Aspire Thought Leadership! Ever wondered about benefits of blockchain technology?. Find out more on what has changed with benefits of blockchain techn
The sudden doubling in the price of Bitcoin in just two months in 2017, sparked a cryptocurrency gold rush. Bitcoin, Ethereum, and other alt-coins also soared giving them a collective market value of over $80 billion. Lets explore the benefits of blockchain technology in this post
While the public, permissionless incarnations of blockchain technology may spark virtual tulip mania, the experiments with private, permissioned blockchains have also taken off. Sometimes the two have become cyclical, each riding the crest of other’s wave. Cryptocurrencies of all types rely on the process of mining to unlock units of currency for transactions and online exchanges but may require gargantuan computing hardware setups working around the clock to beat other miners.
While the public, permissionless incarnations of blockchain technology may spark virtual tulip mania, the experiments with private, permissioned blockchains have also taken off. Sometimes the two have become cyclical, each riding the crest of other’s wave. Cryptocurrencies of all types rely on the process of mining to unlock units of currency for transactions and online exchanges but may require gargantuan computing hardware setups working around the clock to beat other miners.
However, blockchain in the business context is different. The term ‘distributed ledger technology’ is being used to distance the term blockchain from Bitcoin.
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| Benefits of Blockchain Technology |
In this post, I establish the business context and lay the groundwork for a deeper dive into the technology. I will start by defining blockchain for enterprise, the changes it causes to basic business processes, benefits, hurdles, potential areas of disintermediation, and disruption.
Each new transaction updates the ledger. However, instead of an overwriting an old record that denotes a transaction, a new entry is added into the ledger and the blockchain protocol shares transaction information with all nodes using a peer-to-peer protocol. This ensures each of the nodes maintains a database of all historical, valid transactions.
It groups transactions into blocks, and each block references the previous block of transactions achieving a temporal ordering of transactions. The network selects a leader node at random, and determines the specific order of transactions based on the consensus algorithm.
It uses complex data structures such as Merkle trees to store all transactions in a way that any change to a historical transaction in a single node results in invalidate states if one node would recalculate the current state from all historical transactions.
The blockchain network ignores any transactions considered invalid by other nodes in the network, and various forms of throttling or penalties to nodes that propose invalid transactions consistently.
Most blockchain implementations have support for a scripting code to execute business logic triggered by a transaction called smart contracts.
Validation —The nodes taking part in the transaction validate that every transaction in the new candidate block for addition to the blockchain is legitimate. The blockchain network may also nominate one or more nodes not taking part in the transaction to validate the block contents.
Broadcast & Consensus —This process enables the validating nodes to reach a consistent view of the new entry in the distributed ledger and broadcast the information about the new block to all other nodes.
The market created by a business network can be open (for example, fruit market, or an open-outcry commodities market) or closed (business supply chain financing, or bond market).
Interactions between parties in a business network create transactions, which record the exchange of an asset. Anything capable of being owned or controlled to produce value and has a positive economic value is an asset. Further, assets may be tangible (such as a house) or intangible (a mortgage on the house).
Technology innovations have helped overcome distance and address inefficiencies in the era of modern capitalism. Introducing the Telegraph in 1837 had a direct impact on businesses, starting with the railways and expanding to the transport of goods and materials. Faster transports such as steamships and railways moved goods faster and cheaper. The subsequent introduction of telephony in 1876 developed city centers, office buildings and the concept of an urban worker society.
Throughout this technological advancement, one thing remained constant— the use of double entry bookkeeping in a principal book, known as a ledger. The invention by Luca Pacioli, a Franciscan friar in late 1400s, has remained in use today. A Ledger is THE system of record for a business and records asset transfer between participants that affect the business. Businesses today will have multiple ledgers for multiple business networks in which they take part. The ledger records all transactions, and the basic concepts have remained unchanged since its invention.
Today’s asset transfer process can be inefficient, expensive and vulnerable since each party on the network maintains its ledger. Information sharing is at a minimum, and while the parties may engage in transactions, they use middlemen (such as banks, or regulatory bodies) to establish trust. The middlemen may view portions of each party’s ledger to ensure regulatory compliance.
Permissioned blockchain technologies share a ledger across the business network. The network will be closed (accessible only by the parties concerned), private (so only allowed participants can join), and requires permissions (to ensure that participants only see what they may view).
The business network participants will be the same - disintermediation is not a natural consequence of blockchain usage. The shared ledger is resistant to failures since it is replicated & distributed. There will be a consensus across the network where the provenance of information is clear and transparent. Transactions will be immutable (unchangeable) and final.
It is this shared, replicated ledger that provides trust “digitally” by providing a mechanism for the participants in the network to arrive at a consensus, and usage of cryptographic algorithms to achieve the immutability of transactions (or ‘records’) once written on to the blockchain. Blockchain shifts the paradigm from information held by a single owner to the life history of an asset or transaction. Instead of messaging-based communications, the new paradigm is state-based: Information that was once obscure now becomes transparent.
Each node has an owner, maintains a local copy of the ledger, has a digital certificate that holds permissions for that node to join the business network and enables the node to issue transactions.
A blockchain is a continuously growing list of data records organized into a series of blocks. Each block contains a batch of transactions. Each block has a timestamp and a reference to the previous block.
Transactions include information about the asset transfer, the identity of the involved parties, and metadata such as transaction time, asset value, and contractual clauses.
Blockchain uses one-way cryptographic hashing to guarantee the integrity of data, encryption to guarantee data confidentiality, and digital signatures to ensure the authenticity of the sender of transaction data.
The users of the blockchain submit a transaction (via their node). A user signs the transaction with their digital signature (i.e., ‘private key’) and includes the address of the receiver (i.e., receiver’s ‘public key’).
A block has one or more transactions. Before adding a block to the chain, the ledger network validates it through an iterative process that requires consensus from a majority of the members. The network may elect one or more nodes as consensus leaders, which ensure that they follow the network rules. The network arrives at consensus through different methods (such as, ‘proof of work’ or ‘proof of stake’).
The blockchain technology codifies network rules as ‘smart contracts’. After validating all the transactions in a block, it executes the transactions, and broadcasts the updated state of the ledger to the network. All nodes update their local copies to reflect the change of state.
As the blockchain maintains the history of all transactions, it grows with transactions.
A transaction inherits essential attributes upon initiation, such as the time of creation, information about the seller and buyer involved in it (i.e., where do the inputs come from, and where to deliver the outputs). Users rely on these attributes to perform related actions (e.g., the seller may ship the goods once the buyer transfers funds). Some of these actions take place for every transaction (e.g., settlement), while future events may trigger other actions. An interesting subset of future events is those that require additional verification. For example, a problem with the transaction may emerge, and original attributes may require re-verification via an audit. The audit is often costly as it may require a third-parties to mediate between buyer and seller.
Blockchain technology changes this flow by allowing for costless verification of all the attributes when a problem emerges since it stores all transaction attributes (e.g., the time-stamp of a transaction, digital “fingerprints” of the individuals, goods or services involved). Blockchain technology may even deliver ‘sousveillance’—an audit embedded in the marketplace itself.
Guardtime is an Estonian startup which uses blockchain enables to ensure the integrity of enterprise networks, prevent loss of critical digital assets and track data securely throughout the supply chain. The Holbertson School, a California-based software skills program, announced it would use blockchain technology to authenticate academic certificates to ensure that students claiming they passed courses at the Holbertson School aren’t using accreditation they didn’t earn. Visa and DocuSign unveiled a partnership in 2015 that used blockchain to build a proof-of-concept for streamlining car leasing, and making it into a “click, sign, and drive” process. Startups such as PeerTracks and Ujo Music have emerged, who aim to use smart contracts to let artists sell directly to fans without going through a record label, track rights owners, and automates royalty payments using smart contracts and cryptocurrency, respectively.
Types of Blockchain technology
The blockchain technologies are of the following categories:- Public Blockchain : A public blockchain is one anyone in the world can read and access. And anyone with a valid node can make transactions and check transaction validity. Any individual or organization can be a part of the process for determining addition of new blocks to the chain. Participants do not need permission from any authority to join the network. Participants are unknown to each other and trust emerges from game-theory incentives, which often involve spending physical resources such as computing power. Public blockchain are censorship resistant, may have reversals possible (contradictory to their original intent), and are suitable only for on-chain assets. Bitcoin, Ethereum, and Ripple are examples of public blockchain.
- Private Blockchain : If members know the identity of others in the network and can trust them to act honorably most of the time, there is no need to introduce artificial incentives to ensure co-operation. On an aggregate level, the lack of the need to spend physical resources makes the network much faster, more flexible and more important, much more efficient. Such blockchain networks have a central organization to assign permissions and the members may have varying levels of read and write access. Traditional security techniques may further secure private blockchain such as integration with Certificate Authority, and the use of public/private keys to enable fine grained privacy for the data written on the blockchain. Private blockchains are more attractive to business to recreate their existing networks or create new networks for fulfilling business requirements. Also known as Distributed Ledger Technology (DLT), private blockchains can host off-chain assets due to their authenticated, permissioned approach to validation. In this capability, permissioned blockchain has legally-accountable transaction validators, have settlement finality (no reversals) and are suitable for integrating with off-chain assets such as securities, fiat currency, and ownership titles. Examples of private blockchain are Hyperledger Fabric and Multichain.
- Consortium Blockchain : Consortium blockchains are where several entities within an industry vertical such as banking, healthcare, or utilities, come together to form an blockchain industry network, and are partly-private. Members of a consortium blockchain share the capabilities of private blockchains, providing greater decentralization yet provide the same benefits affiliated with private blockchain such as transaction privacy and efficiency. One aim of consortium blockchains is encouraging organizations in that industry to come together for technology trials, shared investments, and enablement of new services. Examples of consortium are R3, Corda, and B3i.
Blockchain System Concepts
What is blockchain? Blockchain can serve as a distributed ledger technology where paricipants’ identity is known. Such a ledger may record a wide range of items, such as asset ownership, asset transfer transactions, and contract agreements. Some participants may exhibit byzantine behavior but most act with honesty, enabling the network to achieve consensus with relative efficiency and expediency. The nodes are computers of the participants, each with a local copy of the ledger containing a full record of all transactions.Each new transaction updates the ledger. However, instead of an overwriting an old record that denotes a transaction, a new entry is added into the ledger and the blockchain protocol shares transaction information with all nodes using a peer-to-peer protocol. This ensures each of the nodes maintains a database of all historical, valid transactions.
It groups transactions into blocks, and each block references the previous block of transactions achieving a temporal ordering of transactions. The network selects a leader node at random, and determines the specific order of transactions based on the consensus algorithm.
It uses complex data structures such as Merkle trees to store all transactions in a way that any change to a historical transaction in a single node results in invalidate states if one node would recalculate the current state from all historical transactions.
The blockchain network ignores any transactions considered invalid by other nodes in the network, and various forms of throttling or penalties to nodes that propose invalid transactions consistently.
Most blockchain implementations have support for a scripting code to execute business logic triggered by a transaction called smart contracts.
Updates to distributed ledger
When there is no central trusted party, the process of updating the ledger relies on a process of achieving consensus among the nodes for all new information added to the ledger. There are two parts to achieve consensus:Validation —The nodes taking part in the transaction validate that every transaction in the new candidate block for addition to the blockchain is legitimate. The blockchain network may also nominate one or more nodes not taking part in the transaction to validate the block contents.
Broadcast & Consensus —This process enables the validating nodes to reach a consistent view of the new entry in the distributed ledger and broadcast the information about the new block to all other nodes.
What is blockchain in business?
Businesses don’t exist in isolation. They exist in a network connected to customers, suppliers, and partners, and operate across geographic & regulatory boundaries in a logical business network. This business network is not static over time and will morph upon business acquisitions & mergers, introducing new products and services (which may create new consumers and suppliers), and technological changes. This interchange of goods and services across a business network creates a market. Global trade across a business network has generated wealth for centuries, measured as the sum of flow of goods and services across a business network. If business networks are fragment or inefficient, they constrain the growth of wealth. As Adam Smith noted, ‘market friction is the ability of capital, labor, and technology to move forward to create economic success.’The market created by a business network can be open (for example, fruit market, or an open-outcry commodities market) or closed (business supply chain financing, or bond market).
Interactions between parties in a business network create transactions, which record the exchange of an asset. Anything capable of being owned or controlled to produce value and has a positive economic value is an asset. Further, assets may be tangible (such as a house) or intangible (a mortgage on the house).
Technology innovations have helped overcome distance and address inefficiencies in the era of modern capitalism. Introducing the Telegraph in 1837 had a direct impact on businesses, starting with the railways and expanding to the transport of goods and materials. Faster transports such as steamships and railways moved goods faster and cheaper. The subsequent introduction of telephony in 1876 developed city centers, office buildings and the concept of an urban worker society.
Throughout this technological advancement, one thing remained constant— the use of double entry bookkeeping in a principal book, known as a ledger. The invention by Luca Pacioli, a Franciscan friar in late 1400s, has remained in use today. A Ledger is THE system of record for a business and records asset transfer between participants that affect the business. Businesses today will have multiple ledgers for multiple business networks in which they take part. The ledger records all transactions, and the basic concepts have remained unchanged since its invention.
Today’s asset transfer process can be inefficient, expensive and vulnerable since each party on the network maintains its ledger. Information sharing is at a minimum, and while the parties may engage in transactions, they use middlemen (such as banks, or regulatory bodies) to establish trust. The middlemen may view portions of each party’s ledger to ensure regulatory compliance.
Permissioned blockchain technologies share a ledger across the business network. The network will be closed (accessible only by the parties concerned), private (so only allowed participants can join), and requires permissions (to ensure that participants only see what they may view).
The business network participants will be the same - disintermediation is not a natural consequence of blockchain usage. The shared ledger is resistant to failures since it is replicated & distributed. There will be a consensus across the network where the provenance of information is clear and transparent. Transactions will be immutable (unchangeable) and final.
It is this shared, replicated ledger that provides trust “digitally” by providing a mechanism for the participants in the network to arrive at a consensus, and usage of cryptographic algorithms to achieve the immutability of transactions (or ‘records’) once written on to the blockchain. Blockchain shifts the paradigm from information held by a single owner to the life history of an asset or transaction. Instead of messaging-based communications, the new paradigm is state-based: Information that was once obscure now becomes transparent.
The characteristics of blockchain for business are:
- Shared Ledger : The shared ledger records all transactions across the business network. It is the is the system of record, the single source of truth. All participants in the network share the same copy of the ledger through replication over a peer-to-peer network. The ledger is permissioned, so participants see only those transactions they’re allowed to view. Participants have identities which link them to transactions on the ledger, but they can select which aspects of transaction information other participants can view. Most modern databases store the world state of the data and keep the logs of transactions with the database as a separate “thing.” Blockchain clients build the world state of the data from the blocks of authenticated transactions that are “chained” together. Thus, it is always possible to tell if something is valid, as it must have come from a validated history, and everyone agrees on the sequence of historical records.
- Privacy : With a permissioned blockchain, each participant has a unique identity, which enables the use of policies to constrain network participation and access to transaction details. Organizations can comply with data protection regulations by restricting access to known participants. Permissioned blockchains may allow participants to see only certain transactions, while they may give other participants, such as auditors access to a broader range of transactions. For example, if the Party A transfers an asset to Party B, both Party A and Party B can see the details of the transaction. Party C can see that A and B have transacted but cannot view the details of the asset transfer. If an auditor or regulator joins the network, privacy services can ensure that they see full details of all transactions on the blockchain network. Cryptographic technology — this time through the use of digital certificates — makes this possible. Just like a passport, a digital certificate provides identifying information, is forgery-resistant, and is verifiable. The blockchain network will include a certification authority who issues the digital certificate.
- Trust : The ledger is a trusted source of information. The most common mechanism used to establish trust is the use of a consensus algorithm by which a majority of the network members agree on the value of a piece of data or a proposed transaction, which then updates the ledger. Consensus algorithms allow the machines connected in a business network to work together as a group that can survive even if some members fail. Permissionless blockchain networks need cryptographic consensus to support participant anonymity and establish trust, such as the use of ‘Proof Of Work’ in Bitcoin. PoW is expensive and adds cost to preserve anonymity. However, in permissioned blockchain networks where the identity of the participants is known, other mechanisms can achieve network consensus. They use non resource-intensive consensus algorithms, ledger immutability, permissions, and a full audit trail of all assets to establish trust.
- Smart Contracts : A smart contract is a computerized protocol that executes the terms of the business contract. Smart contracts in blockchain enable encoding in computer code contractual clauses (such as collateral, bonding, and delineation of property rights) to enforce compliance of contractual terms for a successful transaction. For example, a smart contract embedded in the operating system of the car may make the car inoperable unless the user completes the proper challenge-response protocol to verify rightful ownership. Smart contracts ensure a party in a business transaction that the counterparty will fulfill the promise with certainty and reduce costs for verification and enforcement. Smart contracts in the enterprise world are smart contract code accompanied by the traditional legal contract. For example, a smart contract code on a land registry blockchain for transferring the ownership of a house may update the land registry records in real time, and all participants (such as the city, realtors, lawyers, and banks) can view the sale when it happens. However, the homebuyer will insist on the traditional, legal contract with indemnity clauses to cover any undiscovered liens. Smart contracts have many potential applications and are fueling device democracy, such as the smart washer dryer that IBM and Samsung demonstrated at CES in 2015. [application of blockchain] These transactions still require a minimum level of trust to be viable but are ill-suited for legal contracts, which are expensive and involve legal entities.
How does the blockchain work?
Each participant in the business network hosts the blockchain network on their server (whether a physical server, a virtual machine or a Docker container running on their premises or in a cloud computing environment). The nodes representing the network participants connect to one another establishing a peer-to-peer business network.Each node has an owner, maintains a local copy of the ledger, has a digital certificate that holds permissions for that node to join the business network and enables the node to issue transactions.
A blockchain is a continuously growing list of data records organized into a series of blocks. Each block contains a batch of transactions. Each block has a timestamp and a reference to the previous block.
Transactions include information about the asset transfer, the identity of the involved parties, and metadata such as transaction time, asset value, and contractual clauses.
Blockchain uses one-way cryptographic hashing to guarantee the integrity of data, encryption to guarantee data confidentiality, and digital signatures to ensure the authenticity of the sender of transaction data.
The users of the blockchain submit a transaction (via their node). A user signs the transaction with their digital signature (i.e., ‘private key’) and includes the address of the receiver (i.e., receiver’s ‘public key’).
A block has one or more transactions. Before adding a block to the chain, the ledger network validates it through an iterative process that requires consensus from a majority of the members. The network may elect one or more nodes as consensus leaders, which ensure that they follow the network rules. The network arrives at consensus through different methods (such as, ‘proof of work’ or ‘proof of stake’).
The blockchain technology codifies network rules as ‘smart contracts’. After validating all the transactions in a block, it executes the transactions, and broadcasts the updated state of the ledger to the network. All nodes update their local copies to reflect the change of state.
As the blockchain maintains the history of all transactions, it grows with transactions.
Business benefits of blockchain technology
Removes cost
Business networks exist to facilitate the exchange of assets between buyers and sellers in a business transaction, who have to verify key attributes of any transaction before execution, increasing the need for intermediation as markets scale in size and geographic reach. The intermediaries or reputation systems in business networks perform this validation, forcing additional disclosures (such as those mandated by regulation). These mechanisms introduce a cost for verifying the attributes of a transaction. Further, there may be asymmetric information between the seller and the buyer (for example, the inability of the buyer to assess the quality or provenance of goods). However, transaction verification is costless with distributed ledger technologies and opens new types of transactions, intermediation and business models.A transaction inherits essential attributes upon initiation, such as the time of creation, information about the seller and buyer involved in it (i.e., where do the inputs come from, and where to deliver the outputs). Users rely on these attributes to perform related actions (e.g., the seller may ship the goods once the buyer transfers funds). Some of these actions take place for every transaction (e.g., settlement), while future events may trigger other actions. An interesting subset of future events is those that require additional verification. For example, a problem with the transaction may emerge, and original attributes may require re-verification via an audit. The audit is often costly as it may require a third-parties to mediate between buyer and seller.
Blockchain technology changes this flow by allowing for costless verification of all the attributes when a problem emerges since it stores all transaction attributes (e.g., the time-stamp of a transaction, digital “fingerprints” of the individuals, goods or services involved). Blockchain technology may even deliver ‘sousveillance’—an audit embedded in the marketplace itself.
Saves time
The use of distributed ledger technology saves time in multiple ways. Smart contracts which codify business policies for routine and ad hoc checks of the stored transactions and associated asset ownership information save time. Most banks perform Know Your Customer (KYC) checks out of centralized databases, and different departments within a bank will perform repeated checks of a customer. With blockchain, these checks are completed only once, and all departments can share the KYC status without breaking down the regulatory boundaries. IBM’s Global Financing blockchain implementation has seen dispute resolution time reduced from 40+ days down to less than 10 days. Blockchain may some existing business processes redundant. For example, financial institutions could track the underlying structure and performance of mortgage-backed security on blockchain and make it accessible to relevant parties in real-time. Regulatory authorities could audit accounting records while preserving the privacy of the entities.Increases trust
For almost any supply chain—be it food, medical records, precious gems and minerals, real estate or credit default swaps, to name a few—success depends on the promise of transparency and auditability for all participants. The distributed ledger technology with the clever use of cryptography- and permission-based access ensures all participants have a single source of truth updated with each transaction, every time. Transaction metadata improves auditability and increases traceability.Reduces risk
Using distributed ledgers for settlement and reconciliation among network participants creates a more open and secure platform. Using a permission authority, public-key cryptography, and hashing algorithms reduces the risks of nefarious actors, double-spending, and malicious impersonation. Some blockchains may provide multiple mechanisms to enhance privacy (e.g., use of a per-transaction certificate), and sensitive information could be stored off-chain in a private database which is linked immutably to the blockchain entry using cryptography.Example use cases of benefits of blockchain technology
There is plenty of literature on the Internet that describes the uses of blockchain. [IoT and Blockchain] Moody’s Investor report on blockchain identified 25 blockchain use cases across a wide variety of industries such as financial institutions, healthcare, real estate, media, energy, and governments. Financial institutions have been developing blockchain-based solutions (e.g., payments, post-trade life cycle in capital markets, and trade finance) to gain cost efficiencies in times of constrained bank profitability. Blockchain startup Ripple is developing enterprise blockchain solutions for international payments, with its custom payment protocol and exchange network, and its cryptocurrency XRP. [examples of disruptive technology]Guardtime is an Estonian startup which uses blockchain enables to ensure the integrity of enterprise networks, prevent loss of critical digital assets and track data securely throughout the supply chain. The Holbertson School, a California-based software skills program, announced it would use blockchain technology to authenticate academic certificates to ensure that students claiming they passed courses at the Holbertson School aren’t using accreditation they didn’t earn. Visa and DocuSign unveiled a partnership in 2015 that used blockchain to build a proof-of-concept for streamlining car leasing, and making it into a “click, sign, and drive” process. Startups such as PeerTracks and Ujo Music have emerged, who aim to use smart contracts to let artists sell directly to fans without going through a record label, track rights owners, and automates royalty payments using smart contracts and cryptocurrency, respectively.
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