pIs the hype around blockchainjustified Since Bitcoin introducedthe world to the concept of securedistributed ledgers, much has beenwritten about their potential toaddress other business problems.But the discussion often remainsabstract, focusing on the opportunityto decentralize markets and disruptmiddlemen. In the latest in ourProfiles in Innovationseries, we shiftthe focus from theory to practice,examining seven real-worldapplications of blockchain, such asenhancing trust in the SharingEconomy, building a distributedsmart grid, lowering the cost of titleinsurance, and changing the face offinance across capital markets,trading and control. We identify,itemize, and quantify the players,dollars and risks for blockchain toreach its full potential.James Schneider, Ph.D. 917 343-Goldman, Sachs amp; Co.Goldman Sachs does and seeks to do business with companies covered in its research reports. As aresult, investors should be aware that the firm may have a conflict of interest that could affect theobjectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision. For Reg AC certification and other important disclosures, see the DisclosureAppendix, or go to Analysts employed by non-US affiliates are notregistered/qualified as research analysts with FINRA in the U.S.The Goldman Sachs Group, Inc.EQUITY RESEARCH nbsp;| nbsp;May 24, 2016Brian Lee, CFA 917 343- Goldman, Sachs amp; Co.Alexander Blostein, CFA 212 357-Goldman, Sachs amp; Co.Putting Theory into PracticeSteven Kent, CFA 212 902- Goldman, Sachs amp; Co.PR O F I L E S I N IN N O VAT I O NBLOCKCHAINIngrid Groer, CFA 6129321-Goldman Sachs Australia Pty LtdEric Beardsley, CFA nbsp;917 343-Goldman, Sachs amp; Co.May 24, 2016 nbsp;Profiles in Innovation Goldman Sachs Global Investment Research 2 Table of Contents Portfolio Manager’s summary 2 What is blockchain 8 Putting Blockchain to Work Seven Case Studies 12 Case Study 1 Accelerating the Sharing Economy with reputation management 13 Case Study 2 Building a distributed Smart Grid with blockchain 24 Case Study 3 Reducing transaction costs in real estate title insurance 33 Case Study 4 Capital markets – US cash equities 44 ASX A real-world blockchain testbed for post-trade services 54 Case Study 5 Capital markets – Repo 56 Case Study 6 Capital markets – Leveraged loan trading 62 Case Study 7 AML and KYC Compliance 71 Blockchain innovators Select private companies 78 Blockchain innovators Public company enablers 79 Disclosure Appendix 85 This is the fourth report in our Profiles in Innovation series analyzing how emerging technologies are creating profit pools and disrupting old ones. Access the entire series below and visit our portal to see related resources, including a video on blockchain’s potential. nbsp; Virtual and Augmented Reality  Drones  Factory of the Future Payments / Fintech Financials Energy Lodging / Leisure ManagementJames Schneider, Ph.D. Alexander Blostein, CFA Brian Lee, CFA Steven Kent, CFA Robert B Brian.K.L Jordan Fox Ingrid Groer, CFA Michael Lapides Lara F Pierre Safa Conor Fitzgerald Hank E Eric Beardsley, CFAGrayson Barnard, CFAMay 24, 2016 nbsp;Profiles in Innovation Goldman Sachs Global Investment Research 3 Portfolio Manager’s summary Blockchain has captured the imagination of Silicon Valley and Wall Street alike, leaving behind its origins as the underlying technology of Bitcoin. Yet much of the discussion around its potential uses remains abstract. The focus is on the power of a distributed ledger to decentralize markets and undermine the control of existing middlemen. nbsp;But the potential of blockchain is more nuanced and far-reaching than that simple narrative. To move beyond the theoretical to the practical, we explore a range of specific real-world applications across a cross section of markets and industries, including travel, energy, real estate, and finance. We illustrate where the attributes of blockchain are best suited to the business problems at hand and quantify how it might shift the dynamics of the industry. We highlight private and public companies poised to serve as enablers or exploiters of the shift – and analyze where blockchain could create new profit pools or undermine existing ones. A key takeaway across these applications is that blockchain is not just about disintermediating the middleman. In some cases, blockchain could disrupt markets and existing participants, while in others, it promises to help drive cost savings by reducing labor-intensive processes and eliminating duplicate effort. And in some instances, it can create new markets by exposing previously untapped sources of supply. The common thread is that by enabling a fundamentally new type of database technology that can be distributed across organizations, blockchain creates the foundation for solving problems or seizing opportunities that have eluded current systems. What is blockchain The heart of blockchain’s potential lies in the unique properties of a distributed database and how they can improve transparency, security, and efficiency. Historically, organizations used databases as central data repositories to support transaction processing and computation. Control of the database rested with its owner, who managed access and updates, limiting transparency, scalability, and the ability for outsiders to ensure records were not manipulated. A distributed database was practically impossible because of technology limitations. But advances in software, communications, and encryption now allow for a distributed database spanning organizations. In its purest – as used by Bitcoin to create and track units of the crypto-currency – blockchain is a shared digital ledger of transactions recorded and verified across a network of participants in a tamper-proof chain that is visible to all. Permissioned or private variations add a layer of privileging to determine who can participate in the chain – and we expect the majority of commercial applications to use some of permissioned model. nbsp;What is blockchain good for We believe blockchain’s transparency, security, and efficiency make it a particularly good choice for reshaping businesses that are bogged down by inefficiencies, and for enabling new business models based on distributed marketplaces and technology. Blockchain is not a “cure all” or a substitute for fixing broken business processes, but we believe it is particularly well suited to address a variety of problems  Facilitating secure, de-centralized transactions among many parties in the Internet of Things Because of the inherently decentralized nature of the ledger, blockchain is particularly effective at handling distributed transactions among a very large number of parties. In addition, blockchain delivers a high level of security for each transaction because of the cryptographic verification and validation among parties. As new distributed economic models evolve that cover tens or even hundreds of millions of For a detailed explanation of blockchain and how it works, see page 8. May 24, 2016 nbsp;Profiles in Innovation Goldman Sachs Global Investment Research 4 assets such as cars or apartments in the case of the Sharing Economy or machines the Internet of Things, secure, distributed transaction models will be needed to facilitate transactions. We explore this application in our Smart Grid case study.  Reducing fraud and increasing trust with increased security In many parts of the world, corruption can lead to counterfeiting or alteration of official records. For example, bribery might drive a government insider to change a record describing the amount of a payment made, or the owner of record of a particular asset. Similarly, a malicious actor might attempt to selectively alter or destroy records for example a cyber-hacker changing payment records or trades between parties. Because each transaction is uniquely encoded via cryptography and this encoding is validated by other parties on the blockchain, any attempt to alter or remove transaction ination would be detected by others and corrected by other nodes. We present a case study in which Airbnb could help accelerate the Sharing Economy with a blockchain-based reputation management solution.  Increasing transparency and efficiency in multi-party transactions In any transaction involving two or more parties, the same transaction is typically entered separately by each party into that organization’s own independent systems. In the world of capital markets, the same trade order might be entered into the systems of two counterparties. In each organization, the transaction works its way through middle-office and back-office systems – at which point errors can create the need for costly reconciliation processes with significant manual intervention. By using a distributed ledger technology such as blockchain, organizations can streamline the clearing and settlement process, shorten settlement windows, and avoid substantial capital and operating expenses. We examine a number of capital markets applications where blockchain can be applied to significantly lower costs. Putting theory into practice Real-world applications and benefits When we consider these applications in real-world scenarios, the dollar benefits start to become apparent. We conducted case studies of seven concrete business problems that would benefit from the full value proposition of blockchain building “trust” between parties in the Sharing Economy peer-to-peer P2P lodging; better managing supply, demand, and security on the US electrical grid; verifying a property title; clearing and settling securities trades; and complying with anti-money laundering and “know your customer” regulations. nbsp; Building trust between counterparties in the Sharing Economy P2P lodging sites like Airbnb have already begun to trans the lodging industry by making a public market in private housing. However, adoption may be limited by concerns about safety and security guests and property damage hosts. By enabling a secure, tamper-proof system for managing digital credentials and reputation, we believe blockchain could help accelerate the adoption of P2P lodging and generate 3 - 9 billion in incremental revenue opportunity through 2020. nbsp; Transing the US electricity industry by enabling distributed markets Today, consumers rely on power generated centrally by utilities. With the advent of rooftop solar and high-capacity battery technology, individuals can potentially act as distributed power providers. We think blockchain could be used to facilitate secure transactions of power between individuals on a distributed network who do not have an existing relationship – a 2.5 - 7 billion annual opportunity. nbsp; Reducing transaction costs in underwriting title insurance Homeowners buying or re-financing property are subject to significant transaction costs, including title insurance, where the title search process can be labor-intensive. Along with business We profile 50 private and 10 public companies that are paving the way for real-world blockchain applications page 78 We quantify blockchain’s value proposition in seven different use cases and find sizeable market opportunities. We summarize the potential for each use case on pages 6-7. May 24, 2016 nbsp;Profiles in Innovation Goldman Sachs Global Investment Research 5 process changes, blockchain could reduce title insurance premiums and generate 2 - 4 billion in cost savings in the US by reducing errors and manual effort. In emerging markets, land registration systems could help reduce transaction and financing costs.  Streamlining clearing and settlement of cash securities Despite the relatively low transaction costs for securities such as equities, up to 10 of trades are subject to various errors, leading to manual intervention and extending the time required to settle trades. By applying blockchain to the clearing and settlement of cash securities – specifically, equities, repo, and leveraged loans – we estimate the industry could save 11 - 12 billion in fees, OpEx, and capital charges globally by moving to a shorter, and potentially customized, settlement window. While we do not treat other cases in detail in this report, blockchain could also potentially eliminate significant additional costs across FX, commodities, and OTC derivatives.  Improving efficiency in anti-money laundering AML and “know your customer” KYC compliance Storing account and payment ination in a blockchain could standardize the data required for an account, thereby improving data quality and reducing the number of falsely identified “suspicious” transactions. A tamper-proof record could also ease the process of getting to know a client and demonstrating compliance with AML regulations – generating 3 - 5 billion in cost savings. When will blockchain really start to matter We expect to see early-stage technical prototypes within the next two years, with limited market adoption in 2-5 years and broader acceptance in 5-10 years. We believe consumer-focused Sharing Economy and social media companies could begin to implement blockchain-based identity and reputation management systems in relatively short order. In capital markets, we expect to see a series of early prototypes over the next two years on a limited scale and with limited numbers of participants. Broader market acceptance is likely to take as much as 10 years given the regulatory oversight required and large number of market participants in large-scale markets such as cash equities in the US. What could go wrong Like all new technologies, the adoption of blockchain in the real world will involve challenges. Below we highlight some of the most significant ones  Standards We expect many special-purpose permissioned blockchains to be created for a wide variety of applications. To gain widespread adoption, we believe technical standards will be needed to ensure similar technical implementations across industries – particularly in cases where multiple blockchains need to interoperate with each other. nbsp; Commercial conflicts and business process differences In many ways, a blockchain database is only as good as the data and business process that underlie it. Failure to reach a consensus among counterparties because of business process or commercial conflicts could significantly slow or even halt blockchain’s adoption.  Privacy Applyin/p