Blockchain Is Set to Streamline Markets and Transform Industries
Business is built on trust. The seller needs to trust the buyer to pay for goods. The buyer needs to trust that the seller will deliver those goods, and that they have the right to sell them to begin with. Financial institutions must trust one another to settle transactions. Other examples abound. To create an environment of trust and accountability among organizations around the world, a vast network of intermediaries has sprung up. Navigating that trust network for each transaction takes time, costs money and can still leave some uncertainty of the other party.
What if a better solution that was comprehensive, transparent, immutable and available to all existed? Some believe it already exists, and its name is blockchain. “It can enable individuals or businesses to move, store and manage anything of value (e.g., money, financial assets, titles and deeds, properties, votes in an election), and they can do it peer to peer, securely and privately,” says Alex Tapscott, CEO and founder of Northwest Passage Ventures, and co-author of “Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World.”
“By driving transaction cost down between all parties and businesses, [blockchain is] going to have an impact on every industry. That means if you’re a business leader inside of an institution, you need to pay attention to this.”
—Alex Tapscott, CEO and founder of Northwest Passage Ventures
According to Tapscott, the development of blockchain is taking us from the internet of information to the internet of value. “By driving transaction cost down between all parties and businesses, it’s going to have an impact on every industry. That means if you’re a business leader inside of an institution, you need to pay attention to this.”
Blockchain 101
Initially developed to enable the cryptocurrency bitcoin, blockchain is an immutable electronic ledger that’s distributed across multiple devices. It’s specifically not a distributed database, which resides in one or more discrete locations. Although multiple users may have access, the database needs someone to own and maintain it. Also, notably, data can be written, changed and erased at any time without record.
In contrast, a blockchain is a decentralized construct. It consists of a chronological sequence (chain) of transactions (grouped into blocks) that are stored and updated on all of the devices in the blockchain. Using a cryptographic technique known as hashing, the software generates a unique identifier for each block based on its contents. This hash is then incorporated into the code that links that block to the next block, so that this identifier becomes a part of the blockchain. If the contents or order of the blocks are altered in any way, the hashes change.
This is important because before a device can access or write to the blockchain, it must demonstrate to the other devices on the blockchain that it has the correct hashes. If a device is trying to access the ledger without authorization, or if it’s trying to make illegal modifications to blocks in the chain, those activities will be detected.
The technology can detect and stop attempts at hacking and fraudulent entries. Just as important, it ensures that every device in the blockchain maintains a complete record of every transaction. This makes the process both transparent and comprehensive.
For an example of blockchain’s potential power, look no further than IBM Global Finance, which is a $44 billion business. At any given time, roughly $100 million in capital is tied up in disputes. Frequently, those disputes are over the digital equivalent of bookkeeping errors among divisions of the company. They are typically resolved, but the process takes an average of 40 days. In the meantime, the capital is parked rather than creating business value.
As a demonstration, the team built a blockchain to mirror the global financing transactions and applied it to dispute resolution. “[The blockchain] went live Sept. 6, and in three months we had reduced average dispute time from 40 days to 10 days, and reduced the amount of capital tied up by 40 percent,” says Brigid McDermott, vice president of business development for blockchain, IBM. “Blockchain is a fundamentally different technology that I truly believe is going to let people think about businesses and industries totally differently.”
The Shipping News
International trade requires an extensive network of intermediaries to build trust. According to a 2014 study by Maersk, for example, a shipment of refrigerated goods routed from East Africa to Europe required almost 30 intermediaries and over 200 communications before it reached its destination (ibm.co/2nHMapC). Despite all of those interactions, it’s frequently difficult to know exactly where the goods in a given shipment are at any one time, or even if they are the right goods. According to the Grocery Manufacturers Association (tinyurl.com/hdsdlh2), global supply-chain fraud in the food industry alone costs between $10 billion and $15 billion annually.
The solution is to swap out all of those intermediaries for a shipping and supply-chain blockchain, an effort now underway. The immutable ledger would involve the entire supply chain so that the origin, status, processing, shipping and location of any particular item is always known by every member. Suddenly, not just the shipping process but the supply chain itself becomes transparent. This blockchain could largely eliminate fraud by introducing complete transparency from start to finish.
“You could use the technology to identify the provenance of something, from its point of origin in a mine or a factory through different points of entry, different ports, different customs officials, etc.,” Tapscott notes. “You can know that you’re receiving what you initially ordered, that it came from where you thought it was coming from and that what you’re receiving has arrived in a legal way.”
The value of the blockchain approach lies in the fact that it’s not just transparent across an ecosystem but can create better vertical integration. Current approaches to supply-chain management only deal with a subset of the data. “You have the information generally from your business but you don’t necessarily have the information from all the players in the supply chain because they’re each dealing with multiple vendors and suppliers,” McDermott says. “If everybody had a complete view, they could do a better job of optimizing how supply chains work, and that would eliminate a lot of inefficiencies.”
Removing Real Estate Risk
For another example, look to the real estate market. The title industry exists to ensure that a property title is clear before an asset is sold. If a real estate blockchain is established, it could contain full chain-of-ownership information for any property included, and make that data immediately accessible to any device on the blockchain. Over time, it could conceivably eliminate the need for title insurance.
The model can be extended into the mortgage business. From a banking standpoint, writing mortgages is an exercise in risk management. Much of that risk consists of an applicant’s ability to repay, but some of it is also based on the accuracy of the information itself. If a blockchain for banking connects with one for business and government, the process of writing and qualifying for a mortgage becomes easier and cheaper. Full information from salary to bank balance to home address is all available, not just as a one-time snapshot pulled from disparate sources but as an unbroken history harvested from a single location in near-real-time.
“If you have a blockchain that tracks back source data, then you suddenly have the ability to be much more specific about how much of the risk is actually due to the probability that this person will repay and how much of it is just noise,” McDermott notes. “A big part of what blockchain does is take away the need for these intermediaries that create trust and allow that trust to happen in a much cheaper, faster and cleaner way.”
Energy, Transformed
Blockchain technology presents a number of future possibilities for revamping the energy industry, as outlined by Frost & Sullivan (bit.ly/2nhxSfi). The capability to establish trust and facilitate transactions among members of a distributed ledger opens the way to decentralized energy generation. Individual homeowners with solar arrays could sell power back to the grid or to other users in a trustworthy way. The transparency of blockchain simplifies the award and distribution of renewable-energy credits. The technology even streamlines collecting and managing data from industrial Internet of Things nodes. All three of these approaches have the potential to increase the efficiency of energy operations and reduce costs, while introducing new business models.
Platform Matters
In order for blockchain to deliver on its promise, it must be available in enterprise-grade form. According to IBM, that means starting with a highly secure implementation allowing levels of permissioning. (Read about how IBM is creating extra layers of security for blockchain ledger technology on the z Systems* platform in “Added Security,”.) It should be based on an open standard so that individual blockchains are interoperable. But it should also be open source because the scale of the problem is too large for any one company to address effectively. Lastly, an enterprise-grade version needs open governance, so that the rules guiding the development and maintenance of the code are consensus-driven and not established by a single individual or entity.
In support of this goal, IBM is making a significant commitment to the development of an enterprise-grade blockchain platform, as well as industry-specific applications (see “The Hyperledger Project,”). These are important initiatives, Tapscott says. “Seeing companies like IBM step up and move into the space is incredibly exciting because they know a lot about what it takes to run massively complicated systems for big mission-critical industries and infrastructure.”
An enterprise-ready platform is the final element of an enterprise-grade blockchain. That means it must be resilient, secure, and scalable, the key characteristics of z Systems. “Fundamentally, blockchain is about transactions,” McDermott says. “You want to use the transaction expertise that IBM has developed over decades, and the reason you want to use it is because of scalability, security, reliability. All of these things are really important to running a business in a responsible way.”
Start Now
Blockchain has been hailed as the second generation of the internet. As with the first generation, benefiting from the disruptive technology requires recognizing the opportunity and acting on it early. Organizations need to consider how blockchain can change their mission and how they execute it. “How does it change the world of supply chain? How does it change the world of finance? How does it change the inside of each company?” Tapscott inquires. “Those are issues that CxOs, especially in IT, need to really think about.”
As to how to get started, the first steps are straightforward, he says. Get educated on the technology. Next, launch an internal pilot project to explore it further. After that, hire a transition team of IT talent inside the enterprise and focus on developing blockchain strategies.
The key takeaway is to avoid delay, Tapscott says. “The most important piece is to start now rather than to wait. The preconditions for this to happen are there, so it’s likely it will happen faster than previous transformations. What’s really important is that you have a technology strategy in the enterprise that allows you to harness this new disruptive trend.”