Blockchain and smart contract basics, myths and realities, ICOs, blockchain validation, use cases

1. April 28, 2018
Blockchain demystified
Overview session
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2. Photo goes here
PwC
Agenda
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• A blue-sky vision and why you should care
• Blockchain basics, myths and realities
• Blockchain validation
• The ICO phenomenon
• Prominent use cases
• Conclusion & Q&A

3. PwC
Blockchain’s blue-sky vision

4. PwC
Principles behind building real blockchain networks
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• Decentralization
• Heterarchy (versus hierarchy)
• Transparency (via a distributed or shared
ledger)
• Tribes (manifested by startups)
• Network effect
• Coherence
• Trust framework
• Standards
• Incentives
Anti-centralization Networked consensus
Phil Windley, “Coherence and Decentralized Systems,” April 24, 2018,
http://www.windley.com/archives/2018/04/coherence_and_decentralized_systems.shtml

5. PwC
Origins of the permissionless Bitcoin blockchain:
The pseudononymous 2009 “Nakamoto” paper
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6. 6
Smart Contracts are software-driven, automated rule-
based agreements that require limited human interaction.
The program checks if a pre-defined condition has been
fulfilled and subsequently executes the embedded logic.
Their outcomes only take affect if there is network
consensus for their effect.
Enabling this concept with Blockchain greatly reduces the
dependency on third-party validation and automates certain
functions; therefore leading to process efficiencies and cost
savings.
Users define the terms
and trigger events of
their contract(s) and
specify parameters
between counterparties
Value Transfer &
Final Settlement
Execution of
Contract
Triggering
Events
Contract
Definition
Events trigger contract
execution according to
pre-defined terms.
Devices are inter-
connected through the
blockchain for users to
verify the information
Upon consensus, the
contract terms are
executed and
blockchain integrations
with third-party APIs
are utilized for inter-
connected services
Accounts are settled
and the information is
broadcasted
throughout the
network
2013: Smart Contracts = Business logic and rules for blockchains
Autonomous
in nature
Self governing and self
executing. Smart
contracts will react
automatically to external
triggers
Trust
built in
Smart contracts can only
change data state if there
is network consensus for
that change
Replication and
backup
Every node on the
network has a replicated
and in sync copy of the
contract. Contracts
cannot be deleted
Execution
speed
Because smart contracts
allow manual processes
to be pragmatically
defined processing times
are significantly reduced
Cost
savings
Smart contracts perform
the function(s) of the
middleman, therefore
there is no need for them
saving time and cost
Error
elimination
Manual tasks can be
taken care of by smart
contracts eliminating
human error
What are the key benefits?
1 2 3 4 5 6
What are they and how do they work?

7. PwC
A blue-sky vision for blockchains and smart contracts
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8. PwC
From simple smart contracts to border-crossing
autonomy
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9. PwC
Blockchain basics, myths and realities

10. Myth #1:
“Blockchain is just
some Bitcoin
thing.”

11. With the help of a blockchain, participants in the network can confirm transactions without the
need for a trusted third party intermediary.
Reality: Blockchains can be currency independent
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Is the “someone
in the network”
requesting the
transaction
trustworthy?
That’s a question
blockchains by
themselves do
not address.
How a blockchain works

12. What’s in a “node” on a blockchain?

13. PwC
What does a permissioned blockchain do? A food
supply chain example

14. Myth #2
Proof of work is the
only viable way to
achieve consensus
on a blockchain.

15. PwC
Reality: Proof of work is being augmented, if not
replaced, by more energy conserving consensus
approaches
Proof of stake
Vested and
participating
Proof of work
Compute-intensive coin
mining

16. Blockchain availability concerns: How do stewards
keep their networks up and running?
From Monax, “Agreements Network” white paper, 2018

17. PwC
Key takeaways: Blockchain-related concepts and
impacts
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18. Myth #3:
“To be able to trust
data, you have to
put it on a
blockchain.”

19. 19
Blockchains are hardly the only immutable data stores, and
you may not need a decentralized data store at all.
Source: PwC
Where
blockchains
fit in—but
for
distributed
transactions
PwC, 2015

20. 20
Other immutable data stores log events for full history,
auditability and recordkeeping too--and are faster and cheaper

21. Myth #4:
“Blockchain will be
the next internet.”

22. Multiple parties
share data
multiple participants
need views of common
information
Multiple parties
update data
multiple participants
take actions that need to
be recorded and change
the data
Requirement
for verification
participants need to
trust that the actions
that are recorded are
valid
Intermediaries
add complexity
removal of
intermediaries can
reduce cost and
complexity
Time sensitive
interactions
reducing delay has
business benefits
Transactions
interact
transactions created by
different participants
depend on each other
Reality: Blockchains are only a fit when these
circumstances apply
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23. PwC
Blockchain security considerations

24. Maturity and related inhibitors
Blockchain Maturity
• Young Technology: May not
operate at scale without
compromising on security,
speed or cost
• Cost: Hard to convince low
budget customers
Adoption
• Proper Incentives: Potential
participants will need to be sold
on the value of the platform
• Consensus Needed:
Participants must come to group
agreement on platform and
standards acceptable to all
Interoperability/ Integration
• Interoperability: Ability to
integrate with participant existing
client systems and processes
• Architectural Role: How will
blockchain eliminate, replace, or
work with current technological
platforms

25. Myth #5:
“If you want to
protect your data,
put it on a
blockchain.”

26. PwC
Reality: Protecting data requires more than
blockchains, including off-chain options
Microsoft, 2018
Microsoft’s blockchain-as-a-service stack Azure cloud computing stack
Microsoft, 2017

27. PwC
Blockchain validation at the system
level

28. PwC
Validating a blockchain
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Reasons enterprises want validated blockchains:

29. PwC
Blockchain risk categories covered in the framework
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30. PwC
Traditional versus blockchain-based validation
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31. PwC
How the risk framework is used in an
implementation
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© 2017 - 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
The risk framework is used to
identify the risk factors against six
different risk categories and 100+
risk areas. The information gained
by employing the framework is
used to configure the Blockchain
Validation Solution Software.

32. The ICO phenomenon

33. 33PwC’s Digital Services
Understanding the ICO
Initial coin offerings are making headlines. What they are, how they work,
and what you need to know about these blockchain innovations.
What if you could raise millions of dollars in capital
for a startup without giving away any equity? One
option could be via ICOs, where tokens are offered
to willing purchasers. It's a complex and rapidly
evolving market. Here is a sense of how ICOs work
and the initial regulatory response.
Initial coin offerings:
Bubble or breakthrough?
Learn more about this
fundraising phenomenom.

34. 34PwC’s Digital Services
At a glance
An initial coin offering (ICO) is a form of
fundraising that harnesses the power of
cryptocurrencies and blockchain-based trading.
Similar to a crowdfunding campaign, an ICO
allocates tokens instead of shares to early investors
in a business.
These tokens typically do not represent actual
ownership in the company, but they often provide
access to an ecosystem and can be traded on an
aftermarket.
It's not just hype: ICOs raised over US$5 billion
in 2017 in nearly 800 deals, according to CB
Insights. Blockchain equity funding by
comparison was a mere US$1 billion in 215
deals for the same period.1
Source: https://www.cbinsights.com/research/blockchain-vc-ico-funding
ICO versus blockchain
equity funding to Q417

35. 35PwC’s Digital Services
Benefits
• ICOs represent a new option for raising capital.
• The funds involved are typically much greater
than the funds in basic crowdfunding campaigns.
• ICO issuers can be creative with their
business models.
• Strong interest in cryptocurrencies has triggered
attention in ICOs by both buyers and sellers.

36. 36PwC’s Digital Services
Challenges
Source: https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11?utm_source
• A token received in an ICO does not grant equity rights.
• ICOs are often unregulated; investors and issuers need to beware.
• Hackers have already breached ICOs and stolen funds.
• When it comes to the taxation and legal status of ICOs many gray areas still exist.
• The US Securities and Exchange Commission (SEC) notes that tokens or coins "that are offered
or sold may be securities." As securities, they must be registered before sale and are subject to
US federal securities laws.2
• Some startups offer "utility" tokens (provide access to an ecosystem) instead of security tokens
(provide economic exposure).
• ICO deals are more and more frequent, and one major challenge is discovering and learning
enough about them for due diligence purposes.
• The ultimate ecosystem or promised product may not come to fruition.

37. 37PwC’s Digital Services
How an ICO works
An ICO is a limited period in which a company offers a predefined number of tokens to investors.
After weighing the risks and upsides, Company X decides that an ICO is the most
viable way to raise funds.
Company X fine tunes how the tokens can be used in the ecosystem.
Company X formally launches an ICO campaign, explaining the goals of the
project, the team's experience. and the problem they are solving. As with an IPO,
an initial price is set (either in traditional currency or, more often, in
cryptocurrency). A pre-sale period often takes place.
Third-party services have emerged that can aid with KYC/AML, token
development, ICO marketing, and more.
LIKE
SHARE
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38. 38PwC’s Digital Services
How an ICO works (continued)
An ICO is a limited period in which a company offers a predefined number of tokens to investors.
On the date of the ICO, the company issues tokens to the participants. Like an IPO or a crowdfunding campaign. ICOs are open for a limited time. Many
have soft or hard caps on the amount that can be raised.
Following the ICO, the team will continue building the promised product using the
funds received.
ICO DATE
BUY
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39. 39PwC’s Digital Services
Initial regulatory response
Regulators have expressed divided responses to ICOs, ranging from total bans to support for the activity as
long as it's regulated. As a result, ICO activity has been migrating to countries such as Japan, which has
taken steps toward legalization.
China imposed an outright ban on "token fundraising" in September 2017,3
declaring that the activity constitutes "an illegal issuance of securities“
associated with financial crimes such as fraud and pyramid schemes.
Source: https://www.coindesk.com/chinas-ico-ban-a-full-translation-of-regulator-remarks/
https://www.coindesk.com/south-korean-regulator-issues-ico-ban/
https://cointelegraph.com/news/breaking-russia-rejects-cryptocurrency-as-authorities-block-access-to-exchanges
https://www.reuters.com/article/us-russia-cenbank-bitcoin/russia-turns-cold-on-crypto-currencies-idUSKBN1CFORF
https://www.cryptocoinsnews.com/japan-accepts-bitcoin-as-legal-payment-method-whats-next/
https://www.cryptocoinsnews.com/china-ico-ban-sees-startups-japan-bound-token-listings/
https://cointelegraph.com/news/challenging-china-taiwan-supports-mainstream-adoption-of-icos-and-bitcoin
Similarly, South Korea banned token offerings at the end of September
2017,4 asserting that these offerings, "regardless of technical terminology,“
violate the country's capital market law. Additionally, the country's Financial
Services Commission plans broader reviews of cryptocurrency company
practices through the end of the calendar year.
Russia's central bank revealed its intention beginning in October 2017 to
block5 all cryptocurrency exchange websites operating in the country
entirely. President Putin pointed out that cryptocurrencies can serve as
a vehicle for money laundering, tax evasion, and terrorism, according
to Reuters.6
The governments of Canada, Hong Kong, Singapore, Switzerland, and
others, in similar fashion to the US, have asserted that at least some coin
offerings will be subject to securities laws. The European Securities and
Markets Authority (ESMA) also echoed this sentiment.
Taking a different tack entirely, Japan recognized7 bitcoin as legal tender
in May 2017 and has since authorized 11 cryptocurrency exchanges.
Tokyo-based exchange Coincheck said in October that it was reviewing
ICO proposals it received from hundreds of Chinese startups after China
imposed its ban.

40. PwC
Use cases

41. Our clients
exploring
blockchain
solutions
Supply Chain
Finance Design
● Designed a solution that
leveraged a cloud-based
predictive analytics and
shared workflow to improve
cash flow and data integrity
across the Order to Cash
process
Strategy Assessment
● Performed a strategy
assessment to identify
potential use cases. Evaluated
potential partners and
provided implementation
considerations
Product Design and
Strategy Assessment
● Assessed technology architecture
and design features of cross
border payments program
leveraging blockchain. Proposed
third party vendors, partnerships
and go-to market strategy
Transaction
Settlement PoC
● Designed and developed a
proof of concept for a central
bank, to explore the use of
resilient distributed ledger
technology for settling
transactions
Supply Chain Pilot
● Built a pilot that would allow
a pharmaceutical company to
attest to provenance / chain
of custody of prescription
drugs in order to prevent
fraud
Trade Finance Pilot
● Collaborated with large
software company and bank
to build a standby letter of
credit proof of concept, taking
a multiday, 15+ step process
to 5 steps with near real-time
data availability
Large Corporate
Treasurer and
Bank
Large Industrial
Company
Investment Bank
Large Asian
Pharmaceutical
Company
Large European
Bank
Global Payments
Processor
Example use cases we’ve helped clients with
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42. Issue: Bank recordkeeping and reconciliation friction
4
2

43. Solution: Reduce transaction friction

44. Automotive supply chain challenges

45. Automotive supply chain solutions

46. Automotive supply chain tracking and tracing

47. PwC
Trend in identity toward controlling your own IDs

48. Unwarranted and fraudulent bot traffic forces
advertisers to overpay and makes customer
data more difficult to track
Ghost Sites lead to advertisements getting
placed on non-existent or incorrect sides. The
opposite can also occur for many publishers
Lack of trust in the supply chain limits the
data that is shared, reducing the ability to
make informed business decisions
Blockchain solutions have the ability to address the major pain felt across the industry
Through the use of an ad network registry, a
blockchain network could prevent fraudulent
players from entering into the advertising
ecosystem
By tagging digital assets as well as creating
an ad network registry, blockchain can track
exactly where an advertisement is placed and
determine if that location is legitimate
By pairing distributed ledger technology
with cryptographic security, blockchain can
enable enhanced data sharing without the risk
of fraud
Current Industry Concerns
Potential Blockchain Solutions
Ad tech supply chain problems
15

49. PwC
Ad tech solutions
49

50. PwC
Conclusion: Opportunities and challenges
• Targeted, smaller footprint
commercialization in financial services
• Substantial transaction friction reduction
promise
• Strong demand for product safety, supply
chain transparency and efficiencies
• Organizational and industry boundary
crossing and new levels of collaboration
• Autonomous capability symbiotic with AI’s
capabilities
• The reality of the adoption S curve
• The lagging legal and regulatory
environment
• The complexity of the business ecosystem
• The installed base of business
technologies, processes, and procedures
• Competing but less advanced offerings
• Uncertainty surrounding best practices
Opportunities Challenges

51. Questions or comments?
http://usblogs.pwc.com/emerging-technology/
© 2018 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes
refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional
advisors.
Alan Morrison
Sr. Research Fellow
Tel: +1 (408) 817-5723
alan.s.morrison@pwc.com