Bus Inf Syst Eng 59(3):183-187 (2017) CrossMark

DOI 10.1007/s12599-017-0467-3

CATCHWORD

Blockchain
Michael Nofer • Peter Gomber • Oliver Hinz •
Dirk Schiereck

Received: 20 January 2017 / Accepted: 20 February 2017 / Published online: 20 March 2017 © Springer Fachmedien Wiesbaden 2017

Keywords Blockchain ■ Block chain ■ Business models ■ financial transaction services: when, e.g., the US invest ment
Disintegration ■ Digital currency bank Bear Stearns failed in 2008 and was
completely acquired by JP Morgan Chase,
the number of shares offered to the acquirer
1 Blockchain - A Disruptive Technology
was larger than the shares outstanding in the
Blockchain technology and distributed ledgers are attracting books of Bear Stearns. It was not possible to
massive attention and trigger multiple projects in different clarify the accounting errors and JP Morgan
industries. However, the financial industry is seen as a primary Chase had to bear the damage from excess
user of the blockchain concept. This is not only due to the fact (digital) shares.
that the most well-known application of this technology is the While the problem of tracing back ownership in long
crypto-currency Bitcoin, but it is also driven by substantial transaction chains is already a critical aspect in financial
process inefficiencies and a massive cost base issue markets, it is also important for physical goods, e.g., (blood)
specifically in this industry. On top of this, the financial crisis diamonds or broccoli. US retailer Wal-Mart with more than
revealed that even in financial services it is not always possible 260 million customers per week is in search for a technology
to identify the correct present owner of an asset. It is even that helps to identify precisely those batches of vegetables that
more of a problem to retrace ownership over a longer chain of in a given case, e.g., are infected by coliform bacteria.
changing buyers in global Intermediation is today’s dominating solution for verifying
ownership of assets and transaction processing. Intermediaries
perform the careful checking of each involved party along a
Accepted after one revision by Prof. Dr. Sinz. chain of intermediaries. However, this is not only time
consuming and costly but also bears a credit risk in case an
Dr. M. Nofer ■ Prof. Dr. O. Hinz (&)
Electronic Markets, Fachgebiet Wirtschaftsinformatik, TU Darmstadt,
intermediary fails. The blockchain technology promises to
Hochschulstr. 1, 64289 Darmstadt, Germany e-mail: [email protected] overcome these critical aspects, representing ‘‘a shift from
darmstadt.de trusting people to trusting math’’ (Antonopoulos 2014) since
M. Nofer human interventions are no longer necessary.
e-mail: [email protected]

Prof. Dr. P. Gomber

E-Finance, Goethe-Universitat Frankfurt, Theodor-W.-Adorno- 2 Blockchain Functionalities and Implications
Platz 4, 60629 Frankfurt am Main, Germany
e-mail: [email protected] A typical example for a blockchain is illustrated in Fig. 1. A
blockchain consists of data sets which are composed of a chain
Prof. Dr. D. Schiereck
Corporate Finance, TU Darmstadt, Hochschulstr. 1, 64289 Darmstadt, of data packages (blocks) where a block comprises multiple
Germany transactions (TX1-n, see Fig. 1). The blockchain is extended
e-mail: [email protected] by each additional block and hence represents a complete
ledger of the transaction history. Blocks can be

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184 M. Nofer et al.: Blockchain, Bus Inf Syst Eng 59(3):183-187 (2017)

Hash of block i+1

Hash of block i-1 Hash of block i
validated by the network using cryptographic means. In delayed transaction confirmation, data retention, and
Timestamp Nonce
addition to the transactions, each block contains
Timestama timestamp,
Nonce communication
Timestam failures),
Nonce and structural problems (e.g.,
p p
the hash value of the previous block (‘‘parent’’), and a nonce, deflationary spiral). At the same time, TX 1 Barber
TX 2 et al. (2012)
TX n
2 • TX n 2 • TX n
which is a random number for verifying the TXhash.1 TX This concept
■ suggest TXsolutions
1 TX
■ for improving the existing Bitcoin
ensures the integrity
Genesis block of the entire blockchain through
Block i to the technology. For Blockinstance,
i+1 a ‘‘fair exchange Block
protocol’’
i+2 might
first block (‘‘genesis block’’). Hash values are unique and improve the user’s anonymity. Privacy implications of Bitcoin
fraud can be effectively prevented since changes of a block in have also been discussed by other authors (e.g., Androulaki et
the chain would immediately change the respective hash value. al. 2013; Bonneau et al. 2014; Miers et al. 2013). In the current
If the majority of nodes in the network agree by a consensus Bitcoin world, privacy can only be protected by using
mechanism on the validity of transactions in a block and on the pseudonyms. As an extension to Bitcoin, Miers et al. (2013)
validity of the block itself, the block can be added to the chain. therefore developed Zerocoin, which allows for trading
According to Swanson (2015), this consensus mechanism ‘‘is cryptocurrencies completely anonymously. In 2016, Zcash, the
the process in which a majority (or in some cases all) of successor of Zerocoin was launched.
network validators come to agreement on the state of a ledger. The process of generating new blocks implies performance
It is a set of rules and procedures that allows maintaining problems if blocks are added to the network at a high rate. As
coherent set of facts between multiple participating nodes’’. an alternative to the existing blockchain structure, Lewenberg
Therefore new transactions are not automatically added to the et al. (2015) introduce ‘‘Inclusive Block Chain Protocols’’ to
ledger. Rather, the consensus process ensures that these increase the transaction speed. It will be interesting to observe
transactions are stored in a block for a certain time (e.g., 10 whether performance problems can be overcome by this new
min in the Bitcoin blockchain) before being transferred to the technology. An analysis regarding the scalability of Bitcoin is
ledger. Afterwards, the information in the blockchain can no provided by Croman et al. (2016).
longer be changed. In the case of Bitcoin, blocks are created by
so-called miners who are rewarded with Bitcoins for validating
the blocks. The example of Bitcoin illustrates that the principle 3 Blockchain and Smart Contracts
of the blockchain cannot only change the process of money
transactions. Using cryptography, people all over the world The rise of the blockchain technology in recent years also
can trust each other and transfer different kinds of assets peer- supports other concepts that have been suggested in
to-peer over the internet.
The distributed ledger system described above offers many
benefits. In contrast to centralized systems, the functionalities
of the network persist even if particular nodes break down.
This increases trust since people do not have to assess the
trustworthiness of the intermediary or other participants in the
network. It is sufficient if people solely build trust in the
system as a whole. The absence of intermediaries also fosters
data security. As discussed by Zyskind et al. (2015), the
current practice of third parties collecting personal data implies
the risk of security breaches. By utilizing the blockchain third
parties can become obsolete, ultimately increasing user’s
security.
In computer science, various papers around blockchains
have been published in recent years and have, e.g., analyzed
consensus algorithms (e.g., Eyal and Sirer 2014) or proposed
novel concepts to tackle issues regarding privacy of smart
contracts (e.g., Kosba et al. 2016). However, besides a lot of
industry whitepapers on blockchains, academic papers in
information systems around blockchain currently primarily
focus on cryptocurrencies. Besides significant benefits, there
are also drawbacks and potential risks which are discussed in
this stream of literature. Barber et al. (2012) highlight several
weaknesses of Bitcoin, such as theft or loss of Bitcoins
(malware attacks, accidental loss), scalability issues (e.g.,

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M. Nofer et al.: Blockchain, Bus Inf Syst Eng 59(3):183-187 (2017) 185
literature. Szabo (1997) introduced the overview of different types of systems is
concept of ‘‘Smart Contracts’’, which provided by Glaser and Bezzenberger
combine computer protocols with user (2015). Ethereum can be seen as an
interfaces to execute the terms of a contract. extension of the Bitcoin blockchain to support
Due to the blockchain, Smart Contracts are a broader scope of applications. Thus,
becoming more popular since they can be blockchain technology allows to establish
utilized more easily by applying blockchains contracts using cryptography and to replace
in comparison to the technology available at third parties (e.g., a notary) that have been
the time of their invention 20 years ago. This necessary to establish trust in the past.
innovative approach might, for example, Blockchain might disrupt the entire
replace lawyers and banks that have been transaction process by automatically
involved in contracts for asset deals executing contracts in a cost-effective,
depending on predefined aspects (Fairfield transparent and secure manner (Fairfield
2014). Smart Contracts can also be used to 2014). The architectural components of
control the ownership of properties. These blockchain technology, their interaction as
properties might be tangible (e.g., houses, well as a framework for implication analysis
automobiles) or intangible (e.g., shares, of blockchain systems for digital ecosystems
access rights). A prominent example for is proposed by Glaser (2017).
blockchain technology that treats smart The financial industry is even wondering if large parts of
contracts as first class citizens is Ethereum, their current business might be replaced by the blockchain.
which is a decentralized system originally This can be illustrated by the payment process. If people pay
goods by credit card today, the settlement occurs after a delay
proposed by Buterin (2014). A taxonomy of
of several days. Utilizing the blockchain, this delayed
decentralised consensus systems and an
settlement would become

Table 1 Applications of blockchain

Type Application Description Examples

Financial Crypto-currencies Networks and mediums of exchange using cryptography to secure Bitcoin
application transactions Litecoin
s Ripple
Monero
Securities issuance, Companies going public issue shares directly and without a bank NASDAQ private
trading and syndicate. Private, less liquid shares can be traded in a blockchain-based equity
Medici
settlement secondary market. First projects try to tackle securities settlement Blockstream
Coinsetter
Insurance Properties (e.g., real estate, automobiles, etc.) might be registered using Everledger
the blockchain technology. Insurers can check the transaction history
Non- Notary public Central authorization by notary is not necessary anymore Stampery
financial Viacoin
application Ascribe
s
Music industry Determining music royalties and managing music rights ownership Imogen heap
Decentralized proof Storing and validating the signature and timestamp of a document using www.proofofexistence.
ofexistence of blockchain com
documents
Decentralized storage Storj
Sharing documents without the need of a third party by using a peer-to-
peer distributed cloud storage platform
Decentralized The blockchain reliably stores the communication of smart devices Filament ADEPT
internet
of things within
the internet of things (developed by IBM and
Samsung)
Anti-counterfeit Authenticity of products is verified by the blockchain network consisting Blockverify
solutions of all market participants in electronic commerce (producers, merchants,
marketplaces)
Internet applications Instead of governments and corporations, Domain Name Servers (DNS) Namecoin
are controlled by every user in a decentralized way

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redundant since payment can be done in real time by adjusting could reduce title insurance premiums and generate $2- $4
the ledger. billion in cost savings in the US by reducing errors and manual
effort’’ (Goldman Sachs 2016).
While computer scientists mainly focus on the technical and
4 Applications of Blockchain and Future Trends cryptographic challenges in this area, researchers from the
Business and Information Systems Engineering field have the
4.1 Applications opportunity to focus on market design, questions of trust and
privacy, and the adoption respective non-adoption of the new
Crosby et al. (2016) distinguish between financial and non- technology. Moreover, this disruptive innovation might change
financial applications that could potentially be addressed by many existing business models, create new ones and might
the blockchain (Table 1). This disruptive innovation has not have severe impacts on entire industries. Therefore, research at
only the potential to change the nature of interactions in the intersection of technology, markets and business models is
Finance, but also in many other areas of our everyday life. For certainly valuable.
instance, the British singer Imogen Heap sells her songs using
the blockchain.

4.2 Future Trends References

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