Digital Transformation A Focus on Blockchain Tristan Relly Director, Financial Advisory June 2018
Digital Transformation in action
The Fourth Industrial Revolution Late 18 th Century Late 19 th Century 1960 s NOW 1 2 3 4 Steam power Rail Mechanisation of Production Electrification Linear / Mass Production Processes Computers Telecoms Automation Internet Cyber Physical Systems IOT Smart Devices & Robotisation Virtual Reality Analytics Artificial Intelligence Blockchain 3
Drivers & Impact of Digital Transformation Disruptors highlighted Drivers Disruptors Impact Customer Constantly connected & experience driven Competition Reduced Barriers to Digital Entry & Non Traditional Sources & ecosystems Configuration Reduced Ownership of Assets & Infrastructure Globalization Internet of Things Value chain inefficiencies Exponential technologies Cognitive intelligence New business models Platform lifecycle Borderless growth Shared economies 4
Elements of Digital Transformation When considering disruption we can look at 4 broad areas of potential impact. Strategic Disruptors Experiences Operational Evolution Engagement Platforms Technologies, business models, operating models, competitors, and ecosystems. The human interactions, emotions, feelings, influences that drive visual, behavioral, and contextual engagement of employees and customers alike. Operational structures, compositions, and mindset changes required to adapt and create opportunities in the digital era. Understand infrastructure, data, harvesting information from many sources and providing customers access to better information with greater transparency. 8
Potential Digital Layers Transformation demands a different type of conversation. Technologies, business models, operating models, competitors, and ecosystems that disrupt the status quo. Strategic Disruptors Exponential technologies Blockchain Cognitive intelligence Customer-centric design Analytics and Data Internet of Things + Sensors Crowdsourcing Robotics Shared economies Talent ecosystems Globalization Like competitors Business drivers and trends Evolving ecosystems Value chain inefficiencies Blurred industry boundaries 9
Focus on blockchain 7
Three Innovations Laid the Groundwork for Blockchain s Invention Public key cryptography is a method for verifying digital identity with a high degree of confidence, enabled by the use of private and public keys 1 2 3 Peer-to-peer network Public key cryptography Proof-of-work In a peer-to-peer model, every peer in the network is a server and client, both supplying and consuming resources Enables the facilitation of a currency without a central, privileged third party Allows for individual ownership and exchange of tokens among users Proof-of-work is a piece of code appended to data that validates that data s authenticity and controls when it can be written into the system Prevents double spend by ensuring data is recorded chronologically Blockchain The first blockchain was created through the formation of bitcoin In its bitcoin application, a blockchain is a continuously growing database of transactions, organized in chronological blocks, that is shared between multiple nodes in a network Transaction 1 Transaction 2 Transaction 3 Transaction 4 Transaction 5 Transaction 6 Transaction 7 Transaction 8 Transaction 9 Transaction 10 Transaction 11 Transaction 12 Past Future In a blockchain, data is captured chronologically in blocks Bitcoin 8
Blockchain myths & facts Although Blockchain is many things, it is important to understand what blockchain can and cannot do Bitcoin 9
What is Blockchain? Near real time Fundamentally a digital ledger system for recording business transactions and events The blockchain enables the near real time settlement of recorded transactions, removing friction and reducing risk, but also limiting ability to charge back or cancel transactions. Trustless environment Blockchain technology is based on cryptographic proof, allowing any two parties to transact directly with each other without the need for a trusted third-party. Distributed ledger The peer-to-peer distributed network records a public history of transactions. The blockchain is distributed and highly available. The blockchain retains a secure source of proof that the transaction occurred. Irreversibility The blockchain contains a certain and verifiable record of every single transaction ever made. This mitigates the risk of double-spending, fraud, abuse, and manipulation of transactions. Censorship resistant The crypto-economics built into the blockchain model provide incentives for the participants to continue validating blocks, reducing the possibility of external influencers to modify previously recorded transaction records. 13
What is Blockchain? a shared ledger among a network Blockchain based on participants consensus Shared ledger of blocks of transactions Cryptographically linked ABCDEf Input Transaction data Network of participants engaged in transactions Cryptographic hashing function ABCDe Hash output XHO59D ABCx ABCd Add participant public key (XHO59D, KEY) Sign with private key to add timestamp (XHO59D, KEY, TIME) = Hashed transaction ABc Previous block # + Hashed transactions = New block # Ab Consensus among all participants on validity of hashed transactions in the new block, then add to the chain No consensus reached on validity of hashed transactions, block not added, retry with corrected or different transactions 11
What is it good for? Shared Data Opportunity for Disintermediation Absence of Trust Multiple Writers Transaction Dependency Blockchain is a technology for shared databases there is a need for a structured repository of information Blockchain removes the need for trusted intermediaries no gatekeeper is required to verify transactions and authenticate the source Blockchain is a technology for multiple nontrusting writers there needs to be a level of mistrust between the entities writing to the database Blockchain is a technology for databases with multiple writers multiple entities generating transactions that modify the database Blockchain provides value when there is interaction between the transactions created by the writers, meaning the transactions depend on one another 12
What are the Different Types of Blockchain? Public Blockchain Fully decentralized requires very low trust Fully transparent Anyone can read, send transactions and participate in the consensus process Blockchains are secured by economic incentives and cryptographic verification No transaction reversal or modification possible Possibility of collusive actors Slow confirmation of transactions Limited privacy protections anyone can read the blockchain Low cost for transactions Permissioned Blockchain Quasi decentralized hybrid Consensus process controlled by preselected set of nodes (M out of N) Read permission of the blockchain restricted to participants Options for the public to do limited queries Participants can agree to rule changes, transaction reversals and modification Low chance of collusion Near-real time confirmation of transactions Greater degree of privacy protections as only preselected entities are allowed to read the blockchain Transaction costs agreed to by the consortium Private Blockchain Centralized requires high trust entity Write permissions are centralized to one entity Read permissions restricted to participants Only the centralized authority has the capability to agree to rule changes, transaction reversals and modification No collusion possible Real-time confirmation of transactions Greater privacy protection as the centralized entity can control who has access to read which part of the blockchain Transaction costs dictated by one entity bitcoin ethereum Majority of Corporate Solutions Do you really need blockchain? 13
Future of Blockchain Industries are talking Aircraft leasing Public health - pharmaceuticals Regulatory compliance reporting Trade finance Identity management & verification Loyalty & rewards points Claims processing Cross border payment processing Supply chain traceability Warranty tracking Smart lending Fine art tracking Digital asset trading Whistleblower case management Bonded loans Healthcare data management Digitized charity Hotel room booking Shareholder proxy votinghi 14
What makes it disruptive? DRAFT A technology becomes truly disruptive based on the impact it has on core underlying economic attributes Internet Reduces cost of Search Semiconductors Reduces cost of Computation Machine Learning Reduces cost of Prediction Blockchain Reduces cost of Trust In the real business operations today, we need intermediaries to validate and establish trust between parties... Blockchain replaces that using technology & math 15
Accounting on the Blockchain The auditor role is important Public (cryptocurrency) vs Private blockchain: primary difference is user acceptance, identity verification and node controls ERP (transaction data) Participants use a uniform interface to establish agreement terms which are translated into smart contract code CREATION Entity A Entity B Business External activities data Term Term Term (e.g. LIBOR, FX rate) EXECUTION agreement is executed by business functions in combination with ERP and external data Manual entries, accruals, estimates Trial balance Top side entries and recorded on a blockchain PUBLIC/PRIVATE BLOCKCHAIN NETWORK Triggered by terms recorded on the blockchain Financial statements AUDITOR *The blockchain is immutable once a transaction is complete (value via cryptocurrency was transferred), the other side can be illicit, real, related party, etc. Not a perfect system.. 16
Blockchain summarized Ledger at its core Records double entry when transferring a value, single entry when recording a fact Distributed No single owner or single point of failure Supercharged via smart contracts Based on cryptography Enables to define rules of engagement among ecosystem partners, provides business logic to be applied to control or execute transactions automatically Embeds cryptography with the use of private and public keys 17
Embracing Digital Transformation 18
How Companies can embrace Digital Transformation GET STARTED Look Outside Cross-industry influence combined with industry expertise drives innovation Get Agile Set your sights on Digital Agility for your mental and doing models Bring Value Emphasizing value creation early fuels the ongoing engine of transformation Think and Act with Agility Imagine the Future, then determine how to pursue transformation to create agility in your organization 22
Requires Both Left & Right Brain Left Brain Codified methodologies Data-driven and evidence based Analytical and structured thinking Financial impact and value creation Right Brian Human centered, emotive response Agile philosophy and methodology Prototyping rapid real life testing of strategic choices 23
Target Intended Business Value Creating value through revenue, costs, relationships and expectations - occurs when ideas are stretched across areas of digital impact. Connectivity Digitization Experience Innovation Data Insights 24
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