RIETI Special Seminar

Blockchain and Society 5.0-The Creation of a New Marketplace based on Distributed Consensus (Summary)

Information

    • Time and Date: 15:00-17:00, Friday, October 19, 2018
    • Venue: RIETI's seminar room (METI Annex 11th floor, 1121), 1-3-1 Kasumigaseki, Chiyoda-ku, Tokyo

The Japanese government is aiming to realize Society 5.0, "a human-centered society that integrates cyberspace and physical space." To realize such a society, the creation of "a human-friendly interface" connecting the two spaces will be indispensable. To this end, blockchain (a decentralized ledger) is expected to play a major role. Blockchain is a groundbreaking technology which enables the creation of records (ledgers) on the Internet that cannot be falsified or copied and that are not centrally controlled. Blockchain has been making tremendous advances as a basic technology for building new industries on the Internet. In this Special Seminar, we invited Chris DAI, CEO of LONGHASH, Japan to discuss with YANO Makoto, President & CRO, RIETI, how to ensure the sound development of new industries.

Summary

Opening Speech

NAKAJIMA Atsushi (Chairman, RIETI)

The Japanese government is promoting the policy of creating Society 5.0, embracing such elements as artificial intelligence (AI), the Internet of things (IoT) and big data. In creating such a society, the crucial question is how we should handle the massive volumes of data. Many issues need to be addressed: Can data including personal information be handled safely? Can such data be utilized successfully in the first place?

Meanwhile, much attention has been focused on the use of blockchain technology in virtual currencies. Expectations are high for the possibility of creating Society 5.0, and the new industries and the new society envisioned by Society 5.0, through the use of this technology.

Today, we have welcomed experts to explain what exactly blockchain is and to share with us the concepts and perspectives which could provide hints for the utilization of blockchain technology.

Lecture 1: Blockchain and the IoT

YANO Makoto (President and CRO, RIETI)

Japan is advocating Society 5.0 as a plan to integrate cyberspace and physical space. In specific terms, thoughts developed by humans in physical space are digitalized and accumulate in cyberspace, which are then used to create new value. Such developments are not limited to Japan but are beginning to appear around the world.

The purpose of Society 5.0 is to realize a pleasant, active and high-quality way of life. However, merely waiting for it will not ensure that such a society will come into existence. So then, what are we to do?

I believe that a market perspective is essential for the realization of Society 5.0. In other words, we need to improve the interface of market structures that connect physical space with cyberspace.

Recently, there have been heated discussions on the possibility of technology including AI and singularity overtaking human knowledge. The U.K. periodical, The Economist, ran an article titled, "How to tame the tech titans" with an illustration of tech titans attacking a city. Unless we address such issues, Society 5.0 will probably never come to pass.

Obstacles to the utilization of big data

The utilization of big data will become crucial to the realization of Society 5.0, which, in turn, will give rise to such concerns as information leaks when sharing data and the manipulation of information through data analysis.

A typical example is the mishandling of Facebook data by Cambridge Analytica lead by Steve Bannon. Cambridge Analytica, a political consulting firm that uses methods that combine data mining and data analysis, is said to have successfully created psychological profiles of 230.0 million Americans out of a total population of 325.7 million. Cambridge Analytica has become the center of controversy, as it is believed to have influenced the U.S. Presidential election and the outcome of the Brexit referendum.

The methods used by Cambridge Analytica were originally developed by the researchers at Cambridge University. The method involved conducting a psychological test online in which the user's openness, conscience, social interactions, sense of collaboration and nervous tendencies, among others, were scored. At the end of the test, the site asked the user to provide information on their Facebook friends. To this request, nearly 40% of the respondents consented to provide information. In this way, Cambridge Analytica is thought to have collected volumes of data on Facebook users, analyzed the correlation of "likes" data of millions of users and conducted campaigns based on manipulating information.

Designing an awareness-shaping method based on data

Is it really possible to conduct such psychological manipulations? I would like to introduce a case study that has recently been reported by RIETI. A randomly-assigned cohort group was randomly divided into two groups, and each group was asked to read different articles. One article described how the Islamic State was infiltrating refugee camps with terrorists and sending them over to western countries; while the other article was titled "How many people have been killed by refugees in the U.S? None." Interestingly, the second article hardly had any influence on the readers, whereas the first article moved the people reading it toward opposing the acceptance of refugees. In other words, it was scientifically proven that people were more impacted by negative articles than by positive articles.

Many similar research projects have been conducted in recent years, and as a result, we now know that we can manipulate the recipients' behavior by being selective about the messages that we send them. This is a particularly effective method in influencing elections, and in fact, it is believed that Cambridge Analytica used this method to influence Brexit and Trump becoming President. There has been increasing concern worldwide over the use of such behavioral manipulation based on data.

Mandatory sharing of data

The aforementioned article in The Economist warns, "The dominance of Google, Facebook and Amazon is bad for consumers and competition." As solutions, the article suggests granting ownership of information to individuals and making data-sharing mandatory. However, these solutions are easier said than done.

As an economist, I believe that utilization of market mechanisms will become essential in addressing this issue. An important factor is the ownership of data. For example, there is the question of whether the information which is automatically accumulated by Google, belongs to Google. Furthermore, we must also think about the trading of data. Data acquisition will eventually require micropayments and virtual currencies. These two points will become the two main issues, but today, due to time restrictions, we will focus on the ownership of data.

The theory of market quality

In my view, market quality declines as a result of industrial revolutions. And such deterioration of market quality has led to economic crises in the past. Typical examples are the exploitation of factory workers in the first industrial revolution; and the Great Depression beginning with information manipulation and the alienation that was a result of the automation in the second industrial revolution. Today, nearly a century later, with the advent of the third industrial revolution, problems including the financial crisis, data monopoly and singularity due to AI have emerged. Despite the growing scale of the problem, the substance remains the same, and the issues of ownership and trading methods continue to be discussed. Mankind has addressed these issues by establishing various laws including labor laws, anti-monopoly laws and securities laws. What we will need going forward are new data ownership and currency systems.

New data ownership system and blockchain

Once ownership has been set, the market will be formed (Coase Theorem). We will need to think about the type of environment that will need to be created in order to form a high-quality market.

Currently, a system is developing whereby a large variety of information is collected through the IoT and various analyses are being conducted using big data. One of the most crucial issues is the necessity for decentralized ownership of the big data from IoT. In other words, the party who is the source of or who generates the data rather the party who collects the data should own the data.

One of the reasons why it is so difficult to assign ownership to data is that standalone data points are not particularly valuable. For example, information on what kind of fertilizer was used to grow agricultural produce, what kind of tasks were executed at what timing—such information per se would not be so significant. However, if such information were to cover the entire country, it would become extremely useful for farmers who plan to grow the same produce. In many cases, this type of data on economic activities only acquires value once a certain volume of data has been gathered. Consequently, if a price is assigned to data from 100 people, then a system must be established to distribute that amount to the 100 people.

I believe that we will be able to solve this issue through blockchain technology (decentralized ledgers). The type of ledger that is required for the various markets must be discussed carefully. First of all, we need to build a clear consensus on the ownership of data, and also study the platform for the decentralized ownership of data. In addition, there is a multitude of issues that need to be addressed, including the establishment of a new method to calculate dispersion, building a contact point between the currency system developed for micropayment to purchase IoT big data and virtual currencies, and the transitioning from speculation opportunity to investment opportunity.

If we manage to build a new platform in the next few years by solving these issues, Japan will be able to lead the world in designing an economic model.

Lecture 2: Achieving Society 5.0 through blockchain

Chris DAI (CEO, LONGHASH Japan)

Germany has a similar plan, which is referred to as "Industrie 4.0." From a purely industrial revolution-oriented perspective, it focuses on maximizing economic value. I find it very interesting that Japan's Society 5.0, on the other hand, rather than emphasizing industry, focuses on the individual and the individual's happiness which lies beyond industry. Today, I would like to talk about the kind of changes that will need to take place and in which markets, in order to realize Society 5.0.

The major difference between Society 5.0 and the former Society 4.0 (information society) is that while under society 4.0, the internet was connected specifically to "computers" but under the society 5.0 paradigm, most modern devices will connect to the internet and each other, automatically sharing data and interacting, meaning that all the "things" that people interact with at home and at work and production and use will be interactive in unprecedented ways. Therefore, all information will need to be consolidated as big data beyond the confines of individual servers and AI will need to provide suggestions in real time. To this end ubiquitous data will be essential.

Data silos in existing business environments

Various data silos have developed in the existing business environment. Lawson, Inc. utilized customer data from the Ponta card of its 65.31 million members to successfully develop a new beer product. Softbank, based on its 300 million per month location and connection data points, identified areas with bad connections and improved its connection environment. Honda Motor Co., Ltd. analyzed the driving data of the car navigation systems in its cars and proposed routes to avoid traffic congestion. Furthermore, Rakuten utilizes the consumer behavior analysis data from the Rakuten IDs of its 97 million members in distributing its advertisements.

In this way, entities have already begun gathering and utilizing big data. However, the problem lies in the fact that such data is not being shared across entities. It is a fact that gaining certain information such as marathon routes in specific regions and pedestrian data for small retailers is difficult and micropayment for such data is not being utilized. Unless these issues are resolved, the realization of Society 5.0 will remain highly challenging.

The overconcentration of such data among giant corporations including Facebook, Google and Amazon has become increasingly evident. Capitalism is at work here, as evidenced by the tendency among these entities to try to enhance their respective values by monopolizing information instead of sharing it. However, such corporate behavior has harmful effects. Data being monopolized by a single entity could inhibit innovation and lead to unauthorized use of our data, while our privacy and freedom of speech could also be sacrificed in the pursuit of maximized revenues.

Reasons why data is concentrated in giant corporations

Why does data become concentrated in these giant corporations? There are two main reasons. One is the centralized nature of the Internet platform. In the current state of the Internet, an individual cannot definitively authenticate their own identity and thus protecting the consistency and the safety of data is dependent on centralized control. On the other hand, in our capitalist society, it is logical and inevitable that entities that own large amounts of data would utilize it to enhance their own value.

The other reason is the low fluidity of data. Since data acts as a barrier to entry for other entities, data is rarely sold to another company. As a result, we are seeing a phenomenon in which the value of data for society as a whole is not maximized. Nevertheless, the tenets of capitalism also dictate that entities focus on maximizing their own profits. As a result, data gathered by SMEs fails to scale and data ends up being over-concentrated in the giant corporations which have an abundance of capital.

Entities that believe data is a barrier to entry only enter markets that will maximize their own profits and never address social problems. This is the reason why, I believe, the utilization of blockchain technology will be particularly effective. A blockchain is capable of building a marketplace that reflects the values of each market participant, as well as the opinions of the centralized giant corporations.

The marketplace built with blockchain

The first task is to separate the data collectors from the data users, which can prevent data monopolies, and then make data accessible to many people (democratization of data). As put forward in the Coase Theorem, in areas with high transaction costs, there is a stronger tendency to keep transactions internal--within the corporation. Data collection and utilization illustrate this point. Therefore, I believe that if we were to utilize blockchain in data transactions and lower costs through micropayments, we should no longer be dependent on giant corporations for data collection and this would also raise the fluidity of data. As a result, the profitability of each data source would be assured at a low cost.

At the same time, by allowing universal access to data, we can expect more data analysis and utilization and greater diversification of the people who benefit from the data. This, in turn, should also lead to an increase in the services that utilize data. In such cases, it is essential that blockchain is used in data sharing including sharing between individuals who are the source of the data, rather than simply as an information bank for the sharing of data among firms.

Using blockchain to overcome data issues

Issues arising from data sharing include data security, ownership and data mobility, business partner risk, incentives for consumer participation, the lack of use cases and subsequent high costs, silo systems, and the lack of in-house expert knowledge. Blockchain has four characteristics that provide solutions to these issues. The first is its decentralized management model.

This model ensures that no individual or single entity will control the business eco-system and at the same time minimizes the threat of misuse due to the inherent transparency across all transactions. Furthermore, decentralized resources and services may be utilized in providing various services. For consumers, it will provide an incentive to capitalize on their own purchasing data.

The second is the sharing of open-source analysis technology. By capturing the expertise of the open-source community and engineers from around the world, open data will provide analytical models dedicated to the analysis of purchasing data developed by professionals and at low cost to small and medium-sized operations without analytical capabilities.

Third, blockchains can provide safe encryption technology. The business eco-system surrounding blockchains is known to be extremely resistant to attacks and thus data will be securely protected, as required, and anonymity will be ensured. The ownership of data will be determined simply in a decentralized manner and reinforced through blockchain technology.

And finally, blockchain is a segmented resource. Blockchain encourages the release of unutilized resources, while at the same time separating the retention and processing of data, each time a payment is made.

Examples of the uses of blockchain technology

I would like to introduce "RECIKA," an ongoing project that promotes the liberalization of purchasing information. Presenting ongoing research would normally be avoided out of concerns over whether the research will be copied or stolen; however, this project is free from such concerns because it utilizes blockchain technology and is in an open platform format which allows everyone to access it.

This is a three-tiered project. In the technical, blockchain level, data is written; data use records are written; and token (point) remittance/exchange records are created in a decentralized manner to eliminate the possibility of falsification. On the application level, separate entities are developing their own apps, as required. The entities, then, share common data and acquire resources through transactions involving tokens and data. While this system may seem similar to the Android and iPhone app formats, the data sharing function across apps make this completely different. On the user level, the user may upload or download data using the app and engage in token transactions accordingly.

Finally, in order to realize Society 5.0, we will need to build infrastructures that will allow for the free utilization of data. To make this possible, democratization of data is essential and blockchain is a critical technology for ensuring the integrity of the system as a whole.

Panel discussion

Moderator: KISHIMOTO Yoshio (Vice Chairman, RIETI)


NAKAJIMA:
In the society of the future, physical space will be integrated with cyberspace and we will transition from ownership to sharing of data. The key to such a society will be the utilization of blockchain technology. And in such a society, the imagination and desires of not only the giant corporations but also of the small- to medium-sized entities and of the individuals will be realized on multiple levels. In this context, accelerating the integration of physical space with cyberspace will become crucial.

KISHIMOTO:
I would like to hear your comments on the type of issues we are facing today, and not only the issues of the future.

YANO:
Investors must improve their ability to determine risk appropriately so that opportunities are not lost and in order to do that, they must gain expertise in determining the potential future usefulness of businesses. The industry itself must also become more proficient in examining larger and larger volumes of data for credibility.

Chris DAI:
One technical issue is that the technology required for decentralized storage is still in the testing stage. Ideally, all data will be stored in a decentralized manner but, in reality, only partial decentralization may be possible. On the business side, entities that own data are reluctant to promote blockchain technology. There is also the issue of determining both payment methods and rights and responsibilities when data ownership is shared.

KISHIMOTO:
Next, please tell us your thoughts on the reliability and safety of virtual currencies.

YANO:
As I said in my lecture, the key will be how virtual currencies will transition from being a target of speculation to a target of investment.

Chris DAI:
Anyone can make a virtual currency but the important thing is to make proper rules and determine who by, and how, the currencies should be regulated. Currently, this point remains ambiguous, which has blurred the distinction of what is safe and what is not, triggering a vicious cycle of more people losing money, which, in turn, has damaged the image of virtual currencies. I believe that the government should step in to stop this cycle.

NAKAJIMA:
Currently, virtual currencies have only speculative value and their benefits are limited to raising funds through initial coin offerings (ICOs). However, in the future, virtual currencies might come under national control through the central banks. Then, we are hoping that all monetary movements will be recorded as data; underground money will be eliminated; the national tax agencies will become obsolete and a new system of monetary policies will emerge. Meanwhile, a new type of competition is also envisioned, in which the value of virtual currencies will be determined by the country and the type of credit placed on the virtual currency, which, in turn, will alter the global economic structure from its core.

YANO:
On the contrary, I think the fact that it does not require credit is the biggest benefit of virtual currencies, and for this reason, I believe that central bank intervention is not necessary. Virtual currencies are full of new potential which do not require country-specific policies. In my opinion, self-regulation rather than centralization is essential. And I believe that our responsibility going forward is to reach a global consensus on how to utilize virtual currencies.

Chris DAI:
If a decentralized, fully working blockchain is already in place, self-regulation will suffice and government intervention will not be required. However, at the ICO stage, this is not yet the case. At this stage, I believe that the government still needs to make rules in a centralized manner.

YANO:
I agree. As a sidebar, I would like to add that despite crypto currencies and tokens being separate things, people are not aware of this distinction. I feel very strongly that these two need to be separated.

KISHIMOTO:
Next, I have a question for Chris, from the policy perspective. I am aware that progress is being made in the development of smart contracts, but are they capable of handling complicated agreements? Furthermore, there is a limit to the processing speed of the diversified processing in the proof of work phase. Do you have any ideas on how to speed it up?

Chris DAI:
Smart contracts were introduced in the Ethereum blockchain and although smart contracts are built upon the Ethereum platform, in 2016 there was a movement to develop decentralized applications (Dapps). However, at the current stage, processing takes too much time, and it is not convenient enough for the general public. Therefore, we need to creatively use both centralized and decentralized technology to build applications.
Next, with regard to proof of work, it is currently the mainstream consensus algorithm but its processing speed is extremely slow. Recently, new consensus algorithms such as Delegated Proof of Stake (DPOS) which EOS uses, are appearing, and processing speed has improved exponentially. Furthermore, various new methods are being proposed including the use of directed acyclic graphs (DAGs) rather than blockchain.

KISHIMOTO:
Next, I would like to ask Mr. Yano about the quality of consent. When discussing democratization, it is generally believed that the more detailed the consensual conditions the better. In terms of businesses, however, the harder the entities pursue business the less likely they are to pursue democratization of data. How do you intend to strike a balance between these two positions?

YANO:
Currently, appropriate security levels are determined in an iterative manner, with initial settings determined based on the specific purposes at hand. I believe that in the future the level of security will need to be determined by society as a whole.

Chris DAI:
Society would run more smoothly by fusing blockchain with AI. Having AI acting as the agent for different parties in data trading can make decision-making much more efficient.

KISHIMOTO:
Next, in terms of policies, is there an area in which Japan should take the lead in decentralized transactions?

Chris DAI:
Japan is the world's third largest economy but it has fallen far behind the US, in first place, and China, in second place, in terms of the Internet. These two countries are, in certain ways, centralized states and thus in areas such as blockchain, which utilize decentralized systems, Japan has a chance of taking the lead. Japan can contribute to areas such as finance, real estate and clean energy, which will generate value through the creation of transactions, and also contribute to linking areas such as finance and agriculture, which has not been connected before.

NAKAJIMA:
As raising funds entails various risks, a framework for the protecting investors will become essential. Japan is one of the leading countries for virtual currency transactions. I hope that Japan acquires expertise in this field, establishes a global standard and becomes a center for virtual currencies.

YANO:
In terms of policies, I think we should direct our efforts more towards the IoT rather than blockchain. Economic policies that involve the collection of data in fields such as SMEs and agriculture, and devising ways to utilize such data, are essential. We also need to industrialize medicine and nursing care for the elderly.

KISHIMOTO:
I have a question for Chris. Which country is leading the world in the sharing of open-source analysis technology? And can you also tell us more about the "RECIKA" platform?

Chris DAI:
Blockchain technology is not an established academic discipline but can be learned independently on the Internet. Therefore, in technologically developing countries such as Nepal and Thailand, the social standing of engineers, unlike the engineers of Japan, is high, and outstanding engineers are being nurtured.
RECIKA is built on a public blockchain using DPOS. It has a transaction per second (TPS) rate of 3,000 to 5,000 per second. Recently, a protocol called Taraxa has been developed in Silicon Valley that is aiming for a TPS in the 10,000s. When development is completed, RECIKA plans to migrate to Taraxa and middleware is also being developed. Currently, RECIKA does not use smart contracts on Ethereum.

KISHIMOTO:
Finally, in terms of regulating information, can blockchain technology allow individuals to escape from or avoid regulations, in the event that the government tries to regulate an individual's information?

Chris DAI:
Using blockchains is one method of addressing such situations. However, engineers may develop other methods to protect against this situation. Blockchain is not as anonymous as the public thinks, and if the government uses this technology well, it is possible to solve many problems in regulating illegal transactions.

(Honorifics omitted)
*Titles stated in the text are as of the date of the lecture.