Blockchain

Blockchain as a Business Model

Technology has transformed how we work, play and do business. It has provided new solutions to old problems, disrupted traditional business models, and helped us become more efficient. The speed and scale of this change is not abating. New developments are still being introduced and applied.  According to a new study by Accenture, optimizing the use of digital skills and technologies could generate $2 trillion of additional global economic output by 2020, and it’s calculated that an optimal combination of improvements to digital skills, capital, and other accelerators could lift U.S. GDP by an even greater $421 billion by 2020, representing a 2.1 percent boost.

This growth will be underpinned by new technologies. One of these is distributed ledger technology and its most common application – Blockchain. The World Economic Forum lists Blockchain as one of the top ten emerging technologies of 2016.

Today, there is an opportunity for traditional incumbents to more aggressively pursue Blockchain as an answer to current pain points. Blockchain provides a solution where none existed before: a highly scalable system of record that is nearly invulnerable to attack, provides unmatched data fidelity and is relatively low cost to implement. By optimizing digital investments with blockchain based solutions, organizations can deliver more competitive, efficient, and secure systems.

Benefits of Blockchain

Security

Blockchain has tremendous potential for securing digital infrastructure, protecting against economic losses, cyber attacks, and threats.  Think back to the 2013 breach of Target’s data, or the Equifax hack during 2017.  These companies operate a traditional centralized ledger system, which exposes a single highly valuable target for attack.  Could these attacks have been mitigated if these organizations operated a distributed infrastructure, one that relied on consensus rather than explicit trust?

The March 2018 United States Joint Economic Committee Report states that Blockchain is “not only nearly invulnerable to cyberattack but is revolutionizing the way the world conducts commerce and shares information.”  Blockchain breaks with the traditional security model assumptions: first, Blockchains are trustless; they assume compromise by both insiders and outsiders. Second, Blockchains are transparently secure; they do not rely on failure-prone secrets, but rather on a cryptographic data structure that provides a secure foundation on which to add additional security protocols. Finally, Blockchains are fault tolerant; they use algorithmic consensus mechanisms to align the efforts of honest nodes to reject those that are dishonest.

In most cases, system-wide attacks cannot be considered impossible. But because Blockchain data is distributed to nodes out of the control of the attacker, the attacker would not be able to destroy the evidence pertaining to the state of the Blockchain before the attack. The snapshot of the Blockchain before the attack could still be accessed by clients and independently verified as authentic.

For instance, in a centralized network, outer nodes are reliant on a central node (the source of truth) for network integrity. Thus, if the central node is compromised the network as a whole is vulnerable to compromise. At the other end of the spectrum is the distributed network, where each node is functionally independent of any other node. As a result, the compromise of individual distributed nodes does not necessarily compromise the network as a whole.

Supply Chain & Logistics

One of the advantages of Blockchain solutions is they provide secure remote and transparent monitoring of transactions. Not only is real-time state-of-network analysis a feature, it also facilitates time-traveling to the state of transactions at any point in the past. High fidelity auditing is built in. Aside from that, it can also be used to monitor costs, labor and even emission control at every point of the supply chain. Blockchain’s unique distributed ledger system can be used to verify the authenticity or the trade status of products by thoroughly tracking them from their origin without ever having to explicitly trust any one node in the network.

Maersk, the world’s largest shipping company, completed its first test of Blockchain technology in March 2017, looking at how it could help manage its cargo. In the test, Maersk, Dutch customs, and US Homeland Security were all able to remotely access data about the cargo, suggesting the technology may help streamline and secure international shipping.

Elsewhere, the retail industry appears most focused on supply chain use cases related to Blockchain technology.  Most notably, Walmart is trialing the use of Blockchain to track the movement and origins of pork in China.  After scanning the product with a proprietary mobile app, employees can see which farm the pork came from and where it’s stored in the backroom. The technology could help customers understand where their food originates and expedite the restocking process.

Time & Cost Reduction

There are several key costs that can be reduced with the implementation of Blockchain.  The ability to securely record and time-stamp information on a Blockchain is extremely valuable when issues arise with a transaction.  With traditional systems, often resources are invested to audit the transaction and assess the truth; in the future, these tasks will be automated thanks to a distributed ledger. Settlements and reconciliation across the organization will be simpler and more efficient, shaving operational costs while keeping the rest of the ecosystem intact.  Distributed ledgers, on their own, do not challenge existing revenue models and regulatory frameworks; in fact, they may even allow incumbents to achieve greater economies of scale.

A second cost that can be reduced is the cost of networking.  While distributed ledgers allow for organizations to keep most of their processes in place, cryptocurrencies, such as bitcoin, play a key role when it comes to value generation and appropriation.  Bitcoin is a popular implementation of a technology on a blockchain; it is a type of digital currency that was launched with the intention to bypass government currency controls and simplify online transactions by getting rid of third-party payment processing intermediaries. Of course, there has to be a secure way to make transactions with cryptocurrency. Bitcoin transactions are stored and transferred using a distributed ledger on a peer-to-peer network that is open, public and anonymous. Blockchain is the underpinning technology that maintains the Bitcoin transaction ledger.

Bitcoin alleviates the capital and labor-intensive work of creating and maintaining a secure network, as well as the use of intermediaries because it is extremely efficient at automating value transfer.  Where secure financial platforms such as ACH have to invest in “trusted nodes” to validate transactions, Bitcoin uses a mix of cryptography and game theory to deliver the same results.  Gone are the accounting, reconciliation, and security costs associated with ensuring that a rogue employee or financial institution did not tamper with the transaction. The integrity of the underlying data is not guaranteed by an intermediary but by the design of the system itself. This is the inherent innovation associated with cryptocurrencies and constitutes both an opportunity and a threat to existing business models.

For IBM, Blockchain is used internally by its Global Financing arm to resolve contract disputes between partners on the network. IBM estimates that each year, of its 2.9 million transactions, an average of 25,000 results in disputes. These disputes typically tie up around $100 million in capital. With the Blockchain solution, data that is provided by participants in the network is combined to create a consolidated and detailed view of transactions, while strong privacy and confidentiality controls ensure that parties can only access the data they need to. This has significantly reduced the number of disputes, as well as the time taken to resolve them.

Public and Private Blockchains

As companies move to adopt Blockchain, the security and privacy of data remain a paramount concern. Whereas a public Blockchain network is completely open and anyone can join and participate in the network,  a private Blockchain network requires an invitation and must be validated by either the architect or by a set of rules put in place by the network administrator. Businesses who set up a private Blockchain will generally deploy a permissioned network. This places restrictions on who is allowed to participate in the network, and only in certain transactions based on their security level. Once an entity has joined the network, it will play a role in maintaining the Blockchain in a decentralized manner.

Hyperledger Fabric is an example of a permissioned Blockchain framework implementation; It has been designed from the ground up to cater to these specific requirements. Hyperledger Fabric takes a novel approach to Blockchain transactions by separating the process of executing smart contracts from the process of updating the ledger, making it possible to improve transaction throughout, support more granular privacy controls, and implement more flexible and powerful smart contracts.

In general, companies are favoring private Blockchain implementations as they construct proofs of concept and pilots. The logic of this is easily discernible: closed-wall ecosystems have the appearance of greater security, especially when confronting the unknown.  While proponents of public infrastructure networks such as Bitcoin, Ethereum, and others sometimes do not see value in these experiments since they do not materially add to the transaction volume or overall immediate usage of the public network, this may be short-sighted.  One thing that Blockchains do extremely well is allowing entities who do not explicitly trust one another to collaborate in a meaningful way.  Public Blockchains can already make this claim; however, they currently fall short of particular requirements such as privacy and scalability. Private Blockchains can provide solutions for these shortfalls and enable greater privacy and transaction throughput because all the nodes are strictly controlled. However, there is a trade-off – they do so at the cost of their ability to connect any and all to the network. Still, for any organizations seeking to move to Blockchain, starting with a permissioned Blockchain network (private) can be highly beneficial to support specific business needs.  Long-term, organizations should seek interoperability standards between their private Blockchain and public networks, resulting in a much stronger ecosystem overall.

Distributed Ledger Technology in Modern Industry

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don't let yourself be lulled into inaction.
Bill Gates, The Road Ahead

Numerous industries are in the process of implementing Blockchain as part of their business processes.  Outlier Ventures, an early-stage U.K.-based venture firm, curates a corporate research tracker that describes Blockchain activity at about 285 companies. It counts roughly 140 companies conducting PoCs (Proof of Concepts), from ABN Amro to Wells Fargo. It also lists about 15 companies that have applied for patents related to Blockchain technology, including Amazon, Boeing, IBM, and Western Union.

Companies have also been signaling interest in Blockchain technology through strategic investments and acquisitions. In 2016 and 2017, AirBnB, Daimler, Rakuten, and several others acquired Blockchain-related startups, while the investment arms of Jaguar Land Rover, JetBlue, Verizon, and others made Blockchain-related strategic investments.

Financial services appears the closest to production-ready implementation; the Vanguard Group announced the intention to implement Blockchain in 2018 after successful research and pilots.

Going forward in the future, many industries have great potential to benefit from Blockchain technology.  A big benefactor of Blockchain technology would be the healthcare sector. Healthcare institutions are presently suffering from an inability to share data securely across platforms. Blockchain technology could allow hospitals, payers, patients and other parties in the healthcare value chain to share access to their networks compromising on the data security and integrity.

Real estate Blockchain applications can help in recording, tracking, transferring of land titles, property deeds and even ensure that all the documents are accurate and verifiable.  Blockchain offers a distinct method to reduce the need for paper-based record keeping and speed up the transactions, thus assisting the stakeholders to improve the efficiency and help in reduction of transaction costs at all sides of the transaction.

In the banking sector, since Blockchain uses a secure and tamper-proof ledger, it could serve the same function by injecting enhanced accuracy and information sharing into the financial services ecosystem. It can be modified to provide financial services to billions of people around the world, including to those who are living in third world countries who don’t have any access to a traditional form of banking.  In a related sector, companies have been working for years to ease the process of selling, buying, and trading stocks. But with Blockchain, it is possible to automate and secure the entire process more efficiently than any other past solutions.

As more and more industries are adopting Blockchain technology, companies which are more specialized in areas of research, analysis, and consulting are also being disrupted by this technology. Forecasting operations will have a strong foundation for using machine-generated algorithms to inculcate targeted predictions and insights.

In education, there are strict regulations that the present day educational institutions follow in order to be universally accepted and verified. Despite the progress made in recent years, verification of academic credentials still remains largely a manual endeavor. Engaging Blockchain solutions in academia could help streamline the verification process, thereby reducing fraudulent claims of un-earned educational credits.

Watch This Space

Blockchain has received increased interest in recent years due to its versatile, transparent, highly secured architecture. As the market becomes more competitive, Blockchain is going to have a significant impact across all industries. Processes across the entire workflow will need to become more efficient and secure if industries wish to continue forward into the digital age. Major players in the economy have already begun their development of blockchain applications-IBM benefits from cost reduction and fraud minimization; Maersk has implemented blockchain into its logistics and has made their shipping and tracking processes more efficient.  Companies will need to begin their research on blockchain today, and ascertain when private versus public blockchain makes sound business sense. Where there is an unmet need for veracity, transparency, and disintermediation, blockchain should be considered as a potential solution, be it as a means of operational simplification or fraud minimization, of collaboration across the supply chain, in concert with other technologies to create new business models, or in ways that fit an organization’s specific needs; its potential is significant and should not be ignored.

Convective engineers and develops blockchain solutions for government and enterprise clients. Learn more.

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