Blockchain vs Hashgraph : which creates more value?

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Bachelor Thesis for Business Administration

By

Samuel Ileoma

10676031

Supervisor: W.H. Dorresteijn Coordinator: Rob van Hemert

Title: Blockchain vs Hashgraph: Which Creates More Value? Date: Friday, 1st_{of June, 2018}

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Statement of Originality

This document is written by Student, Samuel Ileoma, who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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ABSTRACT

This project is a literature study to analyze the extent of Blockchain’s obsoleteness as a revolutionary and investible technology due to the introduction of its counterpart, Hashgraph. To do this, a literature review and framework, consisting of four sources of e-business value creation is provided to analyze both technologies and determine the extent of their ability and potential for value creation. This analysis will result in an extended framework which will be used to compare both technologies’ value creation according to core elements and factors of comparison they mutually possess. To enact this comparison, a collection of data is collected that consists of past comparison reviews, observations, and analyses on both technologies. The analysis of this data is then synthesized to the past research and framework provided in the literature review to bring forth relevant conclusions and discussion to the purpose of this study. With this information and activities, it can then be shown how much value Hashgraph creates more than Blockchain, and prove if indeed Blockchain is obsolete in comparison to Hashgraph.

Key Words: Blockchain, Hashgraph, E-business, value drivers, virtual markets, miners, mining, voting, consensus.

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CHAPTER ONE

Introduction 1.1 Background

"Did Blockchain just become obsolete?"

This is the current million-dollar question asked by numerous business reviewers and analysts today with the recent introduction of a new technology – the technology known as Hashgraph (Jia, 2017). This is mostly attributed to the fact of claims announcing Hashgraph to be more improved in handling business transactions in a way that outshines the core features that makes Blockchain so relevant in the business world today. A statement like this poses a joyful wonder of investment for many businesses and individuals to look forward to a

brighter future in business, but it may also be a powerful warning, or dare to say, even a death statement to numerous firms and individuals making sacrificing investments in Blockchain today. But why? Why is Blockchain currently considered so important, and why is the introduction of Hashgraph such a threat to its future existence??

The simple answer is that Blockchain is rather important because of the value it creates in the business world today. Since its introduction, technology has once again made a landmark revolution in the current business world that makes its markets, industries, and transactions more efficient, trustworthy, and secure in various innovative ways (Maloney, 2017). Blockchain's novelty in technology and its efficiency in handling throughput

transactions are just a few of the reasons why it is considered a valuable asset to incorporate into many business ventures (Maloney, 2017). At first, it was the financial sector that was greatly influenced by this technology with the establishment of various cryptocurrencies like Bitcoin, Ethereum, and Ripple to be used as substitute modes of exchange to the fiat

currencies created and circulated by traditional financial institutions. Now, with times past, after the successful dissemination of knowledge concerning the components and process of Blockchain, it is no surprise that many firms and businesses have taken various measures of researches, investments, and development actions towards innovatively incorporating the Blockchain technology into their diverse ventures (Steve, 2016). These implementations are done with purpose to either enhance certain record keeping activities

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6 competitive advantage or create some form of penetration into the market to better satisfy their transactions with their consumers and other businesses. A few examples of such practices include IBM's partnership with Sichuan Hejia to promote the Yijian Blockchain Technology for the applications of pharmaceutical procurement. Another is Microsoft collaborating with the Decentralized Identity Foundation (DIF) to invest in a form of Blockchain technology to improve the management of their digital data in business processes (Mansfield-Devine, 2016; Mix, 2016, 24 April). With such investments like these taking place, it seemed that the radical changes spun by the use of Blockchain

technology secured it as a long-lasting innovative tool to be wisely and widely considered for more future investment and use. But reality may show it only to be short-lived by the

introduction of an even better technology – Hashgraph - that is said to possess a more improved set of competence and process that creates value in a way that makes the current achievements of Blockchain dispensable and its future promises of investment only void.

1.2 Problem Objective and Research Question

With the issue posited above, there is a need for an in-depth comparison between the two competing technologies to show forth to what extent Hashgraph is indeed better than its counterpart, Blockchain, in creating value. And from this comparison, it can then be

concluded if Hashgraph does render Blockchain's operating future obsolete, and if it is wise to continually keep investing in the incorporation of Blockchain technology into businesses today.

Therefore, this project is set to answer the research question:

To what extent is Hashgraph an overall technological improvement in value creation that it make its counterpart, Blockchain, an obsolete investment in handling future e-business transactions?

1.3 Focus of Research

This research project will focus to achieve this objective through providing an in-depth analysis and comparison of the two technologies with the use of qualitative data, on the basis of past research done on analyzing value creation. To do this, a literature review on the

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7 subject of value creation in E-businesses will be observed. This literature review will show forth grounded theory on value creation and provide the approach for the conceptual

framework through which Blockchain and Hashgraph technologies will be analyzed. With the use of the conceptual framework provided, both technologies will be analyzed with detailed descriptions of their component features and processes. They will then be compared on factors that are noted by their original creators to be the core elements through which both technologies create value. This description analysis and each factor of comparison would consist of qualitative data analyzed inductively. Conclusions will then be derived to discuss as to what extent Hashgraph is better than Blockchain on each aspect of the frame work on value creation. With these conclusions, this research project will then give discussions to how obsolete Blockchain really is, and if it is worth to continue investing in.

1.4 Research Structure

The outline of this research consists of five chapters. These include chapters of an

introduction, a literature review, a methodoly, a series of results, and lastly a summary of conclusions.

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CHAPTER TWO

Literature Review

To be able to make a proper comparison of value creation between Hashgraph and Blockchain, a brief description of both technologies and thorough understanding of e-business value creation is needed. To give insight into what value creation is and how it can be analyzed, this literature review focuses on the research done specifically on E-business value creation by Amitt and Zott in their article, Value Creation in E-business (2001). It also presents their framework of value creation as the tool chosen for analysis in this project, and give relevant reasons as to why it was chosen. This includes describing the perception of markets involving Blockchain and Hashgraph and giving credence to grounded theories that prove the chosen framework relevant for this case of analyzing e-business value creation.

2.1 Description of Blockchain and Hashgraph Technologies

Both Blockchain and Hashgraph are known to be full consensus distributed ledger

technologies (Ivan on Tech, 2018). This term is used for technologies that set to enact the operation and recording of collaborative transactions between multiple agents and parties without the inclusion of a ‘trustworthy’ intermediary (such as a bank, stock trader, federal reserve etc) with whom to establish such said transactions (Ivan on Tech, 2018). Mike Maloney (2017) makes it known that both technologies possess different systems of utilizing mathematical algorithms to run open ledgers that records transactions. This operation, in of itself is a core reason to why Amitt and Zott’s research and framework (2001) were chosen amongst all others to analyze and compare both technologies in this study.

2.2 Essence of Value Creation in E-business

So why Amitt and Zott?

Strategies of value creation in traditional business have been consistently researched upon since the Design School of Strategy – the first schooling thought that began the process conception of business and corporate strategy (Mintzberg & Lampel, 1999). With the scarcity of academic literature on e-business value creation, Amitt and Zott (2001) were one of the first academics to provide proper research and analysis on the particular matter. The purpose of their research was to fill in the theoretical gap of e-business value creation by providing a framework that identifies the sources of value creation in e-businesses. It

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9 revealed four primary and interrelated value drivers (sources) in e-businesses namely; Novelty, Efficiency, Lock-in, and Complementarities.

Throughout their literature, Amitt and Zott (2001) gave various definitions of value creation according to the theories combined through which they provided their framework. Essentially, the authors summed up that the core essence of value in any business is the potential generation and eventual creation of wealth in unprecedented ways that transforms the rules of competition of established businesses in concerned industries. With this claim, they termed a value driver as any factor that contributes to the enhancement of total value that can be utilized by the agents of e-business transactions .

To examine these sources in detail, an array of grounded theories were used to highlight potentials of value creation embedded in e-markets known as virtual markets. A core reason as to why Amitt and Zott’s framework (2001) was chosen for this literature study is the fact that the markets involved with technologies such as Blockchain and Hashgraph are virtual markets. Therefore, these theories applied to their conceptual framework for this analysis, can also be applied to the resulting framework that will be used to compare both technologies in value creation.

The theories consists of five existing entrepreneurship and strategic management literatures that explored the main drivers of value creation in all businesses, and combine together to form the supportive research to prove the framework of e-business value creation relevant. They include the value chain analysis, Schumpeterian innovation, the resource-based view of the firm, strategic network theory, and transaction cost economics. And would all be briefly described further on in this chapter.

Each theory above corresponds to a value driver, and provides linkages of synergies between them. Their literature therefore produces exposition, and gives theoretical

implications to the comparison of Blockchain and Hashgraph as emergent virtual markets.

2.3 Blockchain and Hashgraph as Virtual Markets

In analyzing e-business value creation, Amitt and Zott particularly focus on the potential of value creation embedded in virtual markets, and it has been previously stated that Blockchain and Hashgraph are virtual markets. The question then is, how? In other words, what are the features and characteristics that make both technologies’ markets virtual markets?? It is

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10 therefore necessary to show this is indeed the case for this research to give relevance to the framework used in the comparison of both technologies.

Virtual markets refer to settings in which business transactions are conducted via open networks based on the fixed and wireless Internet infrastructure (Amitt and Zott, 2001). According to research, they exhibit four main characteristics. They have a possession of high connectivity; they focus on transactions; they provide important contribution to information networks; they have high reach and richness of information.

The markets of Blockchain and Hashgraph exhibit all these traits as they make use of the internet as a medium of operation, possessing high connectivity and reach amongst its users (Satoshi, n.d; Baird, 2016). They both possess focus on transaction as the main objective of their market which is to record transactions made between participants of e-businesses. They also form new collaborations amongst firms, providing a reduction in asymmetric information amongst its economic agents (Satoshi, n.d; Baird, 2016) . All these features together contribute to the markets of both technologies to be classified as virtual markets. Proving it therefore possible and relevant for Blockchain and Hashgraph to be analyzed by the theories and framework of e-business value creation provided by Amitt and Zott’s research.

2.4 Theoretical Approach to Conceptual Framework

With Blockchain and Hashgraph technologies proven to be virtual markets, the framework used to analyze e-business value creation is now shown to be relevant for this project. It is therefore necessary to briefly describe the theoretical approaches used in creating their framework and show how they give relevance to resulting core elements and factors of comparisons used to analyze and compare both technologies in this study.

• Schumpterian Innovation: the theory of Schumpterian Innovation provides a view of technological development as the discontinuous change and disequilibrium resulting from innovation (Schumpeter, 1934). Its research was led by Schumpeter (1934) with theory stating that innovation is the main source of economic

development and new value creation. This innovation is achieved through novel combinations of resources and competences as the foundations of new products and production methods. Amitt and Zott (2001) use this theory to give relevance to selecting novelty as the first value driver for e-business value creation. They make it known that the internet features of virtual markets provide e-businesses the

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11 opportunity and ability to achieve competences through constant technological innovation that provides them competitive advantage over traditional businesses.

In other words, through the means of the internet, firms can create, identify and incorporate new products and services, like Blockchain and Hashgraph, to their value propositions and business operations to provide better competences and produce more revenue or lower cost. It therefore gives relevance as to why the analysis and comparison of novelty between Hashgraph and Blockchain involves to what extent each technology produces competence.

• Value Chain Analysis: To support linkages of novelty to efficiency and

complementaries as value drivers, Amitt and Zott (2001) highlighted the theory of

value chain analysis. The value chain framework analyzed value creation at the

strategic business level (Porter, 1985). It explored the contribution and combination of primary activities which involve inbound logistics, operations outbound logistics, marketing sales and service. Amitt and Zott (2001) through studying the works of Rayport and Sviokia (1995) pointed out that the value chain of virtual markets includes the sequence of gathering, organizing, selecting, synthesizing, and

distributing of information. In other words, value is not just created by differentiation (novelty) strategies provided by information technology as stated by Porter (1985), but requires the efficient (efficiency) and synergetic (complementarities)

combinations of activities across the value chain. This theory therefore gives

relevance as to why the analysis and comparison of novelty between Hashgraph and Blockchain involves how each of their novel features reduce cost and sequence the value chain of their virtual markets. It produces extended dimensions for the novelty of each technology to be analyzed to determine which creates more value.

• Transaction Cost Economics: To support efficiency as value driver in their

framework, Amitt and Zott (2001) highlight the theory of transaction cost economics. Developed by Williamson (1975), transaction cost economics identifies transaction efficiency as the major source of value, because it reduces cost. Essentially, the core of this theory is concerned with showing that value is created by businesses when they gain optimal operation and governance of transactions at the lowest cost of choice, uncertainty, exchange frequency, and specificity of assets enabling such exchange (Amitt and Zott, 2001). These costs specifically include direct costs of time and

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12 money spent in searching for information, efforts spent to acquire collaborative communication, costs of inventory management and procurement. Indirect costs include costs of adverse selection, moral hazard, and waiting times (Lucking, Reiley, and Spulber, 2001) .

Amitt and Zott (2001) showed that the internet features of virtual markets also reduces the cost of transactions between agents as supposed to traditional businesses. Also, these e-businesses invest in novel technologies and models to improve their transaction operations and reduce direct and indirect costs, linking the value drivers of efficiency with novelty as synergetic sources of value creation. They also discovered linkages between efficiency and lock-in sources. Williamson (1979) extensively notes that reputation, trust, and transactional experience within a highly networked

environment can lower costs of asymmetric information exchange and switching costs as information technology can reduce coordination costs and transaction risk.

In the case of this study, this theory gives relevant use of efficiency as a source of value creation for both Hashgraph and Blockchain. It also highlights the fact that the analysis and comparison of efficiency between both technologies involves the extent to how their operation of transaction reduces cost and produces revenue according to scale.

• Strategic Networks: Amitt and Zott (2001) use the theory of strategic networks by Gulati, Nohira, and Zaheer (2000) to support lock-in as a primary value driver to e-business value creation. Strategic networks are defined to be stable

inter-organizational ties which are strategically important to participating firms, taking the form of strategic alliances, joint ventures, long-term buyer-supplier partnerships etc (Gulati et. al, 2000). Essentially, the theory proposed that governance mechanisms of trust and transparency, synergy of agents, and collaboration of their resources and capabilities create value creation in businesses. And from their data analysis, Amitt and Zott (2001) found that e-businesses improve their performance by configuring alliances into networks that enable them to take advantage of linked capabilities and information of partners.

This theory also contributes to the linkage between the sources of lock-in and complementarities as the loyalty of agents to a particular business is highly influenced

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13 by the quality of resources and capabilities it seeks to incorporate into its operations through networked alliances.

Amitt and Zott (2001) point out that virtual market do in fact possess reduction of asymmetric information due to their internet features that provides fast information and transparency. The speed of information exchange and high

connectivity over the internet grants virtual markets ability to form very large networks of alliances amongst partners, making lock-in an essential value driver to the creation of value in e-business spaces.

In the case of this study, the theory of strategic networks supports importance and relevance of the analysis and comparison of lock-in features between Hashgraph and Blockchain to involve the extent to how each technology provides security and transparency to reduce asymmetric information and build trust between its users.

• Resource-based View: From Amitt and Zott’s data analysis (2001), it was found that e-businesses leverage their potential for value creation by offering bundles of

complementary products and services to their customers. In other words, e-businesses can create value by capitalizing on products with complementarities among operation activities like supply-chain integration, technological collaboration, information and financial transactions (Amit and Zott, 2001). This interweaving of resources and capabilities to produce synergetic competence is supported by the theory of the Resource-based view by Barney (1997) to highlight the role of complementarities as a primary source of value creation.

In virtual markets, internet features provide technological products the ability to produce complementary services with other products when incorporated into e-businesses. Extensions in the RBV theory terms this competence as ‘dynamic capabilities’ that are set to improve the coordination, reconfiguration, and

transformation of managerial and operational learning and performance (Amitt and Zott, 2001).

In the case of this study, the Resource-based view gives relevance as to why the analysis and comparison of complementaries between Hashgraph and Blockchain involve the extent to how each technology can be incorporated into diverse corporate organizations and collaborative networks to show forth which technology creates more value.

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2.5 Illustration of Conceptual Framework

As stated above, each value driver contributes to the enhancement of total value of e-businesses in ways that grants them competitive advantage and competences to radically transform their markets and industries. Amitt and Zott (2001) discovered these value drivers through a data analysis that involved an in-depth qualitative inquiry of 50 open-ended questions from a sample of 59 e-business firms. With each theoretical approach given, the illustration of the conceptual framework by Amitt and Zott (2001) used for this project is presented with brief descriptions of each value driver below.

Figure 1. Value Drivers of E-business Value Creation

• Novelty: In traditional businesses, this is the source that involves the introduction of new products or services, new methods of production, distribution, and marketing, or tapping of new markets through innovation. From their data analysis, Amitt and Zott (2001) found that e-businesses also innovate ways to transform their markets. This innovation is mostly technological, involving a novel structuring of their transactions.

• Efficiency: The data analysis showed that transaction efficiency is one of the core value drivers of e-business (Amitt & Zott, 2001). This is because most e-businesses are able to lower costs due to the gains of improved efficiency from their transactions, thus creating value. Activities that involve transaction efficiency include the reduction of information asymmetries between buyers and sellers through the supply of

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up-to-15 date and comprehensive information, and a reduction of customer search and

bargaining costs.

• Lock-in: ‘Lock-in’ is defined as the prevention of migration of customers and strategic partners to competitors (Amitt and Zott, 2001). It creates value through the reduction of switching costs mentioned in Williamson’s (1975) transaction cost theory, and the building of trust and collaboration of business agents and networks.

• Complementarities: Amit and Zott (2001) defined complementarities as a

competence present whenever a bundle of goods or/and services together provides more value than the sum of value each good/service provides separately. Essentially, customers value a product more if it possesses unique features complemented with features of other player’s products than if it just possesses its own unique features Brandenburger and Nalebuff, 1996). This concept provides a linkage between

complementarities and lock-in sources as synergetic value drivers in e-business value creation. Also the need for complementarities is also essential as their creation leads to the necessary activity of forming business networks.

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CHAPTER THREE

Methodology

The method of research used in this project is a literature study that involves the collection, analysis, and synthesis of past data to the literature reviewed. This chapter therefore presents a description sequence of activities taken to enact the methodology of research for this project and leads to a provision of results from the analysis and comparison of Hashgraph and

Blockchain as tools for value creation.

3.1 Research Design

The data collected consists of qualitative reviews, observations, analyses, and comparisons of both technologies conducted by several cryptocurrency reviewers, software programmers, financial analysts, and credit union associations. The sources of data are also described with detailed accounts of analysis through which the research for comparison was done to prove the relevant results observed. This data was then analysed through trigulation, and then synthesized to form an emergent framework extended from Amitt and Zott’s research that can be specifically used to analyse and compare value creation specific to full distributed ledger technologies.

3.2 Extension and Limitation of Data Collection

The data for this project was all gathered from online sources made publicly available on the internet. This reason for this method of data collection is simply that the lack of common knowledge and time available for this project made it not feasible to reach the groups of experts through the use of interviews or questionnaires. The collection of data is divided into two groups. The first was the collection of papers written by the creators of both technologies to gain indepth knowledge of their design and operation. The second consisted of public data collected in three fold sessions to be used in trigulation for the analysis of this project. Each session is described below:

The first fold involved the collection of reviewing comparisons of both Hashgraph and Blockchain from a total of six cyptocurrency reviewers, three of which have more than 1000 followers on Twitter, and the other three holding more than 5000 followers on Youtube. It involved observing each of their personal websites, social media pages, and Youtube channels to read the articles and watch the videos they shared on the comparison of both technologies.

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17 The second session involved a collection of qualitative observation analyses of full concensus ledger technologies done by a software programmer, commonly known as Ivan on Tech (2018) with a following of 173,000 followers on Youtube, and a financial analyst, Mike Maloney (2017), who has 310,000 followers on the same website. This activity involved visiting their Youtube pages and personal websites to watch a total of 5 videos that contained interviews with the creators and users of both technologies and other cyptocurrency reviewers and financial analysts. Their analyses also showed comparisons between both Hashgraph and Blockchain with links to scientific documentation and observable evidence to the results presented further in this project.

Lastly, the third session involved an observation of reviews on full consensus distributed ledger technologies made by two famous credit union associations. These associations are: (1) CU ledgers, formerly known as CU Blockchain that consists of more than 6000 credit unions; (2) CUNA, a credit union association that currently consists of more than 100 million members. The collection of data involved a look into their public documents of official reviews of Hashgraph in comparison to some of the best variations of Blockchains available today.

3.3 Data Analysis

The analysis of data involved the routine inspection of data collected. The inspected data was then synthesized to the theoretical literature of value creation used in the framework of this project.

The procedure involved the reading of written articles, watching of documented videos, and the writing of notes containing extrapolations gained from the collection and observation of data. These extrapolations of information included the trigulation of data that was similar across the three fold sessions of data collection, and important information documented in papers written by the creators of both technologies. In other words, the trigulation consequently provided results of comparison between Hashgraph and Blockchain that was realized in all three folds of data collection and were recorded as concluding results to be used in creating the extended framework emerged. All results were then reviewed again and then allocated to categories based on the value drivers of e-business value creation.

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CHAPTER FOUR

Results

The analysis and synthesis of data resulted in an extention of Amitt and Zott’s framework (2001) that is specific to the analysis and comparison of Hashgraph and Blockchain. It consists of a five core elements based on the sources of value creation that are mutually possessed by both technologies. These five core elements include, operating features, throughput performance, security, transparency, and public use integration. Each of these elements are described in detail to show both their correspondence to the value drivers in e-buisness value creation and their relevance to the analysis specific to full consensus

distributed ledger technologies.

The framework then further presents four factors within each element that can be used to compare Hashgraph and Blockchain based on the five elements. These factors are

characteristics specific to the value creation of both technologies (claimed by their creators) within the criteria of the five element extention of the framework.

4.1 Core Elements for Analysis

• Operating Features: As full consensus distributed ledger technologies, Hashgraph and Blockchain each possess operating features of processing transactions. It involves novel ways of distributing digital ledgers of information to all agents within their networks until a state of shared agreement and equality of shared information is reached. This state is simply termed consensus. Through the data analysis of this project, this element was found to be the main attribute through which novelty is a source of e-business value creation specific to full consensus ledger technologies. It also presents the mutual characteristic through which the novelty of Hashgraph and Blockchain can be compared. This is because the operating feature of a distributed ledger technology is the core aspect of innovation that determines to what extent a particular technology can reconfigure the virtual value chain in novel ways that either reduces costs or produces more revenues.

From the data collected, the operating feature of the Blockchain technology was observed to be a peer-to-peer timestamp networking system which involves the distributed ledger of bundles of transactions labeled ‘blocks’, and links these blocks in grouped order known as a blockchain (Satoshi, n.d.). The peer-to-peer networking

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19 system uses a digital procedure of operation known as timestamp consensus

procedure to form bundles of transactions that will be added to the distributed ledger

of the Blockchain. This procedure is explained in detail in the description of other elements below. Essentially, the peer-to-peer networking system creates value for many e-businesses through the removal of an intermediary agent thereby creating a new structure through which transactions can be made in a way that is both fast, secure, and transparent.

Figure 2. Simplified Illustration of Blockchain

In the case of Hashgraph, the technology uses a different system known as the gossip protocol. This is a process whereby an agent gives all his information of a transaction to another member who also does the same, then each member gives the same combined information they have gathered to another member to repeat the same procedure (Baird, 2016). This interaction is repeated several times until every single agent of the network has the same information, producing both a distributed record and transfer of information that is also always in consensus. The gossip protocol is in fact an ancient system, but has never been properly implemented because its

bandwidth of ensuring the transfer of such large information across numerous agents is practically impossible (Ivan on Tech, 2018). To put this complex task into practice, Hashgraph utilizes the procedure of virtual voting which performs the gossip protocol randomly rather than selectively. Its procedure will also be explained extensively in the description of other elements below. The gossip protocol is therefore a complex but incredibly fast digital process of recording transactions that provides a

decentralized interaction of multiple parties to pass distributed information in order that is always in consensus.

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Figure 3. Simple Illustration of Hashgraph

In this project, Blockchain’s peer-to-peer network system and Hashgraph’s gossip protocol are compared to determine which technology possesses the better feature for operation. The data will therefore give conclusion as to which technology creates more value as regards to the value driver of novelty.

• Throughput Performance: The data collected showed that full concensus distributed technologies focus on delivering transparent collaborative transactions in a digital way that is both fast and secure. To perform this, thier operating features of technologies use similar or different procedures to work the throughput of this

function. From the analysis of data, the performance of throughput was highlighted as the element through which efficiency as a value driver for these technologies can be mainly observed and measured. Through this element, it is therefore possible to

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21 analyze the extent to which each technology creates value in its performance of sequencing efficient transactions in a way that reduces costs or produces revenue.

As stated before, the Blockchain’s peer-to-peer networking system performs its operations through the procedure of a process known as a timestamp consensus procedure that involves the operations termed mining and voting. Mining is a complex verification process of mathematically encrypted data, and is the first process towards validating a transaction block to be part of a blockchain network. It is a procedure where by blocks of transactions are privately verified or mined by multiple computers known as miners and then put through a voting system as to which blocks mined should be selected and timestamped to become confirmed transactions that are publicly acknowledged in the distributed ledger (Satoshi, n.d.). Selected blocks are then added to become public updates of the blockchain, while unselected blocks of transactions are dumped back into the pool of unconfirmed transactions to continue the cycle of operation.

With Hashgraph, to implement the complex task of the gossip protocol, it uses the procedure of virtual voting as also stated above. Virtual voting is a procedure whereby the information of transactions are transferred randomly from one agent to another in packages known as events that parallel the blocks of the Blockchain. Virtual voting unlike the voting system in Blockchain does not require an actual voting process, but rather through the random transfer of full information from one agent to another, it mathematically calculates how the interactions of transactions will take place to become either confirmed or unconfirmed transactions (Baird, 2016). This is because virtual voting includes the transfer of combined information of what is being transacted, who is transacting, and when the transactions happened (Maloney, 2017). This process is simply termed gossip about gossip consensus. It allows

Hashgraph utilize the gossip protocol by optimizing its advantages of decentralization and loss of waiting times while at the same time addressing the problem of its

impractical implementation due to its heavy bandwidth of information transfer. In this project, the performance of Blockchain’s timestamp procedure and Hashgraph’s virtual voting are compared to determine which technology possesses better throughput performance. It will give information to conclude which technology creates more value as regards to the value driver of efficiency.

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22 • Security and transparency: Through the synthesis of data to the literature review of

Amitt and Zott (2001), the elements of security and transparency are observed together because they both overlap to highlight lock-in as a value driver for distributed ledger technologies. This is because the high level of security of these technologies is a direct casaulity from the intricate levels of transparency they provide between their agents to meet consensus (Mike Maloney, 2018). In other words, the higher the transparency, the higher the level of security within their networks. Therefore, the combined analysis of transparency and security determines to what extent a technology creates value in the prevention of migration of its agents to use competing ledgers, and presents mutual attributes through which the lock-in of both Hashgraph and Blockchain can be compared. It is strictly based on protocols through which trust is built amongst agents to reduce asymmetric information and assure fairness within each network.

As full consensus distributor ledger technologies, Hashgraph and Blockchain have been noted by their creators to find solution to an ancient problem known commonly as the Byzantine General’s Problem (Mike Maloney, 2017). It basically asks how is it possible to be absolutely certain that multiple entities which are separated by distance can come into full agreement to take collaborative action (Palmer, 2017). It essentially questions the possibility of consensus between multiple parties despite the difficulty of information transfer over distance and time, the risk of asymmetric information, and the spread of malicious information. The technologies of both Hashgraph and Blockchain are set to solve this problem through the solution of Byzantine Fault Tolerance.

Byzantine Fault Tolerance is a characteristic that defines a system or network to accommodate or tolerate the failures that belong to the Byzantine General’s

Problem. In the case of Blockchain and Hashgraph, the Byzantine Fault Tolerance are algorithms that accommodate for the risks of asymmetric information and malicious transaction for the reaching of consensus as long as the computational power of honest nodes (agents) are higher than the computational power of malicious nodes (Konstantopoulos, 2017). To ensure the position of honest nodes remaining in the majority, both Blockchain and Hashgraph have structured their networks to

incentivise this situation. Because they are open sourced networks, all transactional activity involved with both technologies are computationally impractical to reverse,

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23 protecting selling agents against fraud (Satoshi n.d; Baird, 2016). Also they possess routine escrow mechanisms that can be easily implemented to protect against buying agents.

In the case of Blockchain, a proof-of-work (POW) or proof-of-stake (POS) protocol is used (Ivan on tech, 2018). Each or both of the protocols can be

implemented to provide the technology transactional security. Proof-of-work is a digital validation check entrusted to agents monitoring the miners of the timestamp network system. Essentially, it is the algorithmic decryption of encrypted data needed to be solved before a block of transactions can be added into the blockchain.

Validated blocks added to the blockchain then possess a verification label

acknowledged by all agents of the network to prove that a verification decryption had taken place with the concerned block (Palmer, 2017). The cost of time and

computational power to decrypt blocks added into the blockchain deters miners from becoming malicious agents to the blockchain network as it would be highly expensive to do so. Unfortunately, despite the issue of security solved, POW developed other problems as Blockchain began to scale. These problems included the cost of power and time needed to implement the verification process of a larger network, and the lack of decentralization that occurred to solve these costs (these issues with POW will be discussed in detail in later parts of of this project). To address these problems, another type of validation protocol is used - this is the proof-of-stake.

Proof-of-stake is a validation process that is also entrusted to the agents monitoring the miners of the timestamp network (in these case, agents are called

validators, and the process of mining is termed minting or forging) (Palmer, 2017).

Unlike POW, validators are pseudo-randomly chosen to be entrusted in committing the block to the Blockchain. This selection of validators is normally based on the amount of wealth or stake an agent has in the block of transactions (Ivan on Tech, 2018). In other words, the agent set to gain the largest wealth involved in a validated block of transactions is entrusted to make the verification process of the block. This deters the agent from making malicious mining, as if he/she tries to attack the blockchain network with a malicious block, he/she loses the most wealth from the block of transactions when it is dumped. The reduction of miners through validators addresses most of the issues with the POW system by reducing its costs and making it more decentralized and fair.

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24 In the case of Hashgraph, due to its gossip protocol set at random and its mathematically calculated virtual voting process to reach consensus, it possesses a characteristic known as a non-deterministic asynchronous byzantine fault tolerant (BFT) (Jia, 2017). This is a feature that gives Hashgraph the algorithmic ability to tolerate any number of faulty or malicious events in its virtual voting given that the number of faulty events are not up to one-third of the all the events of agents that are within the network (Jia, 2018). With the network being the open source of the

internet, is it practically impossible for Hashgraph to have an issue with virtual voting as it would take a collaborative effort of one-third of its agents to halt the flow of transactions or make malicious transactions (Baird, 2016). Also, because all the nodes of events - both faulty and legit - are accommodated within the network, unlike Blockchain’s POW or POS systems, none of the nodes for transactions are dumped and all information transferred through gossip protocol is used in the process of virtual voting to reach periods of consensus (Baird, 2016).

The unique combination of the gossip protocol and virtual voting also provides Hashgraph the ability to create a ledger of transactions without the use of miners to lead and verify the transfer of transaction (Baird, 2016). This means that the transfer of information through the network is decentralized as transactions confirmed within the network are not determined by the operations of miners and validators, but an algorithmic process that makes voting fair (Maloney, 2017). Because every single information has been taken into account via the gossip protocol, when consensus is reached through virtual voting, the consensus is absolute and cannot be changed or doubted by the community of the network. Essentially, Hashgraph’s verification process is applied alongside the transfer of information during transaction that gives Hashgraph the sense of certainty when consensus is reached, and provides it a constant level of security as it increases in scale (Maloney, 2017).

In this project, Blockchain’s POW/POS systems and Hashgraph asynchronous BFT are compared to determine which technology provides better security and

transparency. It will give information to conclude which technology creates more value as regards to the value driver of lock-in.

• Public Use Integration: From the data analysis, this element highlights

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25 determines to what extent a technology creates value with its ability to create

numerous and diverse collaborative networks in its application, and can be used to compare the value of complementarities between Hashgraph and Blockchain.

According to data collected, both technologies are being applied in diverse ways by several organizations as a resource to increase operational competence within their industries (Satashi, n.d.; Baird, 2016). They can also be utilized by multiple parties of individuals to provide and improve consumption services across the internet. This includes their use in being the main engines for multiple

cryptocurrencies and/or a recording system of transactions between or within organizations and collaborative networks (Cryptopedia, 2018). But because they currently possess different structures of legalities through which their technologies can be applied in creating collaborative networks, the amount of value that contributes to complementarities as a source of value creation between both technologies also differs, and can therefore be compared.

In the case of Blockchain, free public use of the technology was granted at its creation by its mysterious creator Satoshi Nakamoto with no form of licensing or corporate governance (Maloney, 2017). Satoshi Nakamoto had personally applied the use of the technology to be the main engine of the cryptocurrency, Bitcoin, to validate the technology as useful and provide relevance to its operation (Satashi, n.d.). With the freedom of use attached to Blockchain, the technology was soon applied to create diverse kinds of competing legders and cryptocurrencies (Cryptopedia, 2018).

Although this freedom permitted a constant innovation in the application of

Blockchain, its lack of governance created opportunity for the technology to be used in nefarious ways. An example of such a situation involves the period where 421 fake cryptocurrencies were claimed to be discovered in just China alone (Helms, 2018). Issues like this called for the governance around the application of the technology. Since then, several associations like CU ledgers and CUNA consisting of thousands of credit unions collaborate in making decisions as to which applications of the Blockchain can be legally deployed (Maloney, 2017). Blockchain is still considered a public ledger as it can be used and utilized by anyone. But with the new governance in place, there are currently small restrictions to the ways it can be applied.

In the case of Hashgraph, to not repeat the same mistakes as the Blockchain, its technology was patented to restrict the ungoverned creation of competing ledgers and cryptocurrencies (Maloney, 2017). The company, Hedera Hashgraph, was

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26 founded to be a corporation of governance and monitoring to the application of its technology by organizations that possess license to use it (Cryptopedia, 2018). Currently, Hedera Hashgraph provides opportunity for the technology to be

downloaded as an SDK software for free on its website, but restricts its use both with a license only the company can permit. It also restricts the services to three ways through which Hashgraph can be applied (Hedera Hashgraph, 2018). These services include:

o The use to back-up cyptocurrencies and micro transactions o The use as a distributed file storage or record-keeping ledger

o The use as a solidity smart contract that is currently backed up by the Ethereum Virtual Machine(EVM)

With these restrictions, Hashgraph is currently not a public ledger but rather a commission ledger to be only used by private collaborative networks. The main targets of its users are currently private enterprises who are commercial customers that use the technology at an industrial scale (Maloney, 2017). Hashgraph’s creator, Leeman Baird (2016) makes it known that this current situation of the technology is put in place to ensure the proper use of the technology as its collective network scales. He and Hedera Hashgraph have made plans and promises to have the technology become a public ledger in the long run (Maloney, 2017).

In this project, Blockchain’s Public Incorporation and Hashgraph’s patented commission are compared to determine which technology can be better applied to create collaborative networks. It will give information to conclude which technology creates more value as regards to the value driver of complementaries.

4.2 Factors of Comparison

This involves the features of Hashgraph and Blockchain highlighted within each element of analysis. The features of both technologies form four factors through which both technologies can be compared in correspondence to the framework of e-business value creation. These factors include:

• Peer-to-Peer Networking System vs Gossip Protocol: This factor compares Blockchain’s peer-to-peer network system to Hashgraph’s gossip protocol system to

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27 determine which possesses better novelty in its operating feature. It focuses on the comparison of accounts of advantages and disadvantages each feature holds in correspondence to the reduction of costs they provide and production of revenue they create. The results of this comparison of operating features therefore contributes to the overall conclusion to determine the extent of truth or falsehood to the claim of

Blockchain’s obsolescence to the introduction of Hashgraph as regards to thier novelty.

• Timestamp Procedure vs Virtual Voting: This factor compares Blockchain’s timestamp procedure to Hashgraph’s virtual voting to determine which possesses better efficiency in its throughput performance. It focuses on the comparison of speed and scale of transactions each procedure can perform. The results of this comparison of throughput performance therefore contributes to the overall conclusion to

determine the extent of truth or falsehood in the claims of Blockchain’s obsolescence to the introduction of Hashgraph as regards to thier effieciency.

• POW/POS Systems vs Asynchronous BFT: This factor compares Blockchain’s combination of proof-of work and proof-of stake systems to Hashgraph’s

asynchronous Byzantine Fault Tolerant to determine to which possesses more lock-in value in regards to how much security and transparency each offers. It focuses on the comparison of costs to maintain security and range of fairness and transparency alongside scale to maintain or even increase the lock-in of its agents against competition. The results of this comparison of transparency and security provided therefore contributes to the overall conclusion to determine the extent of truth or falsehood in the claims of Blockchain’s obsolescence to the introduction of Hashgraph as regards to thier lock-in properties.

• Public Incorporation vs Patented Commission: This factor compares Blockchain’s public incorporation to Hashgraph’s patented commission to determine which

technology creates more value as regards to the complementarities each provides in creating collaborative networks. It focuses mainly on the legal and technological extensions and limitations through which each technology can be applied to create diverse collaborative networks and services. The results of this comparison of public use integration therefore contributes to the overall conclusion to determine the extent

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28 of truth or falsehood in the claims of Blockchain’s obsolescence to the introduction of Hashgraph as regards to thier complementarities.

4.3 Illustration of Emergent Framework

This is the illustration of the resulting framework created for the purpose of this project. It presents all five elements for analysis and their factors for comparison described above. Each element is enclosed in boxes and linked to the value drivers they correspond to with the use of arrows. Finally, next to the area of each element, the factors for comparison between Blockchain and Hashgraph are presented. This information altogether illustrates how both technologies are analysed and compared in relativity to e-business value creation. With all properties combined, it therefore provides possibility to measureably determine to what extent Hashgraph possesses ability and potential in value creation than Blockchain that it renders Blockchain obsolete.

Figure 4. Conceptual Framework

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4.4 Results of Comparison

These are the results concerning the factors of comparison through which Hashgraph and Blockchain were compared. It contains detailed descriptions of information found within the analysis of data concerning each element and highlights conclusions to which of the

technologies creates more value in regards to the value drivers of e-business value creation.

• Peer-to-Peer Networking vs Gossip Protocol: From the data analysis, results showed Hashgraph to be more novel in its operating feature than Blockchain. It is a fact that the creation of Blockchain’s peer-to-peer networking system was definitely a revolutionary innovation for the financial industry, but Hashgraph’s utilization of the gossip protocol through the use of its virtual voting is known to be far more

revolutionary (Maloney, 2017). This is attributed to the fact that though Blockchain provides a fast, secure, and fair way of handling transactions beyond traditional alternatives, Hashgraph innovation provides the opportunity to do the same alongside the economies of scale.

The peer-to-peer network was incredibly novel that it completely reconfigured the structure through which transactions were carried out by removing the need of an intermediary. Before this, most transactions were carried through a bank or some other form of financial institution with the average time of a transaction taking four to five days (Maloney, 2017). With the use of the blockchain network, transactions take at most a few hours to be carried out, reducing the costs of time by a considerable amount (Satoshi, n.d.). Also with the ledger of the blockchain being distributed to all agents within its network, a higher form of fairness and decentralization was

established in ways that was unfamiliar to the involvement of traditional

intermediaries. This feature reduces the cost of asymmetric information and search costs experienced with traditional intermediaries. It also gives new content of transactions to its participants, empowering them with improved monitoring and administration of past and present transactions. Unfortunately, Blockchain possesses disadvantages of costs accrued to the use of its feature. It takes considerable amount of computational and electrical power to administer the peer-to-peer network on a large scale through its timestamp procedure. And as it scales, transactions on the Blockchain have to be made slower to ensure security and reduce a halt in the flow of transactions known as ‘soft forking’. Because of this, Blockchain can be only limited

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30 to have small collaborative networks otherwise it would be using an immense amount of power to run it, and would be incredibly slow.

As for Hashgraph, the gossip protocol also provides the exclusion of traditional intermediaries just like the Blockchain (Ivan on Tech, 2018). It even provides a far more decentralized and fair process of transferring information more than the peer-to-peer network, and provides Hashgraph the ability to handle

transactions in minutes – sometimes even seconds. With the use of its virtual voting process, the complex bandwidth of the gossip protocol can be constrained in such a way that consensus of transactions is reached every few seconds (Maloney, 2017). Also because gossip protocol does not require any mining or voting procedure as the peer-to-peer network does, it neither needs as much computational and electrical power to reach consensus with its network, nor does it have to be slowed down as it scales. All these attributes together shows Hashgraph to possess a more novel

operating feature than Blockchain. In other words, Hashgraph creates more value than Blockchain in regards to novelty.

• Timestamp procedure vs Virtual Voting: From the data analysis, results showed Hashgraph to be more efficient in its throughput performance than Blockchain. This involved documented evidence of the most transactions performed by both

technologies on scale, and the speed through which each technology can output a number of transactions on average per second. According to all the three folds of research, Hashgraph’s virtual voting was able to reach consensus of transactions well faster than Blockchain(Maloney, 2017). Most public cyptocurrencies using the Blockchain can make an average of 7-10 transactions per second (Ivan on tech, 2018). When isolated to a private network, the Blockchain works better with

examples of IBM’s Blockchain handling an average of 700 transactions per second, and Red Belly’s Blockchain handling 400,000 transactions per second (Jia, 2018).

Hashgraph, due to the speed of its virtual voting, was able to pull off 50,000 transactions per second with a range of 32 computers on a global reach with

consensus reached in an average of 2.5 seconds (Cryptopedia, 2018). Because Hashgraph is currently not a public ledger, it is irrelevant to compare its throughput performance to that of public ledgers belonging to cryptocurrencies (Jia, 2018). Yet, Hashgraph proves itself faster than even the best private Blockchain ledgers as it

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31 manages to output an average of 500,000 transactions per second in a collaborative network that was constrained to a continent (Cryptopedia, 2018).

These documented evidences attest to Hashgraph producing more throughput performance than the best of Blockchains. An example being CU Ledger Association proclaiming Hashgraph’s deployment, in the earliest stages of its introduction, to be above IBM’s Blockchain in 2017 (Maloney, 2017). Essentially, evidence points true to Hashgraph creating more value than Blockchain in regards to the value driver, efficiency.

• POW/POS Systems vs Asynchronous BFT: Results from the data analysis also show Hashgraph to be more secure and transparent than Blockchain. This is firstly attributed to the fact that Hashgraph’s gossip protocol is far more decentralized and fair than the Blockchain’s peer-to-peer networking system (Ivan on tech, 2018).

In the case of Blockchain, decentralization of information is not pure as the confirmation of blocks are entrusted to the miners and validators of the POW/POS systems. In other words, though the Blockchain is more fair and transparent than traditional intermediaries with the use of its open distributed ledger, its distribution of information is still centralized amongst its miners and validators.

Also due to the dumping of unconfirmed transactions in both systems, the order at which transactions are confirmed is not always accurate (Maloney, 2017). This means that consensus even when reached is not always certain or finalized by the agents within its network, but rather confirmed over time when consensus is reached in several blocks (Maloney, 2017).

Hashgraph’s Asynchronous BFT is certified by CUNA to be the strongest security possessed by a distributed ledger (Cryptopedia, 2018). This is because its gossip about gossip consensus is completely decentralized with no leading nodes (miners or validators) determining the confirmation of events within its network. According to the credit union association, Hashgraph achieves all four criteria in providing bank-grade level security which includes:

o Immutability of transaction History (no single party within the network can change the order of transactions applied to the ledger).

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32 o Distributed Denial of Service (DDoS) Resilience (no single party can disrupt

the flow of transactions throughout the ledger, making it resilient to malicious intent termed DDoS)

o Fair Access (decentralization of information)

o Fair Ordering (no dumping of information within the network to reach full consensus).

Because no information transferred during transactions is dumped or lost, when consensus is reached to confirm a transaction with the network, it is always certain. This feature of finality in consensus is the main point that trumps Hashgraph’s security and transparency over every Blockchain, whether it uses the POW or POS system, or even both.

The information of results gathered here, therefore attest to Hashgraph creating more value than Blockchain in regards to its lock-in capabilities of building trust and reducing asymmetric information.

• Public Incorporation vs Patented Commission: Results from the data analysis currently show Blockchain to possess more ability to be applied in creating diverse collaborative networks. This is mainly attributed to the current legalities attached to the application of Hashgraph that limit it in its public application (Hedera Hashgraph, 2018). Blockchain is currently being applied in numerous industries beyond the financial industry (Mansfield-Devine, 2016). The use of its technology in both public cryptocurrencies and private industries is evidence to that (Ivan on Tech, 2018).

Hashgraph currently remains a commission ledger patented for the licensed use of private organizations and collaborative networks. Despite the claim of Hashgraph ability to be better than Blockchain in public performance, they is currently not enough evidence to support that claim (Maloney, 2017). As a result, evidence points to Blockchain creating more value than Hashgraph in regards to complementarities as a value driver through which both technologies can be compared.

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CHAPTER FIVE

Conclusion 5.1 Summary of Results

The observation of results combined shows Hashgraph to possess more potential and ability to create value than Blockchain in four out of the five elements through which they were both analyzed and then further compared. These results therefore show three out of the four value drivers of e-business value creation to be stronger for Hashgraph than Blockchain. It includes Hashgraph’s higher novelty in its operating feature, better efficiency in its

throughput performance, and stronger lock-in through its transparency and security. These advantages of Hashgraph over Blockchain therefore proves Hashgraph to indeed be a better tool for value creation than Blockchain.

5.2 Discussion of Blockchain’s Obsolescence

But do these results proof Blockchain’s obsolescence to the introduction of Hashgraph?

The results of this study show the opposite! With the legal restriction of Hashgraph to optimal public integration, Blockchain creates more value in its complementarities than Hashgraph due to its public use. This single advantage of Blockchain over Hashgraph has huge impact in refuting the claims of its obsolution to the introduction of more novel, efficient, and lock-in technologies like Hashgraph. It is because of this that numerous corporations, collaborative networks, and governments still see Blockchain as a profitable tool for investment despite the existence of Hashgraph (Ivan on Tech 2018). But a few business analysts claim that this feature of the Blockchain over Hashgraph is a temporary one, as Hedera Hashgraph is making future plans to give public integrated use to Hashgraph with the means of creating public IOUs and cryptocurrencies of the likes of Bitcoin,

Ethereum, and Ripple (Mike Maloney, 2017). If this true, and these future plans for Hashgraph are implemented in such a way that it complementaries become stronger than Blockchain with no adverse impact to its other value drivers, Blockchain might in fact become obsolete, making the current investments in its technology trivial and maybe even void.

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5.3 Limitations of Research

This literature study was only restricted to the indepth study of Amitt and Zott’s research (2001) on value creation. There was also difficulty of gathering data due to scarce sources of relevant information needed for the analysis of this study. This is due to the minority of individuals who have extensive knowledge on the topic of research and the time available to gather information from them.

5.4 Recommendations for Future Research

As the use of full consensus distributed ledger technologies increases, there is a need for more relevant data of these tools to be recorded for future academic purposes. This should include quantitative results of their impact to various economic factors like GDP, inflation, and foreign exchange policies; descriptions and analysis of laws and regulations around its use; scientific and academic documentation of improvements made to the technologies.

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