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50 Shades of the Blockchain and Cryptocurrency Technologies

50 Shades of the Blockchain and Cryptocurrency Technologies

The blockchain is one of the most misunderstood technologies in recent times” (MAS, 2019)

 

1.0 Introduction              

This article attempts to demystify the blockchain and cryptocurrency technologies while highlighting the objective strengths of these technologies, as well as bringing to light some of the very negative shades of the crypto space.

The definition of blockchain according to the World Economic Forum (2016) is: “By using math and cryptography, blockchain provides an open decentralised database of every transaction involving value.” In simple terms, blockchain is a novel form of database. To illustrate how transactions are stored in a blockchain, refer to Figure 1.0 for a start, where we have a table of three student records which can be stored in any traditional database system. Transforming the records in Figure 1.1 into a simplified blockchain is shown in Figure 1.2 where the above “SN” field (in Figure 1.1) is represented by a “Block” field (in Figure 1.2) and the above fields from “Institution” to “Grade” (in Figure 1.1) is incorporated into the “Data” field (in Figure 1.2). The other additional fields within Figure 1.2 such as “Nouce”, “Prev” hash, and Current “Hash” part of a blockchain design but its explanation is outside the scope of this article (refer to Drescher, 2017 for more information).

Figure 1.1 A table of three student records

 

Figure 1.2 A simplified blockchain for the three student records (Yeap, 2018)

 

A cryptocurrency is a form of digital currency and similar to blockchain, also uses math and cryptography. One approach to visualising the relationship between the blockchain technologies, cryptocurrencies and various applications is as shown in Figure 1.3:

  • L1: At the base layer, Hardware comprises of equipment and devices that is related to the blockchain and cryptocurrencies. This include the mining rigs, hardware wallets, among others.
  • L2: Above that is the Platform layer where blockchain technologies can be independent from the cryptocurrencies. Many cryptocurrencies involved a specific type of blockchain, for example, BTC cryptocurrency is based on the Bitcoin blockchain, ETH cryptocurrency is based on the Ethereum blockchain. However, it is possible that a blockchain technology is independent from a cryptocurrency and one such example is Hyperledger (Hyp). Among the cryptocurrencies, one can further sub-divide it into a few types: bitcoin (BTC), altcoins (ETH and LTC) and appcoins (MITx and TKX). Most appcoins are ERC-20 compliant where they operate on the Ethereum platform – to date, there are over 180,000 ERC-20 compliant tokens (Etherscan, 2019) including MITx and TKX which are appcoins for Morpheus Labs (2018) and Tokenize Exchange (2018) respectively.
  • L3: There are numerous blockchain related applications including crypto-exchanges such as Tokenize Exchange (2018) and Binance. To date, there are a several hundred of crypto-exchanges allowing users to trade cryptocurrencies. The Monetary Authority of Singapore partnered with R3 and a group of financial institutions (MAS, 2016) to develop a blockchain project to facilitate inter-bank payments using the blockchain technology and is currently still an on-going development focusing on novel methods to conduct cross border payments using the central bank own digital currency (MAS, 2019). Morpheus Labs (2018) is a blockchain company that developed a blockchain as a service product that enables developers to more rapidly create blockchain solutions and the corresponding appcoin is MITX. Unibright (2018) is another very promising project that is also seeking to ease the creation of enterprise blockchain solutions. In the area of Intellectual Capital, IP Blockchain (Ideacity, 2016) is a blockchain solution that allows creators to register their invention disclosure, trademarks, trade secrets, and copyrighted materials enabling proof of existence of their works in the future. There are a few other thousands of blockchain applications which are available in ICOBench (2019).

 

Figure 1.3 Blockchain System Layers (Yeap, 2018b)

 

2.1. Positive shade: Blockchain Innovation

Patent information is an important source of technological intelligence that institutions may use to gain strategic advantage. Patent information visualisation involved the methodology for the development and application of a technology knowledge base, for purposes of technology and competitive intelligence. The European Patent Office has observed that “Patents reveal solutions to technical problems, and they represent an inexhaustible source of information: more than 80 percent of man’s technical knowledge is described in patent literature” while The World Intellectual Property Organisation revealed that 90% to 95% of all the world’s inventions are found in patented documents.

Figure 2.1 shows the patent landscape of over 3,000 global patents (Orbit, 1998a) involving blockchain technology. A large part of the patents relates to the use of blockchain technology to manage transactions in different manner. While Bitcoin is an open source project where its original code base was contributed by Nakamoto (2010) but have since been improved upon by over 600 other developers around the world.

 

Figure 2.1 Patent Landscape of 3,059 Blockchain Related Patents

 

Citation analysis is an analytical technique that reveals the citations of a patent. The two common types of patent citation analysis used in the industry are:

  • Backward citation analysis which involves the examination of cited patents, and
  • Forward citation analysis which involves the examination of citing patents (or cited-by).

Backward citation analysis is often of relevance if a patent validity study is required. For competitive technology intelligence, forward citation analysis is more relevant.

 

Illustration of the value of high impact patents using forward citation analysis

Scenario: INV is an inventor. Ten years ago, INV was awarded a patent (BPAT) for blockchain related invention. INV has an idea to improve on that invention and to take the technology a step further. Before INV can get additional funding to continue the work, INV needs to prove that this is a viable and fruitful area for development. To prove this, INV need to see what work has been done in this area since the grant of BPAT.  INV also needs to know who is doing BPAT-related work as they may be INV competitors. Patents filed after the publication of BPAT may be cited, especially by patent examiners who are more impartial than competitive inventors. Similar to scientific journal publications, research has shown that patent citations are also positively related to the probability of that patent being licensed (Henk et al., 2005).  While not a perfect tool, patent citation frequency is still useful in assessing and identifying more fundamental patents in a group: the greater the frequency of citation, the more basic the technology is likely to be.

 

Figure 2.2. US10,163,080 Patent titled Document tracking on distributed ledger

 

One of the highly cited patents is “Document tracking on distributed ledger” (‘080) filed by a Canadian bank (Chow et al., 2016) and is based on an earlier provisional patent application (Chow et al., 2015). This invention recognised that the transfer of cryptocurrencies between owners is essential to the success of the cryptocurrencies eco-system which “relies on a robust distributed ledger structure that, due to its public nature, redundant verification, and resistance to fraudulent activity, offers advantages over existing centralized server systems.” This invention improves on the state of the art in the existing blockchain by providing features to use to track assets in a secure, non-trusted, and/or sensitive context, where privacy is of utmost importance.


2.2 Positive Shade: Sources of Funding for Early Stage Companies

Figure 2.3 VC funding, ICO funding and Hybrid Funding

 

Diemers (2018) provides a summary (Figure 2.3) on the different characteristics involved in a traditional angel (Lee, 2010) and venture capital funding and fund raising through Initial Coin Offering (ICO). It also envisaged the possibility of a hybrid funding where companies raised funds through both means. An ICO is a form of crowdfunding method that crowd-source for funds (in one or more types of cryptocurrency) for the purpose of developing a blockchain related application.

 

Figure 2.4 Funds raised by ICO projects and countries

 


Globally, for the past 3 years, Singapore is consistently among the top 3 position (ICOBench, 2019b) in terms of the number of ICOs as the choice country to conduct an ICO as well as in terms of total amount raised.

 

Figure 2.5 Average funds raised (US$ million) from March 2018 to March 2019

 

The average amount of fund raised over the past 10 months is about US$9 million (ICOBench, 2019b). The figures for the next quarter will be closed watch as that would indicate if the ICO fund raising market has stabilises, improves or is still uncertain.

 

3.1 Negative Shade: Money Grabbers

Due to the relative ease of creating an ICO campaign, coupled with the fact unlike equity investments into private company each investment quantum is tens to hundred of thousands of dollars, token buyers of ICO can participant with just tens to hundreds of dollars. There exist an auto ICO website generator (Yeap, 2019b) which allows anyone to generate any ICO campaign with details such as a list of team members and advisors, project roadmap, tokenomics, one pager document and even a white paper which a scammer may modified from (Figure 3.1).

 

 
Figure 3.1 Fictitious ICO Website Generator (YetAnotherICO, 2017)

 

While one may think that it is difficult to fake a list of team members, Artificial Intelligence, specifically machine learning has reached a stage where it is possible to generate many photo realistic individual faces (Yeap, 2019c), (Karras, 2018) that resemble our colleagues or friends (Figure 3.2).

Figure 3.2 AI generated faces (Yeap, 2019c)

 

Among the thousands of ICO and blockchain projects that are listed in the ICOBench (2019) platform, there are several projects which is deemed by the crypto community to be a money grabber projects, meaning that upon collection of the funds, they did not spend as per promises (or lack of) made in their whitepaper. One such project is Lydian (2018) which after collecting over USD11 million dollars, chose to abandon their community without providing updates on how their appcoins can be used in their platform. Another of such project is known as Invacio (2018) which collected a couple of million dollars. Invacio is an interesting ICO company where on the surface, many non tech individuals who read its whitepaper would likely be enchanted with it due to the choice of words and graphics within. However, beneath its slick whitepaper lies much unsubstantiated claims and true enough within less than one year of its ICO completion, there is not a single multi-agent system related product that is released by the company and what was worse is that the company was found to have stolen open source code and claimed it to be its own. Naturally, many of Lydian and Invacio token purchasers were disappointed and are left with little recourse.

 

3.2 Negative Shade: ICO Exit Scams

Just like in any online related ventures, there are always unscrupulous individuals where their objective is to commit fraud and stealing from others. While many of the blockchain and ICO projects are legitimate, there exist a significant number of ICO exit scams and this is considered one of the ugliest aspects of the ICO space. There are numerous statistics in relation to the ICO exit scams and one estimate it to be as high as 81% (Catalini & Gans, 2018), (Morris, 2018), (Dowlat & Hodapp, 2018). In an ICO exit scam, dishonest individual(s) would create a legitimate looking ICO projects luring token buyers to participate in their ICO and upon completion of the fund-raising campaign, they would delete their tracks and disappears into the cyber space. Figure 3.3 shows some of the more well known ICO exit scams: Giza, Bitconnect, Denaro and Centra (Deadcoin, 2017), (Dapped, 2018).

Figure 3.3 ICO Exit Scams

 

One mitigating factor to minimise the risk in the participation of ICO exit scams is to evaluate ICO reviews and ratings done by the ICOBench experts (ICOBench, 2019c). There exist over three hundred ICOBench experts who are all volunteers from the crypto community and many of them are actively contributing to the crypto community by doing deep analysis of various ICO projects that are listed within the ICOBench platform. There over 5000 ICO and blockchain projects that are listed within the ICOBench platform, while it is not almost to identify every shady but it is very encouraging that the crypto community at large (outside ICOBench platform) are also as active in the identify of shady ICO projects (Concourseq 2018), (ICOCheck, 2018), (ShitCoinOffering, 2018).

 

Figure 3.4 Crypto/ICO Scammer Hall of Shame

 

There exists a crowd-resource platform (Yeap, 2018c) compilating various ICO exit scams and various modus operandi used by crypto scammers around the world. In addition, various Telegram support groups for the scam’s survivors are also archive within the same platform so that they might be able to provide support to each other, including taking collective actions against the dishonest ICO companies.

 

4.0 Conclusion

Internet e-commerce first emerged in the mid-nineties (Stone, 2013), and over the next many years, while there are clear benefits offered by e-commerce platform to its customers, there exist also numerous scams as well (Baiden, 2011). It is therefore not surprising that there existing a number of crypto-related scams as well and many of which are ICO related.

Just like there are multiple phases in the e-commerce space, we are currently still in the early phase of the crypto related activities and for every crypto scam that is exposed, the community at large learns to be a bit savvier and more aware of its pitfalls.

 

Figure 4.1. Monthly number of new blockchain patents (Jan 2012 – Dec 2018)

 

On the blockchain side, the future is very bright as there is more innovation to be expected as seen in the steady increase in the number of global patent applications (Orbit, 1998b) as shown in Figure 4.1.

 

References

Baiden, J (2011), «Cyber Crimes», SSRN Electronic Journal.

Catalini, C., Gans, J. (2018), «Initial Coin Offerings and the Value of Crypto Tokens», MIT Sloan Research Paper No. 5347-18; Rotman School of Management Working Paper No. 3137213.

Chow, A. C., Chan, P. M. W., Haldenby, P. A. J., Lee, J. J. S. (2015), «Document tracking on distributed ledger», United States Patent and Trademark Office, Provisional Patent Application 62/204,768.

Chow, A. C., Chan, P. M. W., Haldenby, P. A. J., Lee, J. J. S. (2016), «Document tracking on distributed ledger», United States Patent and Trademark Office, Granted Patent Number US10,163,080.

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Dowlat, S., Hodapp, S. (2018), «ICQ Quality: Development & Trading», Satis Group LLC Publication.

Drescher, D. (2017), «Blockchain Basics: A Non-Technical Introduction in 25 Steps», Apress Business.

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26 Dec 2019
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