PDPRIETI Policy Discussion Paper Series 19-P-029

Creation of a Blockchain and a New Ecosystem

YANO, Makoto
RIETI

DAI, Chris
Leland Capital / Recika

MASUDA, Kenichi
Anderson Mori & Tomotsune

KISHIMOTO, Yoshio
Organization for Small & Medium Enterprises and Regional Innovation, JAPANThe Research Institute of Economy, Trade and Industry

https://www.rieti.go.jp/en/

RIETI Policy Discussion Paper Series 19-P-029
November 2019

Creation of a Blockchain and a New Ecosystem*
Makoto Yano
Research Institute of Economy, Trade and Industry
yano-makoto@rieti.go.jp
Chris Dai
Leland Capital / Recika
chris@recika.jp
Kenichi Masuda
Anderson Mori & Tomotsune
kenichi.masuda@amt-law.com
Yoshio Kishimoto
Organization for Small & Medium Enterprises and Regional Innovation, JAPANkishimoto-yo@smrj.go.jp
Abstract
This study points out issues towards a better use of blockchain technology.

It first identifies the roleof data as the third major productive resources next to labor and capital in the digital economy andexplains that block chain technology may facilitate an efficient and fair use of this important
production factor. Blockchain technology may fundamentally change the current economy in threerespects: (1) Data ownership, (2) money, and (3) data industry.
Keywords: headquarter, centralization, decentralization, information network, TFP
JEL classification: D23, L22, L25, M10

The RIETI Policy Discussion Papers Series was created as part of RIETI research and aims to contributeto policy discussions in a timely fashion. The views expressed in these papers are solely those of theauthor(s), and neither represent those of the organization(s) to which the author(s) belong(s) nor the
Research Institute of Economy, Trade and Industry.

* This paper is a joint product of the two research projects at RIETI titled “Blockchain and Society 5.0-The Creation of a New

Marketplace based on Distributed Consensus” and “Evidence-based Policy Study on the Law and Economics of Market Quality.”
All the authors are grateful to all the participants in the first project; the first author is indebted to the participants in the second
project for discussions over many years even before the project started.

Creation of blockchain and a new ecosystem
Makoto Yano, Chris Dai, Keiichi Masuda, and Yoshio Kishimoto1
The Japanese Ministry of Economy, Trade and Industry regards the process ofincorporating new information technology, such as Artificial Intelligence(AI), Internetof Things (IoT), and Big Data Analysis into society as the Fourth Industrial Revolution.
This view is reflected in the Fifth Science and Technology Basic Plan. The Plan
advocates Society5.0, in which cyber space and physical space are integrated to support
an affluent and human-friendly society. Computer scientists regards the entire industry
or society interconnected by information technologies and people creating and using
such technologies as a single ecosystem. They have actively participated in the designand discussion of such an integrated ecosystem. Blockchain is considered to be at thecore of such a cyber ecosystem.
The terms like the Fourth Industrial Revolution, Society5.0, and cyber
ecosystems seem so colorful and might appear rather farfetched. However, if they are
put in the context of current state of economy and technology, one realizes that the newconcepts are rather persuasive. This is because the technological innovation that is about
to start is very unique in the long history of technological advancement since the First
Industrial Revolution.
Today, we are witnessing the process of a new type of productive resource
being introduced into our economy. That is data. Data is a new productive resource that
had no economic value in the past. Until a few years ago, there was no way to gather
large volume of data that can capture daily life accurately, nor were there any computing
technologies that made it possible to analyze an extremely large volume of data to
explain complicated human interactions on both production and consumption sides ofan economy. This has changed all of a sudden.
Many productive resources, such as coal and oil, suddenly become valuable
during past industrial revolutions. However, they merely replaced already existing
resources. Coal replaced firewood and charcoal; oil replaced coal. Data, in contrast,
does not replace any existing resources but is born as a completely new type of
productive resource.
In short, industrial revolution in the past meant destroying existing resources
and replacing them with new resources. Sitting in the middle of the Fourth Industrial
Revolution, in contrast, data does not replace any existing resources.
From the economic viewpoint, this difference between past industrial
revolutions and the Fourth Industrial Revolution is large. In other words, the ownershipof oil was assigned to the owner of the land containing oil just as that of coal had been
assigned to that containing coal before people started using oil as a major energy source.
In the case of data, we have not established a clear agreement on who owns data. As a
Nobel Prize laureate Ronald Coase (1910-2013) points out, the assignment of proper
ownership rights is a prerequisite for the formation of a market.
In these circumstances, blockchain technology opens important ways to makeefficient and fair use of data. In a broader sense, this technology is also called
The first author gratefully acknowledges financial support by the Grant-in-Aid for
Scientific Research (A) #16H02015.
1

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"decentralized ledger", which can involve a large number of unspecified people tocontribute to the effective and fair use of data in a decentralized manner.
In summary, blockchain is expected to play an important role in connecting
information technology and technology such as AI, IoT, and Big Data with our life.
From this point of view, this book investigates the roles that blockchain plays in a
virtual ecosystem from various angles, in particular, from the following three
viewpoints:(1) Data ownership; (2) data transactions; and (3) data industry.
1. Data: A New Productive Resources
If you are a smart phone user, it must be impossible to think of a day without
access to the Internet. A mechanism to assign unique numbers to various things andintegrate them into the Internet is called the Internet of Things (IoT). Smart phones are
all recognized as “IoT” terminals, identified by their unique ID called telephone
numbers and, now, play a central role in data storage on the Internet.
With the exception of the phone function, almost all the information you
acquire through your smart phone is provided through the Internet. At the same time, wehave become an important source of information. Buying goods through Amazon or
Rakuten is like offering part of your household account book. If you use Facebook andpress “like,” you will express your preference towards society. Sending emails also
implies providing information to society.
It is not just humans that are just about to be connected with the cyberspace
through IoT. If you embed computer sensors on cows and horses on a pasture, you cankeep track of their health and nutritional needs. If sensors are attached to trees and every
square meter of a farm land, you can know the growth conditions of one tree andvegetables in every square meter of a field. In such a way, a new ecosystem of humanbeings and living things, with information technology as an infrastructure, is going to becreated. Sensors on a car can keep track of your driving, which would be useful toenhance driving safety. Sensors in a hospital room can report the state of each patientand give useful signals to care takers. In this way, we are just about to create a new
ecosystem based on information and communication technology.
In the ecosystem, all information is digitized and recorded as numbers. This is
why the information exchanged in IoT is called data. With modern computer technology,
by collecting a lot of data and analyzing it scientifically, it is possible to gain insightvarious phenomena much deeper and clearer that even 10 years ago. Results from data
analysis have started to deeply influencing our society.
This has transformed data into a new type of productive resources, by which
we can manage production processes in a much more precise manner. With data on
people’s medical histories, doctors will be able to diagnose a patient’s illness much
more accurately and to give much better treatments. With data on car driving, insurancecompanies will evaluate driving risks much more accurately, thus able to reduce
insurance fees. With data on purchases in stores, both manufacturers and retailers canprovide much more attractive products to customers. All these are brought about by theInternet’s data gathering capability and the computer’s data processing capability.
2. Blockchain Technology
Blockchain may still be a very new term for many readers. It may, therefore, be2

useful to start with a discussion on what blockchain is.
According to Webster (unabridged, 1961), a ledger is a “book of permanent
record.” The record must be correct and tamper-free. A blockchain is a ledger that is
put together on Internet in a decentralized manner by an indefinite number ofcontributors.
Blockchain is a chain of files containing whatever needs to be recorded
permanently. A basic blockchain connects files to form a simple string of chain. A
more sophisticated blockchain connects files to form a net-like structure.

2.1. Blockchain and Data Ownership
A database is like an address book, in which a lot of data are stored systematicallyand organized for easy use. Blockchain is a new technology that allows us to record dataand sources and recipients of data exchanged on the Internet, thereby creating an
accurate, permanent, and very inexpensive database. Such a database is a ledger that a
blockchain creates.
The first application of blockchain technology is a virtual currency called
Bitcoin. Functionally, a virtual currency is much the same as a deposit currency that isbased on bank accounts. Each bank account records debits to and credits from otheraccounts, which the bank keeps to be absolutely accurate and tamper free. Because therecord shows who owes how much to whom, and because people trust that the records
are absolutely reliable, it can serve as money through wire transferring; debit cards aremajor means of payment nowadays. A virtual currency is a similar collection of
accounts (called wallets) that records debits and credits. Only the difference is thatthose accounts are on Internet. Blockchain technology has made it possible to keep thisrecord absolutely reliable by using algorism without relying on a central authority like abank.
Blockchain accounts record digital data, which plays the role of money because
people trust that they are accurate and tamper free. As this shows, blockchain can assign
the ownership of each data piece to an account holder. This is the innovation thatblockchain technology has brought to the society.
2.2. Distributed Computing
Distributed computing is a revolutionary innovation in computer networks,
which makes it possible for many terminal computers to perform complicated tasks
independently.2One good example is a category of games called massively multiplayer
online games, in which many different players participate and try to achieve theirrespective goals from car racing to shooting to role playing. Blockchain technology isbuilt on this idea of distributed computing and adds decentralization to enable
individual participants to maintain a trustable record of transactions, ownerships, andpromises.
The initial design of computer network, connecting many computers to share
2Anne Holohan, Anurag Garg, Collaboration Online: the Example of Distributed

Computing, Journal of Computer-Mediated Communication, Volume 10, Issue 4, 1 July
2005, JCMC10415, https://doi.org/10.1111/j.1083-6101.2005.tb00279.x
3

resources, is centrally managed. In building a centralized network, a network
administrator is chosen; a large server computer is set up; a network connecting many
computers is designed; software is installed on the server and made available for
network users. The administrator centrally manages the users’ network connection, andonly the users who have the connection permission can use the network. The network ofcompanies and universities is designed in this way. The same is true for a bank’s online
system that connects automatic teller machines (ATMs). In a centrally managed network,
the terminal computers perform very minimal tasks. For example, a bank ATM terminal
recognizes the account number and the password and, then, performs minimal jobs suchas deposits and withdrawals.
As a network becomes larger, it becomes more and more difficult to maintain acentralized network. The load on the central server will increase, and the cost for
managing the server will become very large. The central server will become a very
attractive target for malicious attacks; once the server is broken, the entire system canbe broken.
A distributed network is built by connecting various independent servers andcomputers. Various tasks are distributed to different servers, and altogether a single goalis achieved. A large volume of tasks are assigned to terminal computers. As long as
basic rules for connecting to the network is set and those rules are followed, any server
and any computer can join the network.
Such rules are called protocols. In the most immediate example, the email address isseparated by the at-mark, @; the part after the “at” mark is an address indicating aparticular computer group; the part before is an individual in that group. This rule is avery small part of the large Internet protocol.
A distributed network makes it possible to utilize a large portion of thecomputing power of the computers in a network. The various computers connected to
the network perform tasks while performing independent task, and achieve a large job.
Having a large number of computers work independently will allow you to achieve
great goals at a very small cost.
2.3. Block chain: Decentralized Ledger
Distributed computing has evolved as one of computer network construction
methods. Blockchain technology brings the idea of decentralization into distributed
computing.
Blockchain is a technology that builds a ledger based on distributed computing
in a decentralized manner. This might appear easy; but it is actually not. To create adecentralized ledger, it is necessary to come up with a totally new algorithm, which leadto the creation of Bitcoin.
In order to create and maintain a decentralized ledger securely, it is not enoughto use a security program; such security measure will be easily breached by experiencehackers.. Even if many independent computers maintain a ledger together with goodintentions, they are still vulnerable to attacks by computers with malicious intents.
Especially if such a ledger maintains records that function as money or virtual currency,
you need absolute accuracy and permanence.
This problem was overcome by the first blockchain, known as Bitcoin. In mostblockchain, the database is shared by a large number of servers. Each server stores the4entire blockchain record and carries out similar jobs in parallel. Those servers arecalled full nodes of a blockchain. A new server that wants to join a blockchain
network is free to copy the blockchain record and download the necessary software to
store the records. Once in a while, the records on participating servers aresynchronized so that only one record is produced. The more nodes there are, the more
copies of the blockchain's ledger throughout the world, which makes it extremely
difficult for malicious computers to attack the blockchain.
The decentralized ledger database are linked with the user accounts called
wallets. A wallet is a record of a particular user’s transactions, which is kept in theuser’s terminal computer. Once a transactions between two accounts is agreed on, theaccount owners apply to the blockchain for recording that transaction. In most of theexisting blockchains, recorders of transactions are different from users who use ablockchain as a currency. In some blockchains, users of a blockchain record theirtransactions by themselves.
2.4. Mining
The Bitcoin blockchain’s adopts what is called mining to keep the accuracy andreliability of transaction records. Mining in the context of blockchain technology is topresent a computer generated crypto-puzzle to individuals (computers), to give a prize(in Bitcoin) to the individual who solves the puzzle first, and to let the individual record
the transaction. Competing for the prize, many people (computers) engage in solving
the crypto puzzle to creating transaction records. In that only one individual gets theprize out of many competitors, this process is similar to mining; and individuals
engaging in solving puzzles are called miners.
As soon as a mining computer solves the existing puzzle, a new file (block) is
created and attached to the existing chain of blocks. The new block creates a new
puzzle to be solved. At the same time, the solution is announced to the network ofmining computers. Mining computers check if that solution is correct. If the solution
is in fact correct, mining computers start working on solving the new puzzle created by
the block that they have just validated.
What is important is that in this entire process, there is no single individual
who is in charge of checking the validity and uniqueness of records on blockchain.
Instead, many independent individuals check the validity of records on their own wills,
which produce a unique record (ledger) in the end. This process is completely
decentralized.
On the Bitcoin blockchain, on one hand, simple records of several transactions
are put together and recorded as a new block. On the other hand, on the Ethereum
blockchain, user executable computer programs and resulting transactions of executing
the programs can be written into a new block by a mining node.
The problem with blockchains is that mining consumes computer resources notdirectly related to records. Many minors work on solving the puzzle posed by theblockchain. Because this puzzle can be solved by a sequence of computations, anyone
can find an answer so long as he/she is prepared to spend enough computing resources.
As a result, if there are 1000 minors, the computational resources used by 999
minors (i.e., electricity to run computations) will be wasted. As the value of virtual
currency soars, the number of minors has increased dramatically, and it is said thatabout 10,000 minors are active around the world. Also, since the average time required5

to solve the puzzle is 10 minutes, it is possible that a huge amount of electricity is being
wasted.
In order to maintain the accuracy of the blockchain, a certain number of minors
need to be involved. Whether or not the electricity bill is wasted is related to the numberof minors required to maintain accuracy.
2.5. Advancement of Blockchain Technology
The Bitcoin blockchain proved that a trustable ledger can be created in adecentralized manner without a trusted authority who is specialized in managing aledger. Since then, different types of blockchains have been created.
A blockchain called the IOTA creates a new type of a blockchain that is notbased on mining, which consumes a large amount of electricity. The IOTAis not a linear
chain of files as in the Bitcoin blockchain. Instead, it has a very complicated net
structure, which itself is impossible to replicate. This structure is called a directed
acyclic graph (DAG).Each transaction file (block) is given two arms each of which
randomly grabs another file (directed from grabbing to grabbed files).As the number offiles becomes larger, the number of arms increases by power of 2, which will soon
become an extremely complicated structure. In this structure,a sequence of files iscreated in which a particular file grab another file, which will grab the next, and so on.
It has been shown that if such a sequence never contains a circle (acyclic), the structure
can serve as a blockchain, which can dispense with without mining.
A few years after Bitcoin was introduced, a program called Ethereum wasdeveloped that was able to execute any program and to create execution records, as wellas simply recording transactions.
Not only does Ethereum provide its own virtual currency, called Ether, but also
it works in conjunction with Ether to provide a platform (platform) for loading andexecuting programs. These programs are called smart contracts, which can program theexecution of a promise between users with various contingencies.
Once a business can be run on a blockchain, business developers seek forfunding to develop or their future businesses. Such funding, too, is carried out over theInternet in a manner similar to cloud funding. This method of funding is called ICO(initial coin offering), and it sells and collects funds for business vouchers called tokens.
3. Building a People-Friendly Ecosystem
Information technology such as AI, IoT, and Big Data is expected greatly tocontribute to the realization of a new human-friendly ecosystem. However, it is a
mistake to think that such an ecosystem will be built if technological innovation isrealized. The modern economy faces major problems of data monopoly and data abuse.
Society-5.0 is something that can be formed only after overcoming those problems.
3.1. Society 5.0
Collect data from every part of a society by the IoT, create bigdata, analyze itwith AI, and feed results of data analysis back to the society. An ecosystem realizing
this loop is the blueprint of Society 5.0 advocated by the Japanese government.

6

The government states, “In the information society (Society 4.0),
cross-sectional sharing of knowledge and information was not enough, and cooperation
was difficult.”3 It continues, “Social reform (innovation) in Society 5.0 will achieve aforward-looking society that breaks down the existing sense of stagnation, a society
whose members have mutual respect for each other, transcending the generations, and asociety in which each and every person can lead an active and enjoyable life.”
The government argues, “Society 5.0 achieves a high degree of convergence
between cyberspace (virtual space) and physical space (real space).... In the past
information society, the common practice was to collect information via the networkand have it analyzed by humans. In Society 5.0, however, people, things, and systems
are all connected in cyberspace and optimal results obtained by AI exceeding thecapabilities of humans are fed back to physical space. This process brings new value toindustry and society in ways not previously possible.” However, it is a mistake that solong as technological innovation progresses, the image of Society 5.0 will naturally berealized without any effort.
3.2. Industrial Revolution and Market Quality
Since the First Industrial Revolution, industrialization have brought about theconcentration of resources in specific industries and companies. Yano (2009) views thisprocess as a dynamical system on technology and market quality.4 According to him, amassive technological progress lowers market quality. This brings about various social
problems; the concentration of resources contributes a fundamental change in life styleand social structure. Once market quality falls to a certain level, however, the demand
will increases due the accumulation of knowledge and experiences, which will stimulate
new innovation.5At the same time, it also lowered market quality and caused majorsocial problems.
The first industrial revolution began with the invention of steam engines inEngland from the 1760s to the 1840s. The textile industry has undergone major
technological innovation, many workers have been hired, capital has been invested, andproduction has expanded. Instead of engaging in in-house production activities, people
were hired in large factories. Capital was accumulated in companies rather than
individuals. This resulted in the exploitation of workers, which Karl Marx
(1818-1883) criticized harshly.6The Second Industrial Revolution came with steel
production, railways, large-scale iron and steel production, electricity, telegraphs andtelephones, and machinery. Major companies became enormous, which was perceived
to be a menace to the society.7
3.3. Data Monopoly and Data Abuse
Yano’s theory applies to the recent technological progress brought about by thetechnological revolution in information and communication technology (ICTrevolution).One of the most successful groups of companies after the turn of the century
is GAFA, which represents the initials of Google, Amazon, Facebook, and Apple. These
companies were so successful during the ICT revolution that they have succeeded in
3https://www8.cao.go.jp/cstp/english/society5_0/index.html
4

Yano, M, 2009,

5Yano, M., and Y. Furukawa, 2019, “Two-dimensional Constrained Chaos and Time in

Innovation: An analysis of industrial revolution cycles,” RIETI DP19-E-008.
6Marx, K., 1867, Capital, Volume 1.
7Hilferding, R., 1910, Financial capital.
7

collecting a large volume of data.
This concentration of resources realized economies of scale and production
efficiency. Nevertheless, many people are worried about data concentration on GAFA.8
This worry is not imaginary but real, as is shown by the recent abuse of datacollection by the Cambridge Analytica. The Combridge Analytica is said to havecollected 230 million American’s personal data through Facebook account and accused
to using data to influence voters in favor of Donald Trump when he was a U.S.
presidential candidate.9The original method of data collection, which was developed by
two psychologists, was to offer an Internet service for psychological test for anyone
interested and, at the end of the test in exchange for a permission to the respondent’s
Facebook profiles. According to Cadwalladr (2018), 40 percent of the respondents
gave a permission. By using this data, the psychologists were able to measurepersonality treats and to correlate scores against Facebook “likes” for millions of people.
This method was adopted by the Cambridge Analysica, which obtained personal dataand came up with a way to influence such important votes as the U.S. presidential
primaries and Brexit.
This is a clear warning that data can be badly abused by monopolizing it.
Unless these problems are be resolved, the integration of cyber and physical spaces may
end up with a rather dark society, which is far from the image presented by the Society
5.0 initiative. Avoiding the emergence of such a dark society is a pressing issue that weface with.10
3.4. SMEs
Many people say that in the digital economy, data is a production factor
equivalent to oil. Data needs to be shared and distributed throughout society if they are
to be used effectively in the digital age. So far, however, data has accumulated in thehands of large companies trying to establish competitive advantage. As a result, data isjust stored, and it is becoming more difficult for small and medium-sized companies touse data for innovation.
For small to medium size enterprises, even the bigger problem is that they do nothave good access to human resources specialized in handling data. This has created anegg or chicken paradox. In order to break such a vicious cycle, a good ecosystem isnecessary in which everyone can own and trade data and utility the results of data
analysis.
In order to resolve these problems, blockchain technology is ideal. It can be
expected to release data to every productive sector, thereby enhancing the productivityof an economy as a whole.
4.Organization of the Book

Radingsky, K., 2015, “Data monoplists like Google are threatening the economy,”
Harvard Business Review, 02, March 2015.
9Cadwalladr, C., 2018, “’I made Steve Bannon’s Psychological Warfare Tool’: Meet theData War Whistleblower,” Guardian, 18 March, 2018.
10Economist, 2018, “How to tame the tech titans - The dominance of Google, Facebook
and Amazon is bad for consumers and competition,” The Economist, 18 Jan., 2018.
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As is discussed above, the integration of cyber space and physical space will
not automatically lead to the creation of a human friendly society, unless a soundinterface is created between such a society and data as new economic resources. The
main purpose of this book is to investigate on the role of blockchains as such aninterface. In particular, we focus on the roles of blockchains from three viewpoints: (1)Data ownership; (2) data transactions; and (3) data industry.
4.1. Data Ownership
Many people think that, as the IoT becomes more important in the production
process, data will become a more and more important production factor. In order tomake good use of those new resources, it is necessary to start with setting ownership. Pu
and Yano (2019) cover this issue in the context of market quality theory.11
As is pointed out by the Nobel Prize laureate Ronald Course, a resource cannot
be put on a market unless a proper ownership is assigned to the resource. Many people
say that data in a coming digital economy is a production factor equivalent to oil for the
existing economy.
To whom ownership should be assigned for such an important production? It
is our view that the ownership of data should belong to the originator of data so as to
avoid the inefficient and unfair use of data, which may resulting from monopoly andabuse of data.
Currently, most of the data that we produce are collected and accumulated bylarge internet data companies, as presented by GAFA. Those data are kept in a blackbox, and there is no way for ordinary people to know how they are used. For the oil
industry, on the one hand, everyone has a more or less clear understanding on the supply
chain from producers to consumers. In the case of data, on the other hand, how it is usedis kept under a veil.
In order for data to play an equally important role as oil in digital society, it
must be shared and used by many people. Nevertheless, an increasing number of large
companies are monopolizing data to establish a competitive advantage. Being stored inlarge companies, it is becoming increasingly more difficult for small and medium-sizedcompanies to use data for innovation. On the other hand, for large companies, there is
no strong incentive to use data; it is just enough to hold on to it so as to deter challenges
from competitors. How can we improve this situation?
The first step is to return ownership of the data to the individual who produces
the data. Blockchains make it possible to record data ownership at a low cost. Once theownership of data is decided, data can be traded. In order to assign proper ownership to
IoT data and put them on a market, it is necessary to develop a new blockchain
technology. Pu (2019) explains the development of this technology.12
4.2. Data as Money
As an increasing number of people accepts Bitcoin and other virtual currencies,
a number of problems has arisen such as money laundering, transactions of illegal drugs
and speculative activities. If these problems are not resolved, virtual currencies may not
circulate widely. At the same time, however, blockchain technology itself has shown
11
12

Pu, Steven, and Makoto Yano,
Pu,
9that data can be used as money. It can create a reliable record (ledger) of transaction ina decentralized manner without a central administrator. Yano (2019) investigates thepossibility that whether or not such a decentralized ledger currency can take over theconventional deposit currency and paper money, once the existing problems are
overcome.13
A bottleneck of the current virtual currency system is a time that is needed to carryout transactions. In order to overcome this problem and to provide more convenienttransactions, an exchange market for virtual currency has been developed. Kobayashi(2019) discusses the functions and issues associated with an exchange.14

4.3. Data Industry
As is noted above, Ethereum is a technology that makes it possible to run any
program and to record the results on blockchain. This opens up an infinitely large
possibility for blockchain business.
The market in which data are traded on blockchain is often called amarketplace. On a marketpalce, anything can be traded from candies to golf clubmemberships. These transactions are made by software applications called
decentralized application (DApp). Metcalfe (2019) explains the role of smart contracts
on Ethereum and the current state of DApps technology and their applications.15
On a blockchain marketplace, all transaction records are made public. In
exchanges for virtual currencies, in contrast, they are not made public; in this respect,they are similar to such market places as Amazon; for this reason, they can be called acentralized marketplace. Centralized marketplaces present themselves as a single pointof failure and, therefore, are prone to malicious attacks. Moreover, they lacktransparency, and what the organizer of a centralized market does cannot beenmonitored by outsiders.
The decentralized exchange (DEX) is a new DApp that is developed to copewith these weak points of centralized market places. The DEX makes it possible for aseller and a buyer of crypto assets directly to make an exchange in a decentralizedmanner on blockchain. Data (crypto assets and transaction records) are held in adecentralized manner so that a DEX does not present itself as a single point of failure toattackers. Because, moreover, it is open to the public, transactions can be made in amuch more transparent fashion. It is offered in exchange for investments in DAppdevelopment. Chris Dai (2019) relates DApps and DEX and explain the current stateof token business.16
A token is a device to raise funds for developing blockchains and blockchain
applications (DApps). A token can be thought of as a ticket for using the services thata DApp promises to offer. It is offered in exchange for investments in DAppdevelopment.
The introduction of fund raisings by token issuances may be a result of the
Yano (2019)
Kobayashi (2019)15 Metcalge (2019)16 Dai (2019)
13
14

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decentralized nature of blockchain technologies. Because of decentralization, thestart-up process of blockchain businesses is significantly different from that ofconventional businesses. In the current state of society, in which blockchain is not yet
established, it may be desirable to treat the startups of blockchain businesses likeventure investments. Once, however, the technology is established, a new
decentralized financial system will become necessary. From these perspectives, Yano,
Dai, Masuda and Kishimoto (2019) the editor of this book will study desirable designs
for the decentralized financial system from both short and long run perspectives.17
The main message of this study is that it is important to build an ecosystem inwhich the new technology (blockchain), laws and institutions, including data ownership,and markets for digital assets are harmonized. Market quality theory suggests that theownership of bigdata collected through Internet should be assigned in such a way tosupport high quality digital data markets. See Pu and Yano (2019) and Yano, Dai,
Masuda, and Kishimoto (2019) for a discussion on desirable designs of thedecentralized financial system from these perspectives.
Omote and Yano (2019) discuss the blockchain technology on which Bitcoin isbased.18
Appendix
1. Networks
As shown in Figure 1, modern networks can be divided into three types: Centralized,
distributed, and decentralized. The Internet is a revolutionary technology that has
transformed centralized networks into distributed and more decentralized networks.
Blockchain is a technology that has made it possible to build a completely decentralized
network on the Internet. The difference is that the internet is far less decentralized
than a blockchain so that a government can block internet access for computers, as has
been done in China. A blockchain, in contrast, cannot directly be interfered within its
network system by a government.
When creating a network there are 3 types of topology to choose from, centralized,
distributed, and decentralized. As mentioned above, a computer connected on a network
is called a node. In a centralized network, there are computers called central node thatown and manage the entire network. The central node is a single point of contact for
information sharing, controlling access to all calculations and data, and storing data.
The biggest problem with centralized networks is that the central node becomesa single point of failure. In other words, if the central node is broken, the entire network
will crash. The attacker can break the entire network by bringing down the central node.
Also, since the network workload is concentrated on the central node, the larger the
network, the greater the load on the central node.
A distributed network is a network based on the concept of distributed
computing. The Internet is a representative example. In a distributed network such as
the internet, each participating node performs computation and data storage
independently but a collection of independent computers that appears to its users as a
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Omote and Yano (2019)11

coherent system. This eliminates the single point of failure problem of centralized
networks. Because nodes are independent, even if a particular node fails, information
can be accessed from other nodes.
In a distributed network such as the Internet, there is no single central node.
However, many nodes are similar to the central node of a centralized network andlocated to perform management tasks. Such management nodes control the distributionof workload on the network and authenticate network participants. As a result, the workof the network is optimally distributed among the nodes and calculation processing is
performed. Some distributed networks also have peer-to-peer networks, with only
completely identical nodes without a central node. However in this case, network work
wide sharing of the same data is very difficult.
If a distributed open network is chosen to maintain a universal ledger instead ofa centralized network, we need to eliminate the participation of malicious nodes. In thiscase, it is necessary to develop some special protocol to protect data and computationfrom spamming and wrong data sent from malicious nodes. blockchain technology
makes this possible by utilizing an algorithm that protects data and computations frommalicious nodes by majority vote of participating nodes. Calculation procedure(algorithm) based on blockchain technology is called decentralized consensus formation
algorithm or simply consensus algorithm. Such network is called decentralized anddistributed network in the sense that they fully address malicious attacks based on
majority agreements, and are distinguished from distributed networks that do not datasynchronization across network.
2.Consensus among blockchain nodes
Public blockchain is a type of decentralized network. Nodes participating in the
network independently execute software based on the same algorithm and maintain
coordination throughout the network. The good thing about decentralization is that there
is no central node, so there is no single point of failure and it is resistant to hacking andsingle node failure. Instead, there is a need to maintain common awareness of data
across all nodes in the network. It is very difficult to synchronize data on a network
where independent nodes are unstable (sometimes attackers can take control of somenodes). In blockchain protocol, the algorithm for achieving this synchronization iscalled the "consensus algorithm". Consensus means the data agreed upon across the
network (majority of the nodes) will be reviewed and a copy will be stored at each node.
This data agreement is similar to the political election system. The difference is how tocount 1 vote. In a political election system, normally 1 person can cast 1 vote. However
there is no concept of "number of people" in the network of nodes (computers). In orderto prevent the same person from voting more than once, the unit of vote must be suchthat a network of computers can understand and quantify. For consensus algorithm suchas PoW (proof of work)computational power is the unit of vote. For PoS (proof of
stake), the unit of vote is the number of tokens you own or "stake". Unlike politicalelections, blockchain consensus (voting) is run a lot more frequently and automatically.
For example, in the case of Bitcoin, consensus is reached at 10 min interval with thecreation of a new block.
3.Sharding
Since complete blockchain data is recorded on all full nodes as a feature ofblockchain, it takes a lot time to synchronize and create new blocks (data) withconsensus algorithm reached on all nodes. As a result, blockchain like Bitcoin and12Ethereum can only record about 7-26 transactions per second for the entire network.
This is too slow for many applications. One solution designed to increase blockchain
data recording / processing throughput capabilities is sharding. Even before theinvention of blockchain, sharding was used to speed up database access by dividing thedatabase to several parts and distributing the parts to several separate servers. Applying
the same concept to a blockchain, instead of getting consensus from all nodes and thenadd a new block (synchronization),groups (shard) of nodes can be created and if
consensus can be reached within the group of nodes then a new block can be added.
Theoretically, the more shards and more blocks can be added in parallel, thehigher the overall network throughput. However, while throughput can be improved,
sharding also has serious challenges. For one the more shards the number of nodes in ashard becomes less and more vulnerable to attacks. And since it is also possible toprocess transactions across shards, in that case the process is complicated and there areconcerns about both vulnerability and throughput of transactions.
4. Scalability and Decentralization
Scalability in blockchain refers to the speed at which blockchain can addtransaction records and reach consensus across the network. Decentralization can bethought of as a measure of how independently nodes or computers agree on a set oftransactions without central direction and control. The more decentralized the system
the more independent and tamper resistant the records can be from external monitoring
and censorship. Technically, there is clear trade-off between the three factors
characterizing a blockchain - scalability, safety, and decentralization. However,regardless of the purpose for which the blockchain is use, security is usually not a
feature that can be sacrificed. In most situations, what matters is the trade-off between
scalability and decentralization. Sharding, described in the previous section, is atechnology introduced to improve scalability.
During the early stage of blockchain application development, engineers' emphasis
was placed on decentralization. As a result, technical performance and usability wassacrificed. For example, in a blockchain decentralized application often called "Dapps",
the user is only given a password for login once and if he or she loses it, the user
account cannot be recovered and as a result, the assets stored in the account will becompletely lost. This may be acceptable for an engineer who values the fact his
password is not kept in someone else's server. However, most people are used to an
environment where their account can be reissued or reset if they lose the password. To
appeal to the general public, Dapps must centralize the password management to acertain degree to allow for unintended user errors.
5 Token Price: Security or Utility
During early stage development of Bitcoin program, whitepaper and prototype
protocol was released and the open source community worked together to ensure
reliability and credibility based on the good intentions of ordinary engineers interested
in the program. However, in such collaboration based purely on good faith, it is alsodifficult to secure enough resources to commercialize blockchain based on pure good
will. In recent blockchain projects, financing is done by a method called ICO (initialcoin offering). A typical ICO sells a ticket for a service called a token.
The ICO fundraising method is often abused as a method to evade the13securities law. If a token is recognized as a means of investment, it leads to being
purchased for speculative purposes. As a result, prices can soar and be higher than theiractual value. For example, during 2018, when the price of bitcoin rose, it cost $ 10 totransfer $ 100 for bitcoin. In this case, the bitcoin transaction fee was higher than that ofbank transfer and credit card, therefore not suitable to be used as payment.
An even bigger problem is that the token prices of blockchain based
applications fluctuate significantly due to speculation. The price of Bitcoin rose sharply
in 2017 and dropped significantly in 2018. For speculators, price fluctuations provide a
profit opportunity, but for actual users who pay cash to purchase tokens to use theblockchain based applications will be dismayed at the price fluctuation.
Those who are trying to create new blockchain apps and provide them to themarket are expected to solve these problems by providing stable tokens or virtual
currency. For example, it may be useful to consider automatically adjusting the supply
of tokens to price fluctuations, or to introduce an institution with central bank function.
Doing so may allow users to find higher value in blockchain app services. In the future,in order for the blockchain industry to grow, it is essential to improve the quality ofservice rather than providing more speculative opportunities.

6. Traceability and anonymity
As mentioned in the earlier section, originally, in blockchain, the account andthe owner of the account are not linked. Movement of funds in each account ispublicized, but only the owner know who owns the account. In other words, the ownerof the account is anonymous. By exploiting the anonymity, it is possible to transfer
funds but keeping the identity of the account owner secret, something very difficult to
do with the banking system. So it seems to be a system that is easy to use for illegaltransactions and money laundering. However, anonymity in blockchain is not perfect,
and it is likely to be discovered if it is abused extensively.
This fact is well demonstrated by the case of Silk Road, an illegal drug
e-commerce site. Silk Road was launched in February 2011 and provided a marketplace
for illegal drug trading until it was closed by the FBI in October 2013. This site
provided seller's account and buyer's account, and seller's account was able to list
products, i.e. illegal drugs. The person who bought the illegal drug through the buyer
account was able to place order anonymously and made payment using bitcoin. As aresult, the seller and the buyer were both able to trade the goods anonymously. It isestimated that more than 100,000 buyers and thousands of sellers have been involved
and more than 1 billion USD has been traded before the closure.
By the summer of 2013, FBI had already started investigation of Silk Road andidentified the IP address (a number assigned to recognize the address of each of thecomputer server on the Internet) of the Silk Road site. The person who was operating
the Silk Road was arrested for charges including money laundering, computer hacking,and illegal drug transactions. He was sentenced to life imprisonment.
As this case shows, the high anonymity provided by blockchain is not perfect.
Even if it is not a large-scale illegal activity such as Silk Road, graph / data analysis canbe applied to identify and trace fraudulent transactions.
In Japan, a registered virtual currency exchange is obligated to confirm theidentity of a customer in accordance with the Crime Revenue Transfer Prevention Act.
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In addition, virtual currency exchange manage customer's deposit wallet and able to linkaccount number and the customer's personal identification information. In this way, as
the day-to-day blockchain transactions increase, various insights can be identified fromthe data, which may prevent crimes and identify suspicious transactions that exploit
blockchain anonymity. In the future as more people use blockchain for their transactions
in both the physical and cyber world, how to protect privacy of onchain transactions
maybe a bigger challenge.

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