What is DeFi?

But first of all what is decentralised finance or DeFi? Decentralized Finance refers to platforms that allow consumers to perform financial type transactions with each. The goal is thereby improving the availability of and efficiency in financial services through disintermediation. DeFi uses blockchain, cryptocurrencies (mainly stablecoins) and smart contracts to manage financial transactions such as lending, borrowing and trading outside the control of traditional financial institutions like banks, brokerage firms, and centralised exchanges. Users thereby interact with the open software protocols through unhosted wallets—which are digital wallets that are managed by users themselves rather than by a service provider.

How does DeFi work

Decentralized finance uses blockchain platforms to disintermediate centralized models and enable the provisioning and settlement of financial services anywhere by using crypto currencies, rather than going through traditional financial intermediaries. By eliminating intermediaries, DeFi users are able to maintain full control over their money through personal wallets (DeFi smart contract tokens) and trading services, as well as directly interact with them via DeFi dApps.

Smart contracts

DeFi makes use of smart contracts that provide the fundaments for the functioning of DeFi apps, because they encode the terms and activities necessary for the functioning of these apps. Smart contracts are computer programs run on a blockchain that controls digital assets, and automate agreement terms between buyers and sellers or lenders and borrowers. They are used to execute a transaction between two or more parties, thereby reducing friction and costs.

Software protocols

DeFi software protocols on blockchains are standards and rules written to govern specific tasks or activities. They are interoperable, meaning they can be used by multiple entities at the same time to build a service or an app, enabling  buyers, sellers, lenders, and borrowers to interact peer to peer. DeFi protocols achieve their investment purposes through self-executing smart contracts that allow users to invest crypto assets in a pool from which other users can borrow. The most common protocols for current DeFi projects are built on Ethereum.

Decentralised applications (dApps)

Decentralised applications (dApps) abstract underlying protocols into simple consumer-focused services.  DeFi can be used for the full range of financial services including crypto asset trading, lending and borrowing, savings, payments, derivatives trading, insuring risk etc.

Some DeFi protocols allocate so called “governance tokens” to reward users for engaging with the system and for conducting or supporting different types of transactions. Participants typically earn tokens by interacting with and providing services to a protocol, for example by providing liquidity in a decentralized exchange or collateral on a lending platform.

These governance tokens generally give users a right to returns from the project and allow users to vote on changes proposed to the protocols. Because of these associated rights, governance tokens have value and are tradeable. This structure gives a wide range of holders the ability to contribute to a project’s governance and evolution by voting on proposals to change the protocol and, therefore, its incentives and operations.

DeFi platforms

DeFi does not just build financial services natively as software, but it recreates the entire ecosystem of finance on novel technical foundations, so-called DeFi platforms. These  platforms are consumer-facing financial interfaces that require blockchain technology and  crypto stakers (the transaction processors) to operate. The blockchains thereby act like digital highways allowing DeFi transactions to move. Several decentralized platforms exist including decentralized exchanges (DEX), lending and borrowing, trading (complex) derivatives, insurance, asset management etc.

Decentralised exchanges

Decentralized exchanges (DEXs) are marketplaces that allow the trading of digital assets without any centralized controller. They replace the market-making and custody features of exchanges with a powerful algorithm that dynamically adjusts prices and executes trades based on available liquidity. Automated market makers (AMMs) have become a popular means of providing liquidity. They match buyers and sellers of digital assets or let them “swap” one cryptocurrency or tokens for another (exchange trading). Rewards on this platform results from providing liquidity in token pools. Well known examples are Uniswap and Justswap.

DeFi lending platforms

And there are decentralized lending platforms, that allow holders of cryptocurrencies to lend anonymously vast sums of funds instantly to people who want to borrow, provided that they can provide enough collateral to deposit in a smart contract and settle the loan within an agreed timeframe. Lenders earn interest on the loaned amount (credit intermediation). Some DeFi protocols offer crypto loans against fiat collateral and vice versa. Apart from loans, DeFi users can borrow a token to participate in blockchain activities such as governance. Leading examples are Compound, Makerdao, and Aave.

DeFi derivatives platforms

DeFi derivatives platforms establish markets for synthetic assets, in which users can establish derivative positions in cryptocurrencies while posting collateral to support those positions (derivatives trading). They automatically track the value of commodities, stocks, indices, or any combination of financial instruments. Most known example is Synthetix.

Other DeFi platforms

Other DeFi platforms offer insurance, asset management, and other higher-order financial services, to maximize portfolio returns, as well as collateralising crypto assets for proof of stake or liquidity provision.

Non-Custodial Lending Platforms

Cryptocurrencies have further extended into the world of DeFi through the recent creation of non-custodial lending platforms. These are decentralized markets where users participate as depositors or borrowers. The concept of these lending platforms are designed to mitigate any potential losses or defaults through controlling collateral on the blockchain. Retail lenders are able to quickly liquidate unhealthy loans on these lending platforms through the underlying technology of the platform itself. DeFi pools also have the potential of opening up liquidity in cross-jurisdictional markets that have previously not been able to transact. DeFi users are (theoretically) able to extend credit and liquidity through cryptocurrencies to users across the globe, including markets in developing countries that traditionally do not see influxes of western funds.

New DeFi services

Thanks to DeFi, users can now obtain financial services such as margin trading,  yield farming, liquidity mining, and crypto staking  on a distributed ledger. Especially staking platforms and yield farming protocols have surged in popularity. Yield farming is a tool to help provide network liquidity. It is “the act of hunting for rewards” by interacting with DeFi protocols, by temporarily putting depositing assets as collateral in a liquidity pool, that could be used by others including investors and start-ups, in exchange for financial rewards.  Liquidity mining is a specific form of yield farming, in which digital asset owners provide liquidity to DEXs (Decentralized Exchanges) in return for rewards. Since DEXs historically suffered from low liquidity, this is an important development for the ecosystem as well as a major source of revenue for some digital asset investors. While liquidity miners and yield farmers add funds to liquidity pools, stakers either hold funds in a wallet or delegate their coins to a validator node. This involves locking assets in a wallet in order to gain governance rights and token rewards in proof of stake (PoS) blockchain’s native asset.

DeFi market

Decentralized finance has been one of the fastest-growing crypto sectors since 2019. Interest in crypto and decentralized finance (DeFi) rose sharply during the Covid-pandemic and investment has accelerated. Though decentralised finance is still in the beginning stages of its evolution, the total value locked into DeFi of various types (collateral pools, DeFi smart contracts/protocols) in leading platforms such as Maker, Compound, Uniswap and Aave has grown from less than US$1 billion in 2019 to over US$90 billion early June 2021.

This rise was fuelled in part by investors looking for increased transparency and control of their funds regarding its open network as an attractive alternative to traditional banking. Another reason for the firm growth was the maturation of stablecoins, i.e. cryptocurrencies designed to track the value of stable assets, such as the US dollar. And there was the emergence of incentive structures, such asyield farming and governance tokens, through which participants can earn returns for providing liquidity to DeFi services.

DeFi and benefits

Using DeFi applications has a number of interesting advantages beyond the traditional financial services, in terms of easier access to financial products and liquidity, improved market efficiency, enhanced financial privacy, lower fees and faster innovation.

Easier access

The protocols are easily accessible, making it possible for everyone to experience banking-like services. DeFi applications not only make financial services accessible but also affordable. Besides moving between protocols is relatively frictionless because users have full control of their assets/funds.

Peer-to-peer trade

Since dApps power the ecosystem without intermediaries thereby using self-executing codes that envisage the outcome and resolution of activities on these platforms, it allows for a flexible, direct person-to-person trade with high levels of transparency and zero requirements for joining.

Availability

There are also (theoretical) benefits for international financial transactions. The distributed nature of DeFi platforms and protocols makes them available across the world. The idea is that with a cheaper alternative, remittance charges and commission fees will drop, and currency conversion will have to get cheaper to be more competitive.

Improved market efficiency

Individuals can also borrow of these platforms instantaneously by using crypto assets as collateral. This automation may increase the speed of financial transactions, decrease costs, and—given enough time—broaden the availability of these services.

Lower costs

Such decentralised and non-custodial platforms have low start-up and entry costs as market entrants often remain unregulated and have minimal operating and regulatory costs. The absence or lack of central intermediaries makes it hard for regulators to forbid DeFi services.

Innovation

It may also lead to new types of services, triggering further innovations.  If a community of users is displeased with the service provided by a protocol, that community can vote to change the services supported by it or can fork the existing open source code base and develop a new protocol to meet the community’s needs better.

DeFi and risks

DeFi is an emerging phenomenon that comes with various risks, such as user errors. Who takes responsibility for any mistakes done during a transaction as blockchain is nearly impossible to alter?

And there is the smart contract vulnerability. The engine that runs DeFi applications is embedded in the code bundled together to make a smart contract. When this code has a flaw, it exposes the entire project leading to loss of funds.

Software systems may also malfunction due to a wide variety of factors. For example, what if an incorrect input causes a system to crash? Or, if a compiler which is responsible for composing and running codes makes a mistake. Who is liable for these changes?

While many DeFi tokens have already delivered lucrative returns, they come with considerable risk and price volatility that exceeds that of established digital assets like Bitcoin and Ethereum. Their lower liquidity means that they are more prone to large price swings.

And the anonymity of participants in DeFi transactions, makes it vulnerable for cyberattacks, hacks, scams, false, misleading, or greatly exaggerated recommendations. This may lead to funds theft or loss, without any regulated recourse.

No consumer protections

DeFi has flourished in the absence of rules and regulations. DeFi users however do not receive the protection benefits of transacting with regulated intermediaries. In centralized finance banks are required by law to hold a certain amount of their capital as reserves, to maintain stability and cash you out of your account any time you need. In DeFi they do not receive risk disclosures. Protocols are not subject to risk management requirements, such as capital and liquidity requirements, that protect against loss of consumer funds and systemic risks. So DeFi users may have little recourse should a transaction go foul. There is no help desk or relationship manager to contact if a transaction goes wrong.

Present regulation

DeFi is currently subject to existing regulation laws. The regulatory frameworks that apply to cryptocurrency projects however do not regulate the specifics of DEFI. Their approach is still based on the presence and regulation of centralized intermediaries, and would not work for decentralised DeFi digital asset classes. DeFi transactions conducted between individual users through unhosted wallets would not be subject to existing regulatory requirements, including KYCand AML reviews.Because DeFi protocols support anonymized transactions, there is no meaningful way for market participants to determine what requirements apply to their DeFi transactions.

Regulators are puzzling

Regulators world-wide are gathering speed to step in. They however are puzzling how to deal with DeFi and how to fill the gaps. Considering the fragmented and diverse nature of the DEFI market the task for regulators seems impressive. Who and what is there to regulate? From a regulatory standpoint, DeFi poses several serious and multifaceted risks and challenges, that will become more serious as the market further grows. DeFi does not fit within the historic practical and regulatory model used for financial transactions.

No intermediaries

Present regulation assumes the presence of intermediaries, and it applies regulation to intermediaries as a way to regulate financial markets and related activities comprehensively. But why apply rules designed for centralized finance to decentralised non-custodial, open  information DeFi systems?

Decentralised networks

Blockchain networks are decentralized and global, so participation in DeFi activities presently does not require interaction with the regulated financial system or other national legal regimes, such as taxation and national identity systems. How to look at these centralised networks from a regulatory standpoint?

Governance tokens

As with any new market, classification will be challenging. Governance tokens issued by DeFi projects may not constitute ‘investment contracts’ under securities laws. The absence of intermediaries and a wide dispersal of governance tokens may further weigh against governance tokens being subject to existing securities regulation. How are they going to be classified will determine under what regulatory regime governance tokens will fall.

Codes

Even when a corporate entity develops the software for a DeFi service, the service itself is just software code executing on a blockchain and accessible to all through the internet. This makes regulatory enforcement challenging. Using just the traditional financial services view to regulate the codes is not enough. They not only relate to just blockchain virtual assets, but also around automation and smart contracts more generally. These are very much linked and regulators need to look at those things together.

Source of information

It is also difficult to imagine a practical situation where a user of a DeFi platform is able to provide the source of information about an exchanged private or non-private crypto coin beyond one or two transactions. So what regulatory rules should apply?

WEF Policy Toolkit: regulatory clarity and balanced approach

Policy-makers and regulators are urgently looking for frameworks to address these issues responsibly. The World Economic Forum recently published a policy toolkit for decentralized finance, in a bid to assist governments around the world to appropriately address this phenomenon and help shape regulation of digital asset marketplaces between different countries. Regulators worldwide contributed to the policy document including representatives from lawmakers involved in creating the new European Markets in Crypto Assets (MiCA) rules. The toolkit provides a foundational basis for understanding and examining the critical factors concerning DeFi regulations that should drive policy-making decisions. Authors thereby call for technologically neutral approaches that can balance objectives of regulatory regimes and innovation and market development with policies that are fair, efficient and enforceable.

New regulatory approach: basic principles

As DeFi projects eliminate the need for financial intermediaries, regulators may need to fundamentally rethink their approach. They will need to step away from traditional thinking and take an approach that should have a number of basic principles.

Regulatory clarity

Regulation is key to, at least, set minimum standards to market participants in the DeFi industry, to protect capital and clearly define the regulatory treatment of all crypto-assets that are not covered by existing financial services regulation. Regulators will need to further clarify these guidelines for reporting entities a.s.a.p. to solidify international adoption.

No overregulation

In order not to frustrate full adoption in the DeFi world, government agencies will need to be more flexible in their approach. One should prevent too strict regulation as that could severely disincentivize people to enter the DeFi market. The approach should be based on disintermediation whereby regulatory bodies should look beyond the centralized intermediaries approach.

Balanced approach

To promote the development of the various DeFi markets, it is necessary to put in place a safe and proportionate regulatory framework to support innovation and fair competition. Regulators should thereby maintain an adequate balance between safeguarding positive blockchain-based financial innovation in terms of greater efficiency and broader inclusiveness in finance on one hand and limit the potential of these financial applications being misused for money laundering and terrorism financing.

Level playing field

Given the increasing interwovenness of traditional financial institutions and the crypto market that have to compete against a growing number of non-regulated decentralized and non-custodial DeFi platforms, traditional business may be adversely affected if they fail to compete on an equal basis against them. So regulators should follow a level playing field approach, based on functional and operational equivalency.

European DeFi regulation: MICA

Last year September the European Commission adopted the Markets in Crypto-Assets Regulation (MiCA) proposal. Aim  is to improve harmonisation and legitimisation of how tokens are being regulated generally and the supervision of issuers and firms that qualify as crypto-asset service providers (CASPs). MICA would set clear rules of the crypto assets throughout the European Economic Area (EEA) establishing a common framework and avoiding inconsistencies. MICA thereby follows a technology, asset class and jurisdiction agnostic neutral approach.

MiCA aims to provide greater legal certainty, supporting innovation, ensuring appropriate levels of consumer and investor protection, promoting market integrity and financial stability and thus transform Europe’s current fragmented crypto-asset legislative and regulatory framework into a uniform approach. MiCA will apply to persons engaged in the issuance of crypto-assets and to crypto-asset providers in the EU-27. MiCA itself may be implemented as early as between mid-2021 and early 2022 and aims to be fully operational by 2024.

Main proposals

This new MICA regime clarifies which tokens will qualify as a “financial instrument” and thus fall under the existing financial services regulatory regime, as amended, and which tokens will qualify as “crypto-assets” and thus fall under MiCA’s specific regime for crypto-asset services (CAS).

Assessment of whether a digital asset will be a crypto-asset and subject to MiCA or a token that is a financial instrument subject to the existing financial services regime, will look at the substance over form and thus depends on the content of an instrument and not the technology behind it.

With MiCA, the European Commission intends to include stablecoins within the scope of the tailored MiCA regime on crypto-assets (to the extent not already regulated) and to modify the e-money regime to include a new type of e-money: “ ‘electronic money token’ or ‘e-money token’ means a type of crypto-assets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by being denominated in (units of) a fiat currency”

Other stablecoins are likely in scope as ‘asset-referenced tokens’, defined as: “a type of crypto-assets whose main purpose is to be used as a means of exchange and that purports to maintain a stable value by referring to the value of several fiat currencies, one or several commodities or one or several crypto-assets, or a combination of such assets.”

For stablecoins that do not fall within the above definition, the issuers must still publish a white paper, notify the regulator and may not refer to their coins as being ‘stable’. Stablecoin (being a type of ‘asset-referenced token’) issuers not already regulated as credit institutions or e-money institutions will need to be authorised and to publish a white paper approved by their home state regulator.

Issuers of ‘significant e-money tokens’ and ‘significant asset-referenced tokens’ will be directly regulated by the European Banking Authority (EBA) and will have additional obligations in respect of capital, interoperability and liquidity management.

ECB and MICA

In February this year the ECB published an Opinion on the current proposed form of MICA regulation. Their proposals generally aim to grant greater powers to the ECB, set prudential requirements for certain stable coin issuers and generally improve anti-money laundering and financial crime prevention measures.

The ECB is generally in favour of MICA’s aims and its contribution to harmonization of crypto asset regulation. The ECB however suggests several adjustments and clarifications, specifically calls for improvements, including greater scope of which tokens and what activity will fall under and be regulated by MICA and by which regulatory authority under MICA and what activity will be subject to the MIFIR/MIFID II framework. The ECB has called for changes to provide a clearer definition of what constitutes a crypto-asset and thus falls into MICA. This to help support the provision of crypto-asset services on a cross-border basis and to establish a truly harmonized set of rules for crypto-assets.

The ECB has suggested a distinction between crypto-assets that would be classified and thus treated as MIFID II financial instruments and those that would fall under the scope of MICA’s regulatory regime. Specifically the ECB has requested a number of changes concerning the supervision of stable coins i.e. what MICA defines as asset-referenced tokens (ARTs). The ECB asks for additional safeguards under MICA, including prudential and liquidity requirements for such issuers. And there is the issue of what financial stability and prudential supervisory aspects will require greater regulatory and supervisory oversight by the ECB, and how this will interact with oversight from other European authorities.

The way forward: regulatory sandboxes and safe harbors

Implementing full-fledged regulations right now however would be unwise. Regulators should get well-required time to gain experience in this new technology, interact productively with the DeFi industry, and provide informal regulatory guidance to them. In the meantime regulators can learn from techniques that are proving effective for the existing cryptocurrency market via so-called regulatory sandboxes. These could create a safe space for regulators and innovative services to work through the various issues. In addition, regulators should start with clarifying relatively easy cases first to provide guidance to the industry. This can give them enough time to solve the harder issues later, while ensuring market participants remain confident in the broad contours of the regulatory environment.

Because DeFi encompasses a broad range of applications and protocols, many of which may lie outside securities law, US SEC Commissioner Pierce suggested implementing a so-called ‘safe harbor’ policy with respect to DeFi and cryptocurrency projects. Disclosure requirements or safe harbors can encourage market participants to provide regulators with information that helps them better understand market dynamics and develop best practices. Without this safe harbor policy in place, it is currently impossible for someone to develop a truly decentralized system without potentially being in breach of securities law throughout the development process.

But what is Internet of Things?

IoT or Internet of Things has emerged as a network of internet connected devices. These devices range from simple consumer-devices to heavy industrial machines and may include laptops, smartphones, smart gadgets, smart watches, smart and digitalized vehicles, smart bicycles, medical sensors, smart security systems etc. These IoT devices are integrated with high definition technology like sophisticated chips, sensors, or functional software, that makes it possible for them to communicate or interact over the internet smoothly and exchange information with each other. IoT involves first of all sensing, monitoring, and exchange of data, followed by efficient data storing and processing using technologies like cloud computing. Data is thereby transmitted from the device to the IoT network where the information is managed using analytics and then directed back to the IoT equipment. The analytics capabilities of the IoT use these data to convert insights into action, impacting business processes and leading to new ways of working.

In the meantime the Internet of Things has provided many services in the fields of intelligent transportation, smart cities, medical treatment, smart agriculture and many others. These IoT-based solutions allow the automation of daily tasks and enable effective monitoring and control of the connected devices. This may result in improved efficiency and convenience in performing tasks.

Challenges

The advancements in IoT have popularized the development of 5G-enabled-IoT applications. 5G, the next generation of mobile networks, promises remarkable performance improvements  and is envisaged to broaden IoT’s scope and fields of applicability. Such 5G IoT applications however  pose stringent requirements such as high capacity, assured privacy & security, scalability of heterogeneous applications, ultra-low latency, optimized use of network resources, efficient energy management and low costs.

Since current mobile networks including 5G and also more general IoT systems are based on centralized models they may face big challenges to meet-up the requirements of future 5G-enabled-IoT use cases. With the huge number of devices set to enter IoT networks in the coming years, these centralized arrangements have very restricted scalability, while exposing a large number of vulnerable points that could endanger network security and can become extremely costly and sluggish.

a. Scalability
One of the most crucial difficulties with current 5G IoT networks is that of scalability. IoT relies on centralised cloud-based architecture for their control and management. It would be an urgent task for the centralised cloud servers to scale up their capacity and computing power and handle the massive amounts of data collected by a large network of sensors. With the increasing number of devices and the huge amount of data they are generating, current centralised systems to authenticate, authorise and connect different nodes in a network may become a great bottleneck.

b. Security
Another fundamental problem with current 5G IoT systems that may hinder its large-scale development, is their security architecture. A centralised client-server model managed by a central authority would make it vulnerable to a single point of failure. Many IoT devices have very low security features embedded into them. As a result they may get affected by privacy and security breach, while there is reduced safety for users. That make them an easy target for cyber-criminals to exploit the weak security protection to hack them into launching DDoS attacks.

c. Privacy
Another problem is privacy. The IoT network can process data transactions across multiple devices that are owned and administered by different organisations. This makes it difficult to identify the source of any data leakages in case of a cyberattack. Additionally, the IoT generates a vast amount of data, and with multiple stakeholders involved, the ownership of the data is not always clear. This could potentially undermine the reliability of IoT sensors. Measures to ensure the integrity of IoT devices such that they cannot be altered by external interventions are thus key to securing a safe environment for data recording and transactions.

d. No common standards and protocols
The devices in an IoT network are part of different technology standards with different protocols, making it difficult to build a coherent system. The data generated in the networks have different ownership and are highly noncoherent, hence, hard to trace and audit. Data could either be locked in or may not be inter-operated because of different communication standards and protocols and operating systems.

e. Lack of auditability and control over data sharing/usage
In an IoT network a huge amount of data is generated from devices that are proprietary to several enterprises. It is difficult to manage and audit such data in terms of who owns them, where from are they generated and how can they be processed. Most of the times such data is not under the control of all the intermediate parties involved such as equipment vendors, service providers or users who share a common platform.

Blockchain can be of great help

These  issues have become key in IoT systems and if not solved may aggravate when the increase in IoT products will accelerate. Continuing the use of centralized solutions 5G IoT driven applications will not only struggle to meet the demands but will also adversely affect the projected visions of IoT. To solve these issues blockchain or distributed ledger technology (DLT) is increasingly seen as a promising solution to help address these challenges in a unified and decentralised way.

Blockchain, can play an important role in how devices will communicate directly between each. Blockchain, as a distributed database system, can record all information about transactions. This fits perfectly into the basic functions and architecture of the IoT. The distributed nature of blockchain allows the industrial entities and various IoT devices to exchange data to and from their peers, eliminating the centralized operational requirement. Blockchain thereby enables users of 5G IoT networks to interact and transact (store and retrieve data) with ensured data provenance and authenticity, accountability, immutability, and non-repudiation for every user. Blockchain can thereby help alleviate the security, privacy and scalability concerns associated with IoT, by building trust, cost reduction and the acceleration of transactions, without relying on central participants.

How will Blockchain bring these benefits for IoT?

a. Immutability
The distributed ledger in a blockchain system is tamper-proof. Each transaction is recorded, put into a data block, and added to a secure, immutable data chain that cannot be changed. No single organisation has control over the vast amount of data generated by IoT devices. This immutability is regarded as a principal strength of blockchain-based smart contracts, as it removes the need for trust among the involved parties.

b. Improved security
Blockchain’s strong protection against data tampering helps prevent a fraudulent device from disrupting synergy of communication systems by injecting or relaying harmful information. Using blockchain to store IoT data would thus add another layer of security that hackers would need to bypass in order to get access to the network. The blockchain technology thereby holds the potential to securely unlock the business and operational values of 5G networks to support common tasks, such as sensing, processing, storing, and communicating information.

c. Transparency
Blockchain also provides transparency, by allowing anyone who is authorised to access the network to track the transactions that happened in the past. Compared to the ordinary database systems in IoT ecosystems the distributed ledger provides capability to transparent record keeping of the events logged, while the ledger is protected against alterations with the utilization of digital signatures. Through transparency of smart contracts, the trust in 5G IoT networks is decentralized. The deployment of smart contracts in IoT makes the nodes trustworthy and compliant in the specific business ecosystem.

d. Guaranteed integrity
Blockchain as well as blockchain-based smart contracts may also ensure the accountability and integrity of IoT related networks. Smart contracts can be defined as software codes enforcing the regulatory criteria and make them transparently available. These contracts entirely depend on transparency and consistent integrity of all member nodes. The much more robust level of encryption provided by blockchain makes it virtually impossible to overwrite existing data records.

e. Accelerated data change
The performance of the entire IoT ecosystem in terms of higher throughput and latency depends on the accelerated operation of data change in the IoT nodes. As the number of interconnected devices grows, blockchain and smart contracts may provide a viable solution as it can enable fast processing of the growing number of transactions and coordination among the huge number of connected devices. The centralized validation of a particular data can be replaced by decentralized validation with the use of smart contracts deployed on the IoT node itself. This may drastically diminish the data validation time, as well as the chances of manipulation or access.

f. Reduced costs
And as a result of all this, the operational costs of an IoT ecosystem can be minimized when  blockchain and smart contracts are utilized. Blockchain and smart contracts can allow IoT companies to reduce their costs by eliminating the processing overheads (deploying expensive high-end computing infrastructure) related to IoT gateways, associated with middlemen and intermediaries.

Applications of Blockchain IoT

Blockchain IoT applications are increasingly used in various sectors like supply chains, transportation and logistics, retail, automotive, healthcare, manufacturing, construction, government, energy and utility. Corporations are thereby focusing on increasing operational efficiency through real-time data management and automation of tasks. Blockchain IoT applications are  thereby used for purposes like process automation, supply chain management, smart cities, smart homes, asset tracking and monitoring, data analytics, data sharing and communication, smart cars, decision analytics, home automation, and smart grids.

Supply chain
Blockchain and smart contracts may be of great added value in the 5G IoT smart  supply chain. Blockchain IoT applications for tracking purposes are especially used by supply chains to track the location of goods as they are shipped, and ensuring that they stay within specified conditions. The blockchain can store, manage, protect and transfer all this smart information, such as the temperatures, position, arrival times, and status of shipping containers as they move. Sensors give companies end-to-end visibility of their supply chain by providing data on the location and condition of the supplies as they are transported around the globe.  Immutable blockchain transactions help ensure that all parties can trust the data and take action to move products quickly and efficiently.

Maintenance
Blockchain IoT asset tracking devices are also used by a lot of businesses for long-range identification of assets and machinery to record activity and output as an alternative to cloud solutions. This is especially important for predictive maintenance modelling. The ability to track components/spare parts that go for instance into an aircraft, automobile, or other products is critical for both safety and regulatory compliance. IoT data stored in shared blockchain ledgers enables all parties to see component provenance throughout a product’s life.  From engines to elevators, blockchain provides for a tamper-free ledger of operational data and the resulting maintenance.

Smart city and smart homes
Blockchain IoT solutions are increasingly being used in smart cities to enable the services such as payments, e-Governance, security, and surveillance of the smart cities. Smart cities are the implementation of advanced modern techniques in the urbanization to improve the quality of human life.

Blockchain IoT solutions also find their way in smart homes, that are intended to automate the entire home environment comprising of home appliances and devices. Blockchain can thereby fuel different use cases such as smart home monitoring, remote accessing, energy optimization, surveillance and so on.

Data Analytics
Blockchain IoT can also be applied to data analytics to investigate different types of data. It can be used by businesses for predictive and descriptive analysis to improve customer knowledge, enhance operational efficiency, and create business value. Businesses are increasingly using Blockchain IoT data analytics to determine trends and patterns by analysing big and small data to extract meaningful insights.

Smart healthcare 
Blockchain IoT has numerous applications in the healthcare industry. The technology can be used to provide high-quality medical services using smart devices. IoT devices can collect health care data, and these data is stored online. They can be accessed anytime by a physician, Blockchain can as a result enable secure and trusted IoT medical automation systems for real-time monitoring, logging privately medical history, sharing securely medical documents and supporting vital data which can help in making clinical decisions.

Smart farming
The concept of smart farming can revolutionize the agriculture industry. Farmers can use smart blockchain IoT farming applications for optimizing a lot of different activities such as determining the best time to harvest plants, as these devices can detect weather conditions and other environmental data. But also creating fertilizer profiles based on the chemistry of soil, and sensing soil nutrients and moisture levels. Blockchain enabled IoT applications for agriculture purposes can help to boost both the quality and quantity of agriculture production,  while minimizing the cost.

Key players in the Blockchain IoT market

A growing number of companies are leveraging blockchain technology to allow any IoT device to securely connect, interact and transact independently of a central authority. Key players include big tech companies like Amazon, Cisco, Huawei, IBM, Intel, Microsoft and SAP as well as big blockchain platforms such as Ethereum, the Linux Foundation and R3. And a growing number of smaller companies using blockchain to make the Internet of Things safer and smarter have entered (or are entering) the market. Some interesting newcomers:

Ambrosius
Ambrosius is a public permissioned blockchain ecosystem with a large number of decentralized node operators securing the network. The Ambrosus blockchain is optimized for interconnectivity with IoT devices, sensors, existing ERP systems, and other enterprise management software. Ambrosius is used for decentralized applications, securing the Internet of Things, physically tracking real-world assets, and integrating blockchain into enterprise software.

Atonomi
Atonomi is an open platform that encourages third-party development. Atonomi provides IoT developers and manufacturers with an embedded solution to secure devices with blockchain-based immutable registration of identity and reputation tracking. While device identity is recorded and validated on an immutable ledger, device  reputation is calculated and recorded based on monitored transactions. This enables fluid interactions between validated IoT devices, regardless the manufacturer, across the Atonomi trust environment.

Chain of Things
Chain of Things (CoT) is a consortium of technologists and leading blockchain companies. It investigates the best possible use cases where a combination of blockchain and IoT can offer significant benefits to industrial, environmental, and humanitarian applications. So far, CoT has built Maru, an integrated blockchain and IoT hardware solution to solve issues with identity, security, and interoperability.

IOTA
IOTA is a protocol for fast transaction settlement and data integrity, with a Tangle distributed ledger that eliminates the need for expensive mining (validation of transactions). IOTA is an infrastructure for IoT devices that need to process large amounts of micro data. Features of the Tangle ledger are machine-to-machine communication, fee-less micropayments, and quantum resistant data. IOTA has built a sensor data marketplace and is entering the market for data-driven insights, supported by more than 20 global corporations.

Modum.io
Modum.io combines IoT sensors with blockchain technology, providing data integrity for transactions involving physical products. The modem sensors record environmental conditions, such as temperature, that goods are subject to while in transit. When the goods arrive at the next transit point or end customer, the sensor data is verified against predetermined conditions in a smart contract on the blockchain. The contract validates that the conditions meet all of the requirements and triggers various actions such as notifications to sender and receiver, payment, or release of goods.

Xage Security
Xage is the world’s first blockchain-enabled cybersecurity platform for IoT companies. Their technology can manage billions of devices at once and can even self-diagnose and heal possible breaches. Xage is proximality used by IoT companies in the transportation, energy and manufacturing industries.

Blockchain IoT market 2020–2026

An interesting report was recently launched by Markets & Markets, forecasting the development of the global Blockchain IoT market till 2026. Especially the need for IoT security, simplified processes supported with transparency and immutability, and high adoption of blockchain-based IoT solutions using smart contracts and Artificial Intelligence (AI) are expected to surge demand for the blockchain IoT market globally.

Main highlights

• The global Blockchain IoT market is expected to grow tenfold from USD 258 mio in 2020 to more than USD 2.4 bn by 2026, an average yearly growth of more than 45%.
• Whereas the hardware segment (including IoT sensors and crypto wallets) showed the highest share up till now, due to growing demand and infrastructure for deploying, developing and managing blockchain applications, software and platforms are forecasted to take the lead.
• Data security held by far the largest market share in 2020, due to the crypto mechanisms used of the blockchain. The smart contracts segment is expected to be the fastest growing during the forecast period due to the increasing use of blockchain IoT in the construction industry.
• While the government segment held the largest market share up till now due to the increasing government initiatives and use of blockchain IoT across the many smart city projects, verticals such as supply chain, logistics, automotive, healthcare, manufacturing and construction are also expected to register a high demand for blockchain IoT.
• The growing adoption of blockchain and IoT technologies across the retail sector is also expected to drive market growth during the forecast period. Retailers increasingly use IoT and blockchain technology to track products in stores, prevent product tampering, and increase security across retail stores.

Final remarks

The expected potential of  the 5G IoT market today is limited by an extremely fragmented IoT ecosystem. Blockchain technology appears as potentially the most suitable and efficient way to the various 5G IoT challenges. For optimising the value of blockchain the creation of common ecosystems with commonly accepted standards and global protocols is thereby of utmost importance. To achieve that, standardized infrastructures, open application programming interfaces (APIs) and collaborations among stakeholders are urgently needed. That means that many stakeholders, even competitors in the same industry, should collaborate and adopt a shared distributed ledger platform with compatible standards protocols enabling users to access all connected applications. If so that would be a great marriage a trois between blockchain, IoT and 5G.