Introduction to Blockchain Michael Alles Rutgers Business School

Introduction to Blockchain • • Michael Alles Rutgers Business School Glen Gray California State University, Northridge 1

Introduction to Blockchain 2

Introduction to Blockchain is the “God Protocol”! • In 1998, Nick Szabo wrote a short paper entitled “The God Protocol. ” Szabo mused about the creation of a be-all end-all technology protocol, one that designated God the trusted third party in the middle of all transactions. His point was powerful: Doing business on the Internet requires a leap of faith. • It may not be the Almighty, but a trustworthy global platform for our transactions is something very big. • This protocol is the foundation of a growing number of global distributed ledgers called blockchains—of which the Bitcoin blockchain is the largest. (Fortune, May 8, 2016) 3

Introduction to Blockchain will change the world! • Even more than Trump!! • American Accounting Association: “companies… are leading the blockchain transformation to demonstrate HOW organizations are radically changing their business models, processes, products, services, and uses of data. ” • Don Tapscott’s new book is called Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World. • AICPA: “All signs point to blockchain’s rising dominance in the next five years. You as a finance and accounting professional can choose to shape how the adoption comes to life. ” 4

Introduction to Blockchain On the other hand… • Steve Wozniak, cofounder of Apple Computer, was defrauded in a bitcoin transaction (Detrick 2018). • Griffin and Shams (2018) found that 50% of the rise in bitcoin prices and 64% of other top currencies was due to manipulation. • Mc. Afee indicated that "cryptojacking is becoming a favorite among criminals because it is simpler and more straightforward and less risky than ransomware or stealing data. " (WSJ, Sept. 18, 2018) • The DAO, a smart contract organization (funded by $150 m crowdfunding in June 2016), was immediately hacked for $50 m. (Wired, June 6, 2018) 5

Introduction to Blockchain So what is blockchain? • First and foremost, blockchain was created to operate bitcoin, but blockchain ≠ bitcoin. • Narayanan and Clark (2017): : “So far, this article has not addressed the blockchain, which, if you believe the hype, is bitcoin’s main invention. It might come as a surprise to you that Nakamoto doesn’t mention that term at all. In fact, the term blockchain has no standard technical definition but is a loose umbrella term used by various parties to refer to systems that bear varying levels of resemblance to bitcoin and its ledger. ” • A good a definition as any. 6

Introduction to Blockchain Varying levels of resemblance… • Bitcoin is a public, distributed ledger. Many blockchain initiatives are private. • Bitcoin explicitly designed for a world with zero trust between participants. Is that also true in private blockchains? • Bitcoin ensures “immutability” of data by both distributing it and placing huge transaction costs on validating and changing stored data. • de Vries (2018) estimates that the electricity required by blockchain miners is almost as much electricity consumed that year by a country the size of Austria, a nation with a population of almost eight million. 7

Introduction to Blockchain Critical role of transaction cost • The bottom line is that any consensus mechanism for a distributed ledger must result in a transaction cost. • The transaction cost is the price that must be paid for producing a secure distributed ledger in a trustless environment. • Proof of stake simply replaces the cost of paying for electricity with the cost of buying an ether stake, which may be better for the planet, but does not make it any cheaper overall to use the blockchain. • Do trust partners want to replicate the mechanisms designed for a trustless world? 8

Introduction to Blockchain Value of having a distributed ledger • Is the value added obtained from having a distributed ledger or just a ledger? • Blockchain may be a means towards the end of getting all partners to finally sit around a table and agree to share data. But does that necessitate also paying for all the paraphernalia of bitcoin-like blockchains? • Many highly publicized blockchain initiatives, such as that used by Walmart to track tomatoes and pork in China, are highly opaque as to how they actually work, what power the founders have and the nature of validating mechanisms. Private=Secret, not open. 9

Introduction to Blockchain Still, the consensus is clear… 10

Introduction to Blockchain On to our speakers! 1. “Auditing Blockchain” Dr. Gerard Brennan, CFE, Audit Technologies Director – Libra. 2. “The Digital Pink Slip-A Blockchain Use Case for Automobile Registration” Dr. Cory Campbell, Professor of Accounting, Indiana State University Dr. Dijo Alexander, Head of Technology – Learning Management, SAP Faculty at University of Wisconsin 3. “Open Information Enterprise Transactions: Business Intelligence and Wash & Spoof Transactions in Blockchain & Social Commerce” Dr. Daniel O’Leary, Professor, University of Southern California 11