Digitizing Gold by Applying the Oxford Blockchain Strategy Framework

After completing the Oxford Blockchain Strategy Programme at the Oxford Sa?d Business School, I've had the chance to review my work papers last weekend and wanted to share my insights with the LinkedIn community by further exploring a use case from one of my graded papers back in Module 2. I will try to introduce you to the Oxford Blockchain Ecosystem Map and the Oxford Blockchain Strategy Framework by applying them to a rather simple use case (digitizing gold) in the following paragraphs. There are other concepts like the Oxford Blockchain Regulation Framework which are taught as part of the curriculum, but I will purposefully leave out in this article since I encourage you to consider exploring the Oxford Blockchain Strategy Programme for yourselves.

My Experience with the Oxford Blockchain Strategy Programme

I have really enjoyed the programme and it definitely hepled me solidify my technical and business oriented understanding of blockchain technology. The curriculum is designed to give business leaders, managers, and professionals in a broad variety of industries, the insight to understand the effects and value of blockchain on both short and long-term business strategies. What I particularly liked about each module is the excellent prioritization between theory and use cases. Although I have had already gained a robust self-taught knowledge about distributed ledger technologies through long-lasting fascination, during research for my master’s thesis years ago and my part-time work as a freelance journalist, the curriculum gave me a distinct framework at the beginning and then addressed me as an entrepreneur rather then a student by heavily leaning into use cases and insights from business leaders.

The programme helped me to tidy up my knowledge and to think in useful applications rather than buzzwords. It showed me to ask how blockchain can improve my business idea and not to tailor my business the other way around just to try to fit it for blockchain application (you will see this further below, when I introduce you to the Oxford Blockchain Strategy Framework).

I would definitely recommend the Oxford Blockchain Strategy Programme (and I am not sponsored by the Oxford Sa?d Business School in any way). Contact me via LinkedIn message for additional information about my experiences and the programme in general.

Outline

• I will first introduce you to one of the 16 use cases from Module 2 of the Oxford curriculum to give you an idea of possible real world applications of blockchain technology and as a teaser for the demonstration of the Oxford Blockchain Strategy Framework towards the end of the article.
• I will then introduce the Oxford Blockchain Ecosystem Map and the Oxford Blockchain Strategy Framework by using study materials from Module 2 of the Oxford Blockchain Strategy Programme (mostly information from course videos by Meltem Demirors, expert contributor to the programme and Chief Strategy Officer at CoinShares).
• Finally, I will guide you through the use case by applying the above-mentioned concepts and giving insights to my work in the Module 2 graded Oxford paper.

The Use Case: Store of Value - Digitizing Gold

Digitizing traditional commodities and physical assets has become a new area of interest for blockchain technology. Turning physical assets into tradable digital assets creates more liquidity and lowers barriers to entry for private investors in asset classes that are traditionally dominated by institutional investors and high net worth individuals. Several companies are working on tracking and tracing physical gold using blockchain technology, to make it a digital, easily tradeable asset. This both enables investors to have security and transparency in the chain of custody of the physical gold underlying the digital asset, and provides the accessibility and liquidity that trading a tokenized, digital asset on the blockchain provides. With the speed and transparency of a digital asset trading platform, investors will have access to an exciting, innovative, and secure way to buy, sell, and hold gold globally.

The Oxford Blockchain Ecosystem Map

The ecosystem around blockchain can be interpreted and demonstrated in different ways. According to the Oxford Blockchain Ecosystem Map, the blockchain development stack has three layers. The bottom layer is the protocol layer, the middle layer is the networking layer and the top layer is the application layer. The Oxford Blockchain Ecosystem Map outlines the key stakeholders at each of the three levels of the blockchain development stack. In addition to being introduced each stakeholder’s corresponding layer in the blockchain development stack, you can explore their role in the ecosystem and the motivation that drives their participation.

Figure 1: Overview Oxford Blockchain Ecosysem Map

The Protocol Layer

At the protocol layer, the most important set of stakeholders are developers. Not surprisingly, developers are a critical component of setting up and implementing blockchain networks and blockchain protocols. Developers are the ones who create new protocols. They also write software upgrades and improvements to the protocols, and they are the ones who typically work with every other layer of the application stack to help bring products and services to life. So engaging with the developer ecosystem is very important.

It is interesting to note that there are two different types of developer ecosystems. One that is very prominent on the public blockchain side, typically those blockchains that have their own associated digital currency or token, is the open-source development community. Open-source development means that software code is openly available and can be downloaded, forked, reviewed, audited, and any individual can submit changes or upgrades to the protocol. In each protocol, there will be rules that govern how and when upgrades are made. In the Bitcoin protocol, for example, upgrades happen through consensus, but in other protocols, the upgrade process may differ. For example, in the Tezos blockchain, protocol upgrades happen through voting.

The second type of developer community is focused more on private blockchain implementations, and these developers are typically employed by companies, corporations, or entities that are focused on a specific private deployment of a blockchain. It is very important to understand the distinction between the two, because they can have profound implications to the cost of maintaining and running your blockchain protocol.

The last piece to note about developers in the blockchain ecosystem is to understand what their motivation is. Many developers are really driven by intellectual curiosity and defining and finding new models to use computer science, game theory, and distributed networking theory to create new systems and tools.

Another important part of the blockchain ecosystem at the protocol layer is researchers and academia. Since blockchain technology is still very new, there is a lot of work that needs to be done to fully understand the implications, not just from a technical perspective, but also from an economic, social, political, behavioural, and psychological perspective. It is very important to have members of the academic community and the research community involved in this process. Here, the primary motivation is to gain and gather new knowledge and disseminate it to a wide group of other stakeholders in the ecosystem to ensure that protocol design and development includes and incorporates key components from various disciplines.

The Networking Layer

At the networking layer, there are a number of key industry participants who are crucial in actually implementing the protocol or the code as a live production network. The most important participants in any blockchain network are people who run nodes. What nodes are, are typically devices that run a copy of the blockchain software, and in the case of many blockchain protocols, store a full copy of that blockchain.

There are many different protocols and those protocols have different consensus algorithms and different rules around how transactions are confirmed. In the Bitcoin blockchain, for example, the network is created by miners, or people who validate transactions, and people who run full nodes.

A miner is someone who buys specialized hardware and deploys capital in order to buy that hardware, and runs software. And when they run that software, they're validating transactions that get added to the Bitcoin blockchain, meaning, over time, more and more blocks get added and the size of the blockchain grows. There are also people who run full nodes, which is a full copy of every block on the Bitcoin blockchain. This means there is a record of every set of transactions that has happened on the blockchain since the beginning of its implementation.

Today, the Bitcoin blockchain is over 200 gigabytes, and it continues to grow over time. Running a full node, therefore, is still quite a costly exercise. While there are hardware devices that can help people easily set up full nodes to run in their homes, there are also cloud-based services emerging that enable people to run their own nodes via AWS, Google Cloud, or other services.

Another important stakeholder group at the networking layer are industry bodies. This could be consortia, coalitions, regulators, and other groups, whose focus it is to define the rules of engagement around how various stakeholders in the ecosystem will interact with one another. Often, these industry bodies will create common goals, set standards of behaviour and conduct, and connect various disparate parts of the ecosystem. Many of these industry bodies are focused around a specific mission statement or a specific set of values, and so, the motivation is often mission-based, or values-based. However, in some cases, like in the case of a trade body or an industry association, the motive could also be profit.

Lastly, another important component of the networking layer is people who provide access to the underlying blockchain protocols. In the Bitcoin blockchain, this takes the form of Bitcoin exchanges, or entities that allow users to interact directly with the Bitcoin blockchain. These exchanges provide users with access to the blockchain and its underlying token, and also the ability to send and receive transactions on the Bitcoin blockchain. There is also a services or application component to it, but their core functionality is to sit between the end user and the end-blockchain protocol and to facilitate transactions back and forth. The motive of these types of entities is to derive a financial profit by providing access to a specific blockchain and its associated token.

The Application Layer

Lastly, at the application layer, there are a number of different stakeholders. Entrepreneurs or people who are building actual applications, products, and services using blockchain technology and blockchain networks are the most important components of this layer. These individuals are typically motivated by seeing their vision come to life, whether that vision is facilitating cheaper, easier cross-border transfers or facilitating an entirely new model for how digital identities should work.

Entrepreneurs are typically motivated by solving one very specific problem using a variety of technologies and tools, of which blockchain or digital currencies may be simply one, or maybe the core backbone. Typically, the motive of an entrepreneur is to make money or make profit in order to create a sustainable business. However, in the blockchain ecosystem, many entrepreneurs are very driven by mission.

Another important stakeholder at the application layer is the end consumer, or the end user of a product or service. Ultimately, the design criteria for any product or service will derive from what users find utility in. So, it is up to consumers and users of these products and services to define what is actually valuable. If an entrepreneur builds a product or service that no one wants to use or no one is willing to pay for, then have they really succeeded in creating utility? It’s important to keep consumers and end users in mind, because ultimately, whenever a product or service is designed, it is intended to address a specific problem or use case they have.

Another key stakeholder at the application level are corporations and institutions. Corporations and institutions are actively looking for ways to leverage blockchain technology and digital currencies to solve specific business problems they have. More importantly, corporations and institutions typically have a large network of customers or users to which they can push new technology. This means that working with a corporation or an institution on implementing and addressing a blockchain use case can often help speed the time to market, but more importantly, help drive exponential growth in the adoption curve of a specific technology.

For example, if a company like Facebook or Google, one of the largest enterprises on the planet with one of the largest user bases on the planet, decided to adopt a technology that utilized blockchain or digital currencies, that would create an opportunity to distribute this technology widely to a large number of users that no one small start-up could do alone.

Lastly, at the application layer, there is one final group that is very important, and this is investors. Investors provide the financial capital that is needed to create infrastructure or actual utility through the use of these applications and services. Investors are typically seeking a return on their investment, so they are motivated by profit, but one of the interesting things is many investors that are focusing on digital currencies and blockchain technology also are focused on mission.

The concept of building decentralized, distributed networking infrastructure is very compelling to many venture capitalists who will look at the technologies we use in our world today and see many structural and social problems associated with the problem of centralization.

Figure 2: Oxford Blockchain Ecosystem Map (detailed)

Introducing the Oxford Blockchain Strategy Framework

Deciding whether blockchain could or should be applied to a particular use case can be a challenging task. This is where the Oxford Blockchain Strategy Framework (OBSF) can assist business leaders or innovators in understanding whether blockchain technology is a viable solution and what the most important considerations are when applying blockchain to a particular use case. 

This framework is comprised of six key questions that an entrepreneur should ask himself when contemplating whether or not a business problem or a specific use case is suitable for a blockchain:

1. Is it a predictable, repeatable process that could benefit from being automated?
2. Is there a long-running or ongoing transaction or process, or is it a one-time process?
3. Are there multiple stakeholders participating in a value chain or a transaction of some sort? If there is only one stakeholder, one should reconsider whether or not a blockchain is really necessary.
4. Does one party typically play the role of reconciling disparate data? Is there a centralized intermediary, or someone who plays the role of an arbiter of trust in facilitating a transaction or a transfer?
5. Is there an element of value transfer? Remember that value does not necessarily have to be monetary. Value could be in data, specific rights, or specific access privileges as well.
6. Is there a need for immutability or a permanent unaltered record that could easily be audited, checked, verified, and trusted?

If an entrepreneur, a business leader or an innovator can answer yes to most of these questions, it is worthwhile to begin exploring how he or she might apply the blockchain infrastructure stack to the specific use case.

Figure 3: The Oxford Blockchain Strategy Framework

Digitizing Gold by Applying the Oxford Blockchain Strategy Framework

After introducing you to the necessary concepts, I will guide you through the use case of digitizing gold to demonstrate the practicality of these frameworks. The following paragraphs are from one of my papers for the Oxford Blockchain Strategy Programme (Module 2), which I submitted on June 2, 2020 for grading and passed with distinction as one of the best of all the participants (85% "very high" - in the highest distinction level [80-100%] according to the Oxford executive education / MBA grading system):

Question 1: Assess whether blockchain can help solve for a use case

• 1. Is there a predictable, repeatable process that lends itself well to automation? 

Yes. The benefit of digitizing gold or any other asset is in capturing ownership of physical value into easily tradeable digital assets and tracing it by using blockchain. It works similarly to stablecoins like Facebook’s Libra token which is pegged to fiat money (USD). Each transaction is a predictable, repeatable process that lends itself well to automation.

• 2. Is there an ongoing or long-running transaction or process, rather than a process that only occurs once?

Yes. Much like the original Bitcoin blockchain, there is an ongoing process which is the tracking of the gold transactions on this specific gold blockchain. The crucial difference of this use case compared to Bitcoin is that the ownership of one unit of digital asset is represented in the physical world with corresponding (fractions of) gold bouillons.

• 3. Are there multiple stakeholders in this process or value chain? 

Yes. There are multiple stakeholders like the users who invest in digitized gold units, regulators and auditory bodies who verify the existence of the physical gold and that no physical bouillon can be “double spent”. Developers, nodes as validators and third parties providing save storage are some of many other crucial players for this use case.

• 4. Is the role of reconciling disparate data usually played by one party or a limited number of parties?

Yes. This fact can be demonstrated by currently existing providers of digitized gold like the mobile bank Revolut. When you purchase “gold exposure” with Revolut, they credit your account with the corresponding value based on what the market is doing at the time of the transaction. Revolut plays the role of reconciling disparate data as a trusted third party.

• 5. Is there an element of value transfer? Remember, value is not only monetary. 

Yes. The element of value transfer is the transfer of ownership of physical gold which has a worldwide generally accepted specific monetary value itself. Compared to all the other 15 use cases in this unit, this use case probably represents the element of value transfer in the most fundamental way.

• 6. Is there value in an immutable record? Or is an immutable record a requirement? 

Yes. The concept for this use case only works if there is an immutable record of transactions of ownership which prevents the possibility of double spending. Just like a scarce physical piece of gold guarantees its corresponding value, an incorruptible digital record of ownership guarantees the value of the corresponding digital asset.     

Question 2: Investigate the most important factors for applying blockchain to the use case

Protocol layer

●      Is it possible to use public blockchains, or is there a defined need for a private implementation?

●      What are the design expectations regarding speed, programmability, or payment functionality?

●      Do you have developer resources available or is the protocol you’re using supported by a robust, sustainable open-source developer community with access to resources? 

While the digitization of gold with the pure intent of store of value on a microeconomic scale might be a lucrative business idea which is already leveraged by companies like Vaultoro and Orebits (Lielacher, 2017), this use case has the potential for a socio-economic paradigm shift on a global macroeconomic scale by implementing a digitized gold standard without the need for a government as a trusted third party. Such a possible evolution would classify this project as a non-volatile (real-time) payment rail (Jackson, 2018) around a decade after its implementation.

The only way to implement a globally accepted and trusted digitized gold standard is by pursuing decentralization to the fullest extent with a completely open public blockchain where anyone can participate by adding and verifying data (Selfkey, 2020). Much like the Bitcoin or Ethereum platforms, this gold-backed cryptocurrency would be created with globally accessible open-source computing codes and supported by a sustainable open-source developer community.

While the advantages of a public blockchain like independency from any trusted third party, security and transparency are crucial for this project, the obvious disadvantages are speed, scalability and energy consumption. Nevertheless, the successful implementation of this commodity-backed cryptocurrency would require transaction speeds comparable to Visa which is around 24’000 transactions per second (Selfkey, 2020).

A possible way to achieve such speed could be by transitioning to a permissionless proof-of-stake system like Libra is planning to implement in five years (Costine, 2019). Even the Ethereum platform itself is set to transition from a proof-of-work to a proof-of-stake consensus algorithm in order to improve its throughput (Longchamp, Deshpande and Mehra, 2020).

---

Network layer

●      Who needs to run a node? Who has read access? Who has write access?

●      What are the technology integration requirements?

●      What are the data storage requirements regarding archiving and regulation? 

The best way to implement a generally accepted and trusted digitized gold standard is to publicly grant access to anybody to run light and full nodes. Client and hardware specifications could be similar to running an Ethereum node. Although an original self-made open-source blockchain would make a strong emotional case for general trust, the most efficient way is to implement this gold-backed cryptocurrency as an Ethereum-based project.

As established in the previous section, this project is planned as an open public blockchain. This means that it allows anyone to read, send or receive transactions and to join the consensus procedure of making the decision on which blocks contain correct transactions and get added to the blockchain (Rui, Rui and Ling, 2019).

The long-term desirable consensus algorithm would be proof-of-stake or even delegated proof-of-stake similar to the EOS platform (Walters, 2018). Such a switch to proof-of-stake would make traditional “mining” obsolete and needs to be carefully timed and communicated to the network.

A crucial part of this project is the connection to the physical asset and the guarantee that each physical bouillon exists and cannot be double spent for any transaction. This requires an integration with a backend accounting system which allows data to be implemented into regulatory and compliance management workflows.

The possibility to transfer value in real-time around the world may have implications concerning money laundering which requires storage of personally identifiable information. Such information is subject to regulation in many countries where the data has to be stored separately on servers within that specific county (Demirors, 2020).

---

Application layer

●      Who is going to use the application? What are the implications for user experience and design?

●      What is the existing organisational structure, and what behavioural patterns do users have today? How does this product or service fit into their existing workflow?

●      Are there any behavioural or organisational changes that will be necessary to implement this use case? 

When President Richard Nixon announced the suspension of the convertibility of the United States dollar into gold in 1971, the era of the gold standard and commodity moneys had ended (Kandur, 2017). Never again could anyone legally demand U.S. government gold in exchange for dollars. Today’s governments regularly increase the money supply through changes in the monetary policy of central banks, resulting in inflation (Sutter, 2013).

Since the Nixon shock, several economic crises like the ongoing coronavirus recession have occurred where monetary policies of governments have been globally criticized. There is a general mistrust in central banks which inspired the idea of a decentralized monetary system in the cypherpunk movement in the first place and eventually led to the invention of bitcoin during the financial crisis of 2007-08 (Narayanan, 2013).

A well-developed scalable cryptocurrency with intrinsic value backed by such a traditional (even biblical) asset is agreeable to every generation and could fulfil the originally intended function of bitcoin as a stable generally accepted method for payment and storage of value. Combined with a decentralized simple version of a mobile bank account like Revolut, everyday real-time payments with digitized gold could be a reality in the coming decade.

The biggest hurdle in fitting this service into the current organisational structure is global consensus building concerning the acceptance of this gold-backed cryptocurrency. Although the switch from accustomed payment schemes is a rather inconvenient behavioural change which might only happen out of ideological motivation, the next global crisis might just be the spark to initiate global mass adoption.

Reference List (Harvard Referencing)

• Demirors, M. (2020). Introducing the Oxford Blockchain Strategy Framework. [Video]. Available at: https://oxford.onlinecampus.getsmarter.com/mod/video/view.php?id=19632 [Accessed 30 May 2020]
• Costine, J. (2019). Facebook announces Libra cryptocurrency: All you need to know. TechCrunch, [online]. Available at: https://techcrunch.com/2019/06/18/facebook-libra/ [Accessed 30 May 2020]
• Jackson, B. (2018). Canada’s payments modernization effort chugs towards ‘real time rail’ by end of 2019. IT World Canada, [online]. Available at: https://www.itworldcanada.com/article/canadas-payments-modernization-effort-chugs-towards-real-time-rail-by-end-of-2019/408972 [Accessed 30 May 2020]
• Kandur, J. L. (2017). Stardust is gold dust. Daily Sabah, [online]. Available at: https://www.dailysabah.com/feature/2017/10/21/stardust-is-gold-dust [Accessed 31 May 2020]
• Lielacher, A. (2017). Gold On The Blockchain: How Two Blockchain Startups Are Digitizing Gold Investments. Bitcoin Magazine, [online]. Available at: https://bitcoinmagazine.com/articles/gold-blockchain-how-two-blockchain-startups-are-digitizing-gold-investments [Accessed 30 May 2020]
• Longchamp, Y., Deshpande S. and Mehra, U. (2020). Ethereum 2.0: Where the rubber meets the road. [online] Available at: https://www.seba.swiss/research/Ethereum-2-Where-the-rubber-meets-the-road [Accessed 30 May 2020].
• Narayanan, A. (2013). What Happened to the Crypto Dream?, Part 1. IEEE Security & Privacy, [online] 11(2), pp. 15-16. Available at: https://randomwalker.info/publications/crypto-dream-part1.pdf [Accessed 31 May 2020]
• Rui, Z., Rui, X. and Liu, L. (2019). Security and Privacy on Blockchain. ACM Computing Surveys, [online] 52(3), pp. 11-12. Available at: https://dl.acm.org/doi/10.1145/3316481 [Accessed 30 May 2020]
• Selfkey (2020). Understanding Public vs. Private Blockchain. [Blog] Selfkey Blog. Available at: https://selfkey.org/understanding-public-vs-private-blockchain [Accessed 30 May 2020]
• Sutter, B. C. (2013). Three Essays in Monetary Economics — Liquidity and its Effects on Inflation and Interest Rates. PhD. University of St. Gallen.
• Walters, S. (2018). Delegated Proof of Stake (DPoS) – Total Beginners Guide. Coun Bureau, [online]. Available at: https://www.coinbureau.com/education/delegated-proof-stake-dpos/ [Accessed 30 May 2020]