FITE3011

Distributed ledger and blockchain

Lecture 2 When should we use blockchain?
Agenda
› Properties of Blockchain
› HK Government’s Projects
› Projects around the globe
› Should we use blockchain?
›

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 Traceable Decentralised

Blockchain

Transparent Immutable

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 Key Concepts related to blockchain

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https://www.legco.gov.hk/yr19-20/english/panels/itb/papers/itb20200511cb1-593-3-e.pdf
Intellectual Property Department (IPD)
› Transfer of Trademark Ownership
› Facilitate the receipt of and access to this information by
respective stakeholders
– Assignors,
– Assignees,
– And their agents

Why Blockchain?

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Department of Health
› Record the information of pharmaceutical products
› Selected vaccine and medicines from stakeholders
– DH,
– Manufacturers,
– Distributors,
– Healthcare professionals

Why Blockchain?

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Environmental Protection Department (EPD)
› Blockchain-based document management
› Optimize the compilation and editing of the draft
environmental impact assessment reports from
– EDP,
– External consultants,
– Other related Bureaux / Departments

Why Blockchain?

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Company Registry
› Monitor the filing status of company documents to
enhance the “e-Monitor” service
› Provide more effective and automated services for
company users
– Banks,
– Company secretaries

Why Blockchain?

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Project Inthanon-LionRock

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 Current State & Challenge

liquidity Compliance
Settlement risk Traceability
management

https://www.hkma.gov.hk/media/eng/doc/key-functions/financial-
infrastructure/Report_on_Project_Inthanon-LionRock.pdf

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eTradeConnect
› Facilitate settlement and financing of trades through
sharing of trade data via a secured trade finance platform
riding on the cutting-edge Distributed Ledger
Technology

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Applications of Blockchain in Different
Industries around the globe

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Decentralized Finance

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Insurance: Fraud Detection and Prevention
› Problem
– The insurance industry suffers from 80$ billion per year due to frauds.
– A security issue may occur when information is sent between peers
including the insurers, reinsurers and the claimers.

› Solution
– Blockchain can solve the fraud problem thanks to the transparency it
offers.
– The distributed ledger ensures that the transactions done on the
blockchain are permanent (i.e., no data can be modified once written).
– Claims can reside on the distributed ledger, making it easy for the
insurers to verify the information when the time comes.

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Property and Casualty Insurance
› Problem
– It is plagued with problems such as data evaluation for claim processing,
manual data entry, coordination across parties, and so on.
– The manual data entry also leads to errors which later result in the loss for
any of the parties depending on the type of error occurred.
– The lack of a proper framework for claims processing hurts the end user.

› Solution
– Blockchain manages the physical assets digitally.
– Business rules can be implemented in smart contracts and executed
automatically (i.e., claims can be processed automatically by using smart
contracts).
– All the changes can be traced for authenticity which makes them auditable.

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Health Insurance
› Problem
– Rigid privacy laws mean information cannot be shared seamlessly
among healthcare institutes (i.e., non-access to patient’s data due to
confidentiality leads to a lack of information required to the claim
insurance which costs both hospitals and the patient).
– Outdated backend infrastructure also hampers medical records
sharing, for example duplicate or error information that gets stored
without any form of rectification process.

› Solution
– Blockchain ensures that the patients are always in control of their
medical data (i.e., patients can decide when and how their data is
shared to the practitioners or medical institutes).
– Blockchain is a cryptographically secure network that provides
healthcare with the necessary infrastructure to function properly.

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Example
› MedRec is a system that
prioritizes patient agency,
giving a transparent and
accessible view of medical
history.

https://medrec.media.mit.edu/

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Logistics: Global Shipping Business Network

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Do you need a blockchain?

Wust & Gervais, Do you need a blockchain? 21

Steps Recommended by ACT-IAC

ACT-IAC American Council for Technology and Industry Advisory Council

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https://blockchain-working-group.github.io/blockchain-
Phase 1: Problem Assessment
› Develop a vision and business objectives through various
assessments to ensure the blockchain solution addresses a
specific use case and delivers results that optimize services
and operational delivery.

› Engage with stakeholders to refine the use case the

blockchain will address
– Identify and document the context of the use case, such as business
challenge; business process issues, gaps; and stakeholder needs.
– Detail the stakeholders’ functional requirements.
– Determine their perceived risks related to implementing a solution
along with their expected outcomes and the associated metrics.

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Questions Suggested by ACT-IAC
› 5 – critical, 4 – very high, 3 – high, 2 – moderate, 1 –
slightly, 0 – not at all
› Q1: Will the use case involve a business network, which
spans multiple organizations/agencies?
– While a single organization may be used for an initial proof of
concept or pilot, the varying degrees of trust among multiple
organizations/agencies lead to a stronger long-term case for
blockchain.
– These organizations will look to sharing a common asset or
requiring consensus.

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Questions Suggested by ACT-IAC
› Q2: Is there a current lack of trust among the business
network participants and/or sources of data?
– Sources may include Internet of Things (IoT) devices, legacy
systems, service providers, and users from multiple agencies.
› Note that the Blockchain supports data integrity but does not have
inherent capabilities to validate data quality.

› Q3: Would the organizations in your use case benefit

from a shared governance and data standards approach?

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Questions Suggested by ACT-IAC
› Q4: Is this a use case that can be more efficiently solved
with other technologies (e.g., distributed database)?
– Do those technologies provide the same benefits that a
blockchain solution will provide for this use case and would this
solution be applicable for all parties?
– -5 – critical, -4 – very high, -3 – high, -2 – moderate, -1 –
slightly, 0 – not at all

› Q5: Does the use case require, or can it benefit from

strict transaction immutability?
– Ledger transaction entries are append-only. Transaction records
cannot be altered (even by the admin).

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Questions Suggested by ACT-IAC
› Q6: Does the use case require, or can it benefit from
using distributed ledgers and a decentralized authority
approach?

› Q7: Can your organization benefit from transforming

respective business capabilities into a decentralized
organization?

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Questions Suggested by ACT-IAC
› Q8: If you can repurpose business logic to a distributed
organization – have you identified how your Core
Competencies will benefit?
– Consider the full business considerations of a blockchain
approach that go beyond the technologies involved and may
impact organization, business processes, workflow, customer
interaction, and other factors.

› Q9: Are there existing inter-organization business process

inefficiencies? (e.g., an excessive amount of time being
spent on reconciliation)

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Questions Suggested by ACT-IAC
› Q10: Are you looking for a vehicle to securely share
reference data among members of the business network?

› Q11: Does provenance of a digitized asset (i.e., a record

tracking the lifetime history of an asset) as it is
controlled/owned by different members of the business
network apply? (e.g. moving from factory to distribution
center to final destination across the life cycle)?

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Questions Suggested by ACT-IAC
› Q12: For this use case, is there an existing system that
could serve as a trusted source of the truth for all
parties?
– Would that system be accessible by all parties?
– -5 – critical, -4 – very high, -3 – high, -2 – moderate, -1 –
slightly, 0 – not at all

› Q13: Does the use case have high performance

requirements? (transactions per second (TPS) > 3K/sec)?
– -5 – critical, -4 – very high, -3 – high, -2 – moderate, -1 –
slightly, 0 – not at all

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Decision Gate
› If your score is 41 and above, it is highly recommended to
commence the readiness review.
› If your score is between 21 and 40, it is recommended to
commence the readiness review.
› If your score is between 5 and 20, it is recommended to
further review of your inputs and the assigned weights
before determining if the proof of concept is applicable
for blockchain and continuing with the readiness review.
› If your score is between 0 – 5, it is recommended that the
proof of concept is not appropriate for blockchain.
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Case Study: Luxury Goods Tracking
› The problem:
last year the global brand
counterfeiting report 2018 revealed a
growing problem in the luxury
industry. in the USA alone, 2017 saw a
seizure of $1.38 billion worth of
counterfeit goods, a 10%
increase from the number of fakes
confiscated in 2016.

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How may Blockchain help?
› Do you need to store state? Yes
› Are there multiple writers? Yes
› Can you use an always online TTP?
– Perhaps LV does not want to host a central database, or to improve
transparency
› Are all writers known?
– Known if we only consider authorized distributors
› Are all writers trusted?
– No, not all shops are trusted; or perhaps the employees are not fully
trusted
› Is public verifiability required? Yes

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How may Blockchain help?
› Answer the 13 questions from “Do I need a blockchain?”
in ACT-IAC Blockchain Playbook for the US Federal
Government

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› Q1: Will the use case involve a business network, which spans
multiple organizations/agencies? 5
› Q2: Is there a current lack of trust among the business network
participants and/or sources of data? 5
› Q3: Would the organizations in your use case benefit from a shared
governance and data standards approach? 2
› Q4: Is this a use case that can be more efficiently solved with other
technologies (e.g. distributed database)? -3
› Q5: Does the use case require or can it benefit from strict
transaction immutability? 5
› Q6: Does the use case require or can it benefit from using
distributed ledgers and a decentralized authority approach? 0
› Q7: Can your organization benefit from transforming respective
business capabilities into a decentralized organization? 0
› Q8: If you can repurpose business logic to a distributed organization
– have you identified how your Core Competencies will benefit? 3
› Q9: Are there existing inter-organization business process
inefficiencies? (e.g. an excessive amount of time being spent on
reconciliation) 3
› Q10: Are you looking for a vehicle to securely share reference data
among members of the business network? 3
› Q11: Does provenance of a digitized asset (i.e., a record tracking the
lifetime history of an asset) as it is controlled/owned by different
members of the business network apply? (e.g. moving from factory to
distribution center to final destination across the life cycle)? 5
› Q12: For this use case, is there an existing system that could serve as
a trusted source of the truth for all parties? -5
› Q13: Does the use case have high performance requirements?
(transactions per second (TPS) > 3K/sec)? 0
Result - 23
› If your score is between 21 and 40: A score of between 21
and 40 could typically be supported with a blockchain
approach but is not an overwhelming natural candidate.
These situations can have powerful reasons that can still
drive a blockchain approach, yet they might also have
mitigating factors that make a traditional approach a
better alternative. In these situations, a more thorough
analysis is typically needed.

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The System
› Link each item to a token supported by blockchain
› Ownership transfer recorded on blockchain as the
transfer of the token
› Customer can track their item online
› Put a QR code on the item, develop an app for user
friendliness

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Issues?
› Blockchain is NOT IoT!!!
› Dishonest seller can make a copy of the real item and
copy the QR code
› Solution?
– Each seller must register an account on the blockchain, token
ownership is recorded. If the seller sold the real item, the token
ownership will be transferred to the next register user and the
copied QR code cannot be sold again
› Problem
– The seller could sell a fake item with the real QR code, and sold
the real item to someone who does not care about tokens

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Issues?
› Transparency
› Ordinary user is just interacting with an APP, they have no
clue if the data comes from the blockchain or not

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Yet Another Potential Project Evaluation
› Blockchain-based certificates

• The idea:
• Putting Certificate on the blockchain?

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Blockchain-Based Academic Certificate
› Alternative Solution? Digital Certificate signed by Issuer
– Blockchain-based solution may be more user friendly?
– More transparent?
– Easier to revoke? (using smart contract?)
› Privacy Issue?
– Hash of the certificate/ Encryption of certificate?
– Advanced crypto techniques – zero-knowledge proofs

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Limitations
› What do we mean by “Fake Certificate”?
› Identity of owner still needs to be verified

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Blockchain as a DLT, revisited
› Two data structures
– Linked list: Transaction Log (immutable)
– Key-Value Database: World State (updatable)
› Only need to synchronize transaction log…

Create
Account Create
World State Transfer $5
“A”; Account
to ”B”
Deposit “B”;
$10 to A
Account Balance
A 5
Transaction Log
B 5
Ledger
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Blockchain for Cryptocurrency (e.g., Bitcoin)
› Business logic is fixed, i.e., the set of instructions is for
recording fund transfer.
– Create Account
– Deposit
– Transfer

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Architecture for General-Purpose DLT
› Allow business logic to be written in general-purpose(i.e.,
Turing-Complete) programming language
– Solidity in Ethereum
– Golang in Hyperledger Fabric
› The result is known as “smart contract” or “chain code”
› The smart contract can interact with the world state as a
KV database using primitive commands such as put, get,
delete

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A General-Purpose Blockchain allows developer to
deploy its own business logic (i.e., smart contract)

mycc
func1
GetState, PutState, DelState func2
…

Deploy Contract Invoke Invoke

World State mycc mycc.func1() mycc.func2()

Transaction Log Ledger

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Bitcoin’s Ecosystem
Exchange
Market

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Ethereum’s Ecosystem

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How applications interact with the ledger?
Can be developed in different
languages, including Node.js or
JAVA. In the first lab, you will be
given an application app.js

Default language for chaincode

is golang. In the first lab, you will
be given an incomplete
chaincode mycc.go

Source: Fabric Explored A Technical Deep-Dive on Hyperledger Fabric

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Additional Concepts in Hyperledger Fabric
› Hyperledger Fabric is a permissioned blockchain
› Different nodes play different roles in the system
– Endorser (execute transactions and produce endorsement)
– Orderer (order transactions, form blocks, deliver blocks to all
peer nodes)
– Client (propose transactions, collect endorsement, submit
endorsed transaction to orderer)
– Peer nodes validate endorsements of each transaction included
in the block

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Identity Management
› Note that the above architecture requires each node to
have an identity
› Hyperledger Fabric provides a membership identity
service that manages user IDs and authenticates all
participants