Blockchain is being billed as a technology that will improve visibility, productivity and security for business. In fact, some have gone as far to say that its system for record-keeping, transparency and verification could replace the role of trust in our society.
A global realisation has emerged that the technology can bring new efficiencies to commerce and profoundly change how the world conducts business and interacts with governments. The advent of blockchain is fuelling a huge number of start-up companies focused on specific industries and consumer applications and governments are considering how blockchain can make tax reporting easier while reducing fraud.
The technology explained
Invented to support Bitcoin, blockchain is a digital version of a classic ledger book, holding a list of transactions or events people want to track. The most important and disruptive feature of blockchain is that it’s a distributed ledger—multiple parties have a copy of the entire ledger. That means many kinds of business transactions can be decentralised, eliminating the cost, complexity, and slowness of involving trusted intermediaries. Smart contracts provide new ways to automate complex, multi-party business transactions which reduce costs and increase the velocity of business.
What makes blockchains so appealing is that they are very secure and multiple parties can possess reliably synchronised copies. Blockchains are append-only data structures, which means that entries can only be added at the end of the list. Once added, entries are immutable and cannot be changed or deleted without corrupting the chain. Each entry in a blockchain is digitally signed by whomever creates the entry, and the entire blockchain is also digitally signed to make tampering easily detectable.
Blockchains are a reliable and authoritative record of events, financial or otherwise. No single person or company controls access to the data because any participant can have their own copy. Transactions are guaranteed never to change and their source cannot be repudiated. A blockchain can consist of many replicas of the same data, which enables each party to have an up to date copy of the data. A new block appended to one replica is eventually copied to every other replica.
Along with financial transactions, blockchains can hold code which is triggered automatically when new blocks are added to the chain. This practice is called a smart contract, because these code blocks are typically used to enforce rules or execute actions dictated by legal contracts. For example, a rule to release payment when and only if all goods ordered have been signed as delivered, can be encoded into the blockchain rather than relying on a user to monitor the order and send payment. Smart contracts can also be used to propagate data from one blockchain to another (beyond any replicas) thus creating a business ecosystem automated and secured by a collection of blockchains.
Key points to consider prior to adopting blockchain
Despite being in the news for several years as the technology driving Bitcoin, blockchain for commercial use is still very new. Much of the commercial uptake is still in the proof of concept (or start-up) stage.
There are four areas to consider when deciding if your business is ready for blockchain in 2018.
1) Do you need standardised technology? Blockchain works as an application programming interface (API), which means standards need to be developed before there is widespread adoption. There are multiple groups working on standards, including Hyperledger and the Ethereum Alliance Framework. However, Gartner expects the industry to stabilise in 2018 with 75 commercial blockchain platforms before consolidating to about five platforms in 2019 (source: “The Evolving Landscape of Blockchain Technology Platforms.”)
2) Do you need more robust technology? While blockchain is conceptually simple, the underlying technology encompasses some difficult technology challenges. This is especially true for the distributed capabilities of blockchain which allow each party to have their own writeable copy of the same historical record. An entry written to one replica will eventually arrive at the other replicas, which then have to collaborate and decide if the new entry is valid. This can be harder than it sounds to facilitate.
3) Is the technology secure enough for you? Whilst in general, blockchain is considered a step forward for securing transactions, like most things in computing, security is not inherent. Blockchain uses public key encryption, hashing, and digital signatures, and other mechanisms which are well known, but not always administered correctly. Missteps in securing a blockchain, or simple bugs in the platforms, can cause serious disruption. For example, on November 6th, 2017, $280M in assets were accidentally (and temporarily) frozen in a blockchain managed by Parity Technologies due to a bug in the underlying platform.
4) Will blockchain affect your compliancy? As is often the case for new technologies, there are policy issues to be worked out. For example, if a blockchain is immutable, how can the “right to be forgotten”, a mandatory requirement in the EU’s General Data Protection Regulation (GDPR), be applied? There are also concerns that individuals making property transfers or declaring wills on a permissionless blockchain conflicts with how existing institutions manage public records. These anomalies still need to be ironed out.
There is no doubt that blockchain is a disruptive technology which has the potential to transform industries. However, despite recent momentum, it is a technology that isn’t (yet) particularly easy to use for many businesses. The potential risks of being a blockchain pioneer are higher than other technology adoption waves because blockchains typically apply to monetary transactions as well as transactions carrying fiduciary responsibilities.
In years to come, flexible businesses, and those with modern enterprise resource planning (ERP) solutions in place, will be in a better position to take advantage of blockchain technology and adapt faster. As a technology that provides components needed to achieve business growth, it is worth paying close attention to. In my view, blockchain in some form appears to be in everyone’s future, even if it’s not just yet.
Erik Johnson, chief architect, Epicor Software
Image Credit: Zapp2Photo / Shutterstock