Blockchain made its name as the technology behind Bitcoin, but organizations across industries as diverse as healthcare and music are investing heavily in the technology. But what is it? Should you be looking to adopt the technology in your enterprise? Who do you need to make it happen?
What Is It?
Blockchain is a cryptographically-secure digital register of transactions operated by a decentralized peer-to-peer network. It consists of three main components: a distributed network, a shared ledger, and digital transactions. The ledger book is secure and complete because all changes are verified by the blockchain community which is spread across the distributed network. Nobody can insert, modify, or delete a transaction without affecting the entire chain and knocking the serial number hashes assigned to each block out of sync, which would immediately flag up foul play.
How Does It Work?
Rather than the way a database works in a traditional centralized system, in the case of blockchain, copies of the ledger (database) are given to everyone in a series of private computers, each of which represents a 'node' of the blockchain network.
A transaction is added to a block of data after it has been approved by algorithmic consensus established by verification from this network of nodes, all of whom add it to their own copy of the ledger.
Each block is made up of data from a number of different transactions. After a pre-determined period of time, it is locked using complex mathematical processes, at which point it is time stamped, and given a unique number. The advanced cryptography applied to lock each report and the consensus method of transaction approval means that they are permanent and as unalterable as is currently possible simply because of the amount of computing power required. They are then added to the blockchain.
Why Would Anyone Need It?
Say you have a friend, his name is Charlie. You need to transfer Charlie money. As it stands now, you go online and log into your bank. You enter his details and the amount of money you wish to send him. You send these details to your bank, who update their database accordingly so that the money moves from your account to his account and he is free to do what he wants with it. Nothing has physically happened, the bank has simply adjusted its records so that a number in your account goes down and theirs goes up. While seemingly a fairly simple process, neither of the parties exchanging money control the database, so it still requires that you trust the bank to keep all the information on its ledger and move it in the manner you requested them to. What if the bank's ledger is infiltrated? What if someone at the bank decides to steal your money? These are not issues 99.9% of the time as people are largely trustworthy and there are checks and balances in place to ensure that they remain so. However, by decentralizing the ledger, you are removing this element of chance as you are no longer reliant on a single entity to enable the transaction.
Eliminating the issue of fraud and corruption is not the only benefit. Getting rid of the middleman also cuts out a massive cost in many transactions. Even in the above example, although each transaction may not cost you money, banks always take payment from somewhere, and most middlemen will charge significantly for doing little more than providing a degree of verification around a transaction. Say, for example, a company wishes to create a rival to Uber that uses blockchain technology, you can build what is essentially your own competitor to the app on the blockchain. Everyone who so wished could get a copy of this app as they do with Uber, offering all the same functionality but with a native payment system built into it, like Bitcoin. This means that you don’t need a centralized intermediary to process payments, and you don’t need Uber to organize capabilities because it’s all done with the distributed application. This gives more power to the driver, who no longer has to abide by Uber’s centralized pricing structure and can charge what they see fit. The benefits of such a system to both the driver and consumer are clear. Drivers keep more of the value. This value could, or should, theoretically, be passed onto the consumer, translating into lower fares. The same goes in industries like music, with artists able to offer their creations straight to the consumer, and anywhere else where the middle man is essentially acting only to verify transactions.
Finally, blockchain is far more secure than existing technologies. It is not, as many claim, immutable, but the computing power required to crack the encryption protocols which secure each transaction would far outstrip that presently available. Indeed, analysts told the Washington Post that using blockchain could dramatically improve security across the US military, preventing mega-hacks, tampering, and cyber-hijackings of vehicles, aircraft, or satellites.
How Important Is It?
Very. Investment is swelling and people are calling it the most groundbreaking technological innovation since the internet. The World Economic Forum has estimated that more than 25 countries are investing in blockchain technology, filing more than 2,500 patents and investing $1.3 billion. In a survey by the IBM Institute for Business Value and the Economist Intelligence Unit, one in seven companies it calls ‘trailblazers’ said they expect to have blockchains in production and at commercial scale this year. In July, Juniper said that more than half (57%) of the world's large corporations are considering the deployment of their own blockchain solutions. Larry Summers, president emeritus at Harvard University, has even noted that it is ‘overwhelmingly likely’ that ‘blockchain will change finance forever’. However, blockchain can be used to store any kind of digital information, and it could impact essentially, any industry where information changes hands stands to benefit. As a technology, it is still in the very early stages of maturity, but its potential to transform society is arguably as great as that of AI.
Where Could Your Organization Use The Technology?
1. Supply Chain
According to Jerry Cuomo, IBM’s vice president for blockchain, ‘Supply chain is the most likely application for the technology after financial services.’ The technology is already in use in a number of supply chains. Its value lies in the added level of trust that it provides - particularly important in establishing provenance of products so that you can best verify their quality. Blockchain provides all physical products with an almost entirely immutable record authenticating that they are what they are supposed to be and come from where they are supposed to come from. The anonymity it affords also means producers do not lose competitive advantage by revealing the provenance of their goods.
IBM, in particular, is investing heavily on blockchain solutions for the supply chain, including Everledger, which uses the company’s LinuxOne system to allow supply chain customers to build and test blockchains in a secure cloud - protecting everyone involved against theft, counterfeiting, and other forms of corruption.
Everledger Chief Executive Officer and Founder Leanne Kemp summed up how blockchain could be used in supply chain, noting in a statement that, ‘When you are in the business of provenance, secured records, access and transparency are everything. There is no compromise when it comes to security and one cannot underestimate the expertise required to enable this. Having the opportunity to build, test, scale and refine Everledger on IBM Blockchain, underpinned by a security-rich infrastructure, is a game changer. It has accelerated our ability to move fast and deliver the most innovative solutions to our partners internationally and confidentially.’
2. The Finance Function
Blockchain accounting could help dramatically slash the cost of accounting, auditing, and compliance by all but eliminating the need for any bookkeepers or auditors. This also solves a number of problems, particularly around trust. It prevents the company’s management cooking the books to fool the auditor. It also ends the conflicts of interest that arise when auditors are collecting fees from clients while simultaneously conducting audits on them, which provides real motivation for them to exaggerate how good the numbers are in order to retain high-paying clients. Blockchain also greatly reduces the opportunities for errors that can arise when reconciling complex and disparate information from multiple sources and the natural problems that arise from human error as it is all done automatically and verification is so much more stringent.
Blockchain has the potential to guarantee the validity of clicks between advertisers and web owners by telling marketers in real time where their ad has been placed and whether targeting is being delivered as has been paid for. It ensures that all parties are operating with the same information, providing transparency and a clear audit of interactions and metrics so that both client and ad tech providers are on the same page and focused on outcome-based ROI, rather than ROI-surrogate outputs.
Do You Really Need It?
There is, certainly, a degree of hype, and you should be wary of snake oil salesman and consultants. The blockchain revolution is still at an extremely nascent stage and there is a lot of marketing spin. Nerushka Bowan, a technology lawyer at Norton Rose Fulbright, for one, has claimed the blockchain ‘hype cycle’ is likely to burst this year, as businesses which have invested heavily in researching the technology start to demand practical applications that are not going to be there. Gartner’s senior VP for technology, Peter Sondergaard, agrees, telling news outlet Fin24 that ‘it’s a fascinating area to keep an eye out for but I think it’s being over-hyped right now. I think it’s being over-hyped from the aspect of its short-term impact because there are still technical things that you need to solve and scale and there are still counter-aspects – business model wise – that aren’t necessarily fully clear.’ Even those working in blockchain seem dubious. Adam Ludwin, CEO of blockchain company Chain, has said ‘Blockchain is a database for money. I don’t understand why people talk about it in terms of health records and home deeds and voting systems.’
The blockchain landscape today is too confused. Incumbent financial institutions are making minor improvements while new startups are offering the world. The involvement of big tech like IBM and Microsoft doesn’t appear to be helping things much either. Both are attempting to convert Blockchain into centralized services that they can sell, but this removes the fundament premise behind Blockchain's value - that it is a decentralized ledger. Their offerings are, of course, cryptographically protected, but it is still facilitated by a single trusted entity. There are blockchain solutions out there and given that it will impact almost every industry and every facet of your business, it is imperative that organizations educate themselves as much as possible to stay ahead of developments and best position themselves as early adopters. Companies must not get put off by a few bumps in the road though, and they must not panic if proof of concepts do not reveal themselves immediately. They are going to have to continue to improve their understanding and work with other companies and form new strategic partnerships. Early adopters are always going to be the ones that truly benefit from a technology, and organizations need to get to grips with how they can use blockchain as soon as possible if they are to realize its massive potential for disruption.