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Essay: Blockchain Implementation: Examining Supply Chain & IoT Use Cases

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Blockchain is a new technology, which has a huge potential for implementation in a variety of industries. It is commonly discussed merely as an underlying technology of the Bitcoin cryptocurrency. However, the areas of the technology implementation are not researched thoroughly and not limited to the financial sector.

The objective of this study is to define the concept of Blockchain, analyze use cases and implications of the technology. An exploratory desk study was conducted in order to describe the Blockchain’s history and related concepts. On the basis of the desk research, an analysis of the business value and the technology’s principles was made.

The exploratory research approach based on a profound literature examination was chosen. The exploratory approach was found relevant for this study as it enables to conduct a research of technology implementation into supply chain management and the Internet of Things industries. Analyses of the most relevant and valid sources, such as consulting companies’ reports, was done in order to collect secondary data for the thesis work. This text provides an examination of Blockchain’s implementation areas and possible implications, not concrete suggestions for developing distributed Blockchain-based applications.

The results indicate Blockchain as a foundational, not a disruptive technology, which is to be implemented within the supply chain and Internet of Things. Additionally, the study provides data about economic, technological, social and political implications of Blockchain and the abilities for developing these areas.

SYMBOLS AND ABBREVIATIONS

API Application Programming Interface

DAPP Decentralized Application

EDI Electronic Data Interchange

ERP Enterprise Resource Planning

EVM Ethereum Virtual Machine

ICO Initial Coin Offering

IoT Internet of Things

PKI Public Key Infrastructure

SAP Systems, Applications & Products in Data Processing

SQL Structured Query Language

P2P Peer to Peer

XML Extensible Markup Language

1. Introduction

The background and motivation of the thesis work are provided first, followed by a description of the study scope and objectives. Lastly, the thesis structure is described.

1.1 Background and Motivation

Today, technologies are an integral part of the world economy. According to McKinsey Global Institute analysis (2013), 12 disruptive technologies will significantly change the situation in the global market by 2025. Their potential economic impact is estimated to be between 14 and 33 trillion US dollars. These 12 high-potential technologies discussed in the Institute’s analysis do not include Blockchain. Nonetheless, even though being out of the list, Blockchain might become a dark horse in the competition, because it will influence most of the listed technologies, i.e. Cloud, Internet of Things, and Autonomous cars. Many sources which are dedicated to technology industry have started to share the opinion that Blockchain itself might become one of the most powerful technologies of tomorrow. (TechCrunch 2015.)

Firstly, the technology became well-known in 2008 when it was conceptualized by either an individual or a group of founders of Bitcoin under the name of Satoshi Nakamoto in a research paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". Blockchain was used as a core component for Bitcoin cryptocurrency. There, the concept of technology was referred to as “block” and “chain”. By year 2014, Blockchain had become a term which is referring to new applications of the distributed database. (Kariappa 2015.)

Finally, in 2018 it is discussed that Blockchain is a foundational technology. It has an ability to establish new foundations for both economic and social systems. However, while the influence of the technology is to be enormous, it might take years for Blockchain to be implemented into economic and social infrastructure systems. The adoption process will be smooth and steady, not rapid, because waves of technological and social changes still gain momentum. (Iansiti & Lakhani 2017).

The motivation of conducting this study is to analyze the Blockchain as a foundational technology, which is already not just a part of Bitcoin, but not yet considered as a “new Internet”. It is somewhere between these two states. This study aims to find the current position of Blockchain at the global technological scene and to discuss possibilities of the technology implementation. Use cases of Blockchain will be discussed in order to understand its applicability in real-life environment.

The second reason why this research is conducted is the researcher’s personal interest in Blockchain. The researcher aims to discover application challenges provided by Blockchain and discuss future perspectives of the technology. Implementation of the technology will cause evolvement of human institutions such as social and economic systems. Following the discussions of the challenges of Blockchain, technological evolution and industry perspective will be considered.

The objective of the thesis is to conduct a research which reviews a relevant role of Blockchain in the global economy and analyzes how the technology might be adopted by specific industries. This study aims to analyze the Blockchain technology phenomenon and understand how it can change the world economy, lives of ordinary people and technologies themselves. Finally, use cases and business value of implementation of Blockchain are provided.

1.2 Research Scope and Objectives

To begin with, the thesis work explores and defines the concept of the Blockchain technology. The study analyzes its principles of work, technical specifications and features of Blockchain, as well as identifies economic, social and technical implication provided by the technology. Moreover, the thesis work provides a brief history of Blockchain and previous similar concepts related to it.

This study specifically analyzes the current level of the Blockchain technology and areas where it is being implemented. The thesis work discovers gaps between the current usage of the technology and the potential of its implementation in various areas. As far as Blockchain can be used in wide range of use cases, from intellectual rights to elections transparency, the thesis work will be narrowed down to several specific cases.

The scope does not include the implementation plan for companies and specific areas. However, implementation challenges are overviewed and the reasons of the Blockchain adaptation are provided for supply chain management and Internet of Things. The researcher’s aim is to analyze the Blockchain technology phenomenon and discuss its possibilities of implementation.  

The objective of the thesis is to conduct a research which reviews a relevant role of Blockchain in the global economy and analyzes how the technology might be adopted by specific industries. This study aims to analyze the Blockchain technology phenomenon and understand how it can change the world economy, lives of ordinary people and technologies themselves. Finally, use cases and business value of implementation of Blockchain are provided.

1.3 Research Questions

The following research are presented and described. The questions, which will be answered by this study, are as follows:

1. What are the concept and principles of the Blockchain technology and which essential elements does it include?

This research question is separated into two parts. The first part is targeted to define the concept of Blockchain. The second one helps to consider technological blueprint and understand why it is innovative in modern environment. In order to answer the question, the essentials of Blockchain are discussed.

2. Which industries can potentially benefit from the adoption of the Blockchain technology and how they can do it?

The second research question looks for the business areas for the technology implementation. Areas of application analysis enables to overview practical use cases of Blockchain. Moreover, the outcomes of the technology usage will be described.

3. What are the potential social, economic, political and technological challenges in the implementation of the Blockchain technology?

The aim of this research question is to analyze and point out possible economic, social and technological obstacles, which can be reasoned by Blockchain. The findings are to be researched and described at first. Additionally, the ways to overcome these obstacles will be discussed.  

1.4 Research Methodology

This thesis work uses the exploratory research approach based on literature analysis. The research method is chosen due to the freshness of the topic studied. By conducting the thesis work, the concept of Blockchain can be defined. It is also possible to deeply examine the phenomenon of the technology and discuss use cases and implications caused by it. The Blockchain, firstly founded as a basis technology of Bitcoin and referred to as “block chain” (Nakamoto 2008), evolved and has been re-conceptualized in 2014 and requires further research and development.

According to van Wyk (2012, 8), “the main aim of exploratory research is to identify the boundaries of the environment in which the problems, opportunities or situations of interest are likely to reside and to identify the salient factors or variables that might be found there and be of relevance to the research.” Hence, an exploratory research approach based on literature analysis was selected for this thesis work to ensure identification of environmental obstacles and give recommendations for the Blockchain technology usage for supply chain management and Internet of Things. The work defines the Blockchain concept and describes related notions, which grow its potential for implementation in supply chains and Internet of Things. The data used in the thesis research is up to date and covers the research topic.

As the Blockchain technology is novel and it embraces majority of industries, there is no possibility to collect empirical data, due to inability to indicate and reach an appropriate focus group. Thus, all the provided data was collected by conducting a desk research. The used sources were accessed via the electronic library of Lapland University of Applied Sciences, ACM electronic library, Google Scholar and a variety of articles and e-books accessed from the World Web. Qualitative data was used for ensuring research theory drawbacks with descriptions provided by various authors of the literature used.

By conducting the desk research including profound literature analysis, the theoretical basis of this research was formulated. It discussed the concept of  Blockchain and related technologies. Research findings were used for analyzing technology implementation cases and discussing their possible bottlenecks.

1.5 Thesis Structure

The rest of this thesis work is divided into six chapters as follows. In chapter 2, essentials of the Blockchain technology are discussed by providing a brief history of the technology, principles of its work and similar to Blockchain concepts. In chapter 3, the main principles and business value of the technology are presented. Chapter 4 is dedicated to analyze Blockchain as a foundational technology based on use cases in supply chain management and Internet of Things. In chapter 5, implications caused by Blockchain are identified. Chapter 6 draws conclusions on the results of the research and suggests further studies to be conducted.  

2. Essentials of Blockchain Technology

The technical aspects of Blockchain’s work are described to start with followed by a review of the history of the technology. Thirdly, the concepts which are similar to Blockchain are defined and discussed. Lastly, the summary of the chapter is provided.

There is a plenty of implementations of the Blockchain technology. The first subchapter discussion on Blockchain describes the oldest and still the most common implementation of this technology in Bitcoin cryptocurrency, as it is essential for understanding the initial concept. Additions to the core technology, which were developed in other Blockchain implementations are discussed in the study. Thus, it is specified in the text which implementation case is considered either Bitcoin’s Blockchain or Ethereum’s Blockchain.

2.1 Concept and Technical Aspects of Blockchain Work

Before the Blockchain invention, there was no way to manage individual activities over the Internet without centralized control to ensure non repudiation of data. There was no trust between the parties that none of them could change the data for their own profit without agreement with the second party. A group of distributed individuals could not verify transactions without relying on centralized authority. This problem was mostly known as the “Byzantine Generals Problem” (Wright & De Filippi 2015 citing Lamport 1982). It was questioned how distributed computers could make a decision without relying on a central authority, for the network of the computers to be able to defense against an attack from ill-intentioned actors. The problem assumed that the three parts of the Byzantine army are waiting outside an enemy city and planning to assault it. The generals of each division are independent, and to be able to conquer the city, they need to have a common course of action. However, the generals’ abilities to communicate with one another are restricted to a messenger service, and there is a traitor who is actively ruining the generals’ actions to make a consoled decision by either tricking them to attack before others or missing some relevant data so that there is no opportunity to make united attack (Wright & De Filippi 2015, 5.)

Blockchain uses a probabilistic approach for elaborating a solution for the problem of Byzantine Generals (Nakamoto 2008, 3). Data is moving through a network of computers which increases transparency and reliability. As a result, the ability of potential attackers to corrupt a distributed database with fake data is reduced significantly. The only case to attack is when the attacker can use much more of the computational power than the entire network. The protocols of the Blockchain can ensure that transactions are correct and not double made. (Wright & De Filippi, 2015, 6.).

As it was stated in the introduction chapter, Blockchain was mentioned for the first time in the Bitcoin research paper (Nakamoto, 2008). The definition in 2008: was basic and straightforward, i.e. Blockchain is a technology which runs Bitcoin. However, this definition lacks important details. The Blockchain is a chain of connected blocks that consist of data about transactions. Each block has the hash of the previous block, timestamp and transactional data (Figure 1). When the block is completed with transactions, a new block is created and it contains the same attributes and hash of the previous one.

Figure 1. Structured connection of Blockchain’s blocks (Nakamoto 2008, 2)

The Blockchain may be described as a chronological database of transactions, which are recorded into blocks and checked by other computers in the Blockchain network. Moreover, each block contains a complex mathematical equation or hash functions, which are proving the integrity and non-repudiation of its data. Each member of the network has a copy of the Blockchain database and the computers are synchronized frequently to make sure that all of them have the original and correct version of shared database.

The copy of Blockchain consists of all transactions happened in the currency. Thus, any node of network can discover a balance of each address at any timeframe. From a random block, there is only one chain can be built to the initial block. In a case when the block is mined and a few others are created just in several seconds apart, the nodes build onto the block they received first. The first mined block will be included as a part of the main chain, because the chain will be the longest at that moment. However, from the initial block, there might be several chains or forks (Figure 2).

Figure 2. Main and forked chains into Blockchain (Wright & De Filippi 2015, 8)

In Figure 2, the main chain indicated in black has the longest combination of blocks from the genesis or initial block shown in green to the current block. The side blocks or forks illustrated in purple are not related to the main chain. The Blockchain is shared to all the networks members with use of a flood protocol.

Blockchain ensures decentralized, public and encrypted storage of transactions. The process of Blockchain functionality is as follows (Kehril 2016, 9-10):

• User A makes a transaction to User B through his or her client.

• Blockchain miners receive an order on the transaction and they add it to their current mining block.

• One of the miners completes the block faster than others; in other words, the block is mined.

• This new mined block is added as a last mined block in the Blockchain and the copy of Blockchain in broadcasted through the network.

Mining of the block is a process of recording new transactions on a public ledger of approved ones. The ledger of the approved transactions is referred to as Blockchain, because it is a chain of blocks. The Blockchain functionality as a technology and a system is to approve transaction facts to the network as they take place. Network members use the Blockchain technology to differentiate firstly requested transactions from someone who try to spend coins for the second time, while they have already been spent before. (Kehril 2016, 12.)

To have a new mined block accepted by other network members, miners should complete a Proof of Work including the entire data in the block. The Proof of Work is a consensus mechanism, which requires the condition that specific nodes on the network, referred to as a “miners”, spend computational power to solve mathematical puzzles while other nodes just approve that puzzle solution. (Wright & De Filippi 2015, 6 citing Bonneau 2015.)

In order to motivate miners to spend computational power on mining, the reward system is used. The first miner, who provides the solution of the puzzle, is incentivized by some amount of cryptocurrency or with agreed transaction fees. In Bitcoin’s version of Blockchain, there is a limitation of 10 minutes for mining each new block due to the suggestion that the Blockchain size would be growing 1.2GB per year. (Nakamoto 2008, 4.)

To verify that only correct transactions are added into Blockchain, the network makes a confirmation that the action is valid and has no conflicts with previous transactions. A new block of chain will be added to the end of it only when the members of the network make a decision what the transaction is correct. Consensus within the network is saved through various voting mechanisms, one of which is the Proof of Work. It is dependent on the computational power assigned to the network. (Wright & De Filippi, 2015, 8.)

When a block has been recorded in the Blockchain, it cannot be erased. The transactions of this block are visible and checked by each member of the network. From this moment on, the block is a permanent record of the blockchain and it can be used by network members in order to coordinate an action or prove transaction. (Wright & De Filippi, 2015, 8.)

To change a block, it is required to regenerate all successors and redo the work they contain. It only can be achieved by making a new block containing the same predecessor. This means that Blockchain is highly protected from the tampering. The most common scheme of proof-of-work is using SHA-256 algorithm and it is also discussed in Bitcoin’s research paper by Nakamoto (2008). The target of algorithm is a 256-bit number which is shared by all Bitcoin members. If a lower target is set, it would be complicated and more computational power will be consumed to mine a new block. A valid block is the one which hash value is less than the current hash target. When a new block is produced, it contains acknowledges of the work that was done to generate it. (Kehril 2016, 11.)

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