquated systems. Decentralized ledgers put distrustful parties on the same page using a perfectly neutral and auditable party because of the nature of a decentralized ledger. The possibilities are exciting, and I would encourage you to continue to explore the vast number of ways blockchain is changing the future of our tomorrow.

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