Application of blockchain in organizations

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What can enterprises do? What types of users and roles will develop and administer blockchain applications? Which blockchain application is right for your organization? How do you build a blockchain network? What makes a good blockchain use case? Various application of blockchain? These are some of the questions addressed in this post.

Application of blockchain

Blockchain Network: Participants and Roles

Blockchain Application network participants

The figure above illustrates a high-level architecture for a blockchain application where network members are interacting with the application. Each peer in the network has a copy of the ledger. In a permissioned blockchain, each member has permissions with distinct roles and, depending upon the consensus mechanism used in the blockchain network, each member may play a different role. For example, if Practical Byzantine Fault Tolerance (PBFT) is in use, some peers may act as validators that endorse a transaction to create a new version of the blockchain (i.e., the ledger).

Applications from each organization interact with the blockchain in one of several ways:

1. Use the blockchain provided API (such as REST API) to query or interact with the blockchain.
2. Send or receive data for events emitted by blockchain.

For any blockchain initiative, there are three scenarios which could lead creating a blockchain network:

• Founder Led – An organization utilizes blockchain technology to solve a business problem. As the founder, this provides the organization complete control on the operating model of the solution and enables the Founder to invite partners to join the network. The Founder organization is responsible for development, governance, operation, and integration with existing systems.
• Consortium Led – In this scenario, a consortium of enterprises who agree to solve a mutual business problem. One peer within the group leads the effort for creating the consortium (for example, Walmart for food safety in the retail industry). It is like the Founder led initiative, except that members create a legal entity (i.e., the “consortium”). Consortiums are typically industry-specific (such as financial services or retail). The consortium members share the costs of operating the network.
• Partner Driven – In this scenario, a startup or ISV develops a blockchain solution to solve a problem well known within an industry. As the solution gains traction both with venture capitalists and mass media, it motivates existing members of the industry to join the network. For example, Everledger developed a blockchain based solution for tracking of diamonds, and now diamond certification houses, law enforcement, and the online retail industry is accessing their blockchain network via APIs provided by Everledger.

The participants in every blockchain network play several roles:

• Network Service Provider : The Network Service Provider plays a vital role in a blockchain network. This is the network founder who takes the initiative of starting the blockchain network and defines the policies for membership, contract contracts, and any private channel communications. The Network Service Provider is also responsible for changes to the network. Additional capabilities are introduced as the network size grows. This helps to establish a democratic governance process which allows members to vote on accepting or rejecting changes.
• Network Service Consumer : The Network Service Consumers in a blockchain network operate an organization’s peers and certificate authorities. They install and instantiate smart contracts, managing certificates for Business Service Consumers in their organization, monitoring network resources, and creating channels (following defined policies).
• Business Service Provider : The Business Service Providers develop the transaction logic (via smart contracts that run on the distributed peer network), business logic (via business applications and integration services that invoke transaction logic) and presentation logic (client applications run by end-users of the system).
• Business Service Consumer : The Business Service Consumers host the business logic for integration of existing systems with the blockchain network. An application server hosts the business logic either off-premises (e.g., on a Cloud) or on-premises, and connect via integration middleware (e.g., IBM Integration Bus).
• End-User : End-users run presentation logic on an appropriate device (for example, mobile application or desktop dashboard). There may be multiple end-user applications (often one per organization or user role). The value proposition to end-users is that the information they see is trustworthy, and may be unaware of blockchain back-end.

The figure below illustrates the various network members in a typical blockchain network:

Blockchain network participant roles

For each blockchain network and project, each organization requires several user roles:

• Blockchain Developer : The role requires Blockchain Development skills with experience in building enterprise applications. The role is part of a software team that works on the business application of blockchain technology – focusing on the development of minimum viable products. The Blockchain developer roles and responsibilities include managing the application development while providing expertise in the full software development lifecycle, from concept and design to testing.
• Blockchain Architect : The role requires Blockchain Development skills with experience in building enterprise applications. The role is part of a software team that works on the business application of blockchain technology. The Blockchain architect roles and responsibilities include managing the application development while providing expertise in the full software development lifecycle, from concept and design to testing.
• Blockchain Business Analyst : The role requires a thorough understanding of IBM Blockchain plus relevant industry knowledge. The role is part of a software team that works on the business application of blockchain technology, and responsibilities include managing the application development while providing expertise in the full software development lifecycle, from concept and design to testing.
• Blockchain Project Manager : The role requires agile project management skills with an understanding of blockchain technology. The role is part of a software team that works on the business and technical application of blockchain technology.

Considerations for creating a blockchain network

First, someone must create the blockchain network, prioritizing the benefits of the network effect.

For any network to benefit from blockchain, it must address the following principles:

• Mutual benefit : Consider the automotive industry network discussed earlier, comprising of car manufacturer, parts suppliers, port authorities, shipping companies, car dealers, insurance companies, and car lessees. Each prospective participant will only join if they stand to gain from joining the network. For example, if insurance companies are asked to join the network, but they see no new value, they will be reluctant to join.
• Network effect : A network effect is the positive effect that an additional user of a good or service has on the value of that product to others. The idea is that each additional member that joins the network has a positive impact on the overall value of the network for all members. In the automotive network example, if the network has only one car manufacturer then the value received by other members may not be as high. For example, if that one car manufacturer ships cars only to a certain port then other port authorities may not find the network of value. However, if other car manufacturers join that ship cars to other ports around the world, then the combined value of network increases.
• Design for a market : Design the blockchain network at the level of a target market such that the network can recruit a majority of the companies operating in that market. If the network fails to recruit a majority of the market, then the network will fail to provide value to the participants. The target market could be a segment of the market in a geography where the network can recruit majority of companies. For the automotive network example, the target market may be the European car manufacturers, or port authorities in North America, or environmental protection agencies for the target car consumer market in say, Latin America.
• Shared process optimization : The final element of design for creating a blockchain network is identification of the shared business process between the market members that will be optimized via blockchain. It is not enough to simply recruit a majority of members within a market if processes for interchange of asset lifecycle remain the same. For example, the automotive network members require information about recalls for car parts deemed deficient post-sales and need a mechanism for all car manufacturers to utilize that information. A well designed blockchain network will provide a mechanism for all car manufacturers, car dealers, buyers, and lessees, to obtain that information quickly and with a high degree of accuracy.

Do you need a blockchain application?

Most blockchain platforms are under development and rapidly approach maturity. Most enterprises are embarking on proof of concepts (or First Projects) to learn about the technology, impact to existing systems, resources they need to acquire, and how to create blockchain networks. It can be tempting to apply emerging technology to solve a business problem where existing technologies may suffice.

The flowchart below provides a simple decision tree to help organizations decide whether they require blockchain for their use case.

Do you have a good blockchain use case

Using a blockchain typically falls under the following scenarios:

1. Establishing trust among parties without an intermediary, such that no one party has more control over the operation of the blockchain network than another. Any modifications, deletions or updates can only be made by arriving at a consensus which ensures the immutability of contracts.
2. The use of smart contracts to enforce all parties to follow the same rules and achieve superior security over traditional contract law. Smart contracts also reduce the transaction costs of contracting.
3. changes are immediately broadcast to all members, which improves transparency to all network participants.
4. Only known members (who may all agree to use an enrollment provider) receive permissioned access and ensure an audit trail of all interactions among network participants.

Application of blockchain: Which blockchain application is right for you?

There are several permissioned blockchains now available, or under development, vying for the attention of enterprises such as Hyperledger, Stellar, Ripple, Quorum, and Enterprise Ethereum.

It can get very confusing to pick a blockchain technology to address a specific business case due to the differences in use cases. Other factors to consider are the capability to hold asset state that is more complex than just cryptocurrency, skills to write smart contracts, and whether there are any vulnerabilities in how the smart contracts are being written based on dependence on timestamps or transaction ordering, and so on.

Below is a framework that can assess whether blockchain is a good fit for your organization.

Business Oriented Blockchain application Evaluation Framework

Someone should consider the following criteria when determining which enterprise blockchain is right for your use case:

1. Maturity – Determined from the actual implementation results. Since the actual introduction of permissioned blockchains is very new, it is difficult to evaluate it rigorously. One approach is to evaluate a blockchain platform made up of existing technologies (such as cryptographic techniques, P2P protocol, ledger database, etc.) and new technologies (including the consensus algorithms used), and review the implementations of that blockchain platform in first projects or Proof of Concepts projects.
2. Confidentiality – Does the blockchain provide a mechanism for conducting a private and confidential transaction between two or more network members? What levels of identity and security are provided to members taking part in the network and in transactions? How are identities handled, secured and shared?
3. Security – What is the cryptographic architecture used? What is the protocol design? What capabilities are available to secure transaction data? How can identity management integrate with existing enterprise directory systems?
4. Modularity – Is it possible to replace some components of the blockchain platform with more appropriate implementations for a use case? If the blockchain platform uses a particular consensus mechanism, can it be replaced with another? Could the underlying database used to store the shared ledger be replaced (perhaps with one that may allow for faster querying)?
5. Interoperability – How can the blockchain platform integrate with other, existing enterprise systems? How about other blockchain platforms? What type of API interface is available?
6. Governance – Is there a defined and published governance process that shows how to make changes to the platform’s source code? Is there a publicly available community that discusses vulnerabilities, shortcomings and other limitations in the platform? Can you contribute to improving the platform?
7. Developer tools – What type of developer toolkits are available to simulate and build blockchain networks? Are there any SDK’s available for building, testing and releasing smart contracts?
8. Scalability – How scalable is the blockchain? Are there any limitations to block size? Is there any performance degradation as the size of the ledger increases? How long does it take for block confirmation?
9. Industry Support – What is the availability of resources, services, and entities that can help in implementing a blockchain project? Are there any readily available guides or cookbooks where others have documented their experiences with the platform?

Application of blockchain: ROI & Monetization of Blockchain network

When large enterprises establish or join a blockchain network, how do they justify their investment and expect any return?

The ROI for a blockchain project comes from:

• Reducing the cost of networking – Network effects are a phenomenon whereby the value to the user or consumer of a product or service increases as its user base grows. Facebook, for example, is more compelling to potential users (including Harvard undergraduates) today than it was when only Harvard undergraduates could use it. When thinking of the Return on Investment (ROI) of blockchain network, keep in mind Metcalfe’s law: The value of a telecommunications network is proportional to the square of the number of connected users of the system (). With permissioned networks, the larger the network, the better lower the cost of adding new assets (for tracking and transactions), onboarding new members, or compliance to new regulations (since all participants can pool in costs to adhere to new regulations).
• Process efficiencies – A well-defined blockchain network can provide 20% to 30% productivity improvements by providing transparency, reduction in delays or trivial disputes. IBM Global Financing improved the efficiency of their commercial financing business by sharing data on a distributed ledger, and reduced the average time taken to resolve disputes from 44 days to 10 days. Walmart has improved the time taken to identify the source of a commodity in their retail supply from 2 weeks to almost instantly.
• Increased trust - Small farmers grow most of the world’s coffee, many of whom depend on family labor and unreliable income—often less than $2 a day. 25 million of these farmers produce an astounding four-fifths of the world’s total coffee supply. A startup called Bext Holdings Inc. is using blockchain to improve the upstream supply chains of key commodities starting with coffee. Bext has built a mobile robot which is sensor-laden to sort, weigh, and assess the quality of each coffee cherry plucked on a plantation. The robots analyze and grade the fruit based on its condition (riper, larger cherries generally fetch a higher price). They make the resulting data (weight, grade, and other specs) visible to buyers who then bid on the beans via a mobile app.
• New Business Opportunities - About 8 million tons of plastic go into our oceans every single year. The problem has greatly accelerated within the past few decades as the amount of plastic in the oceans continues to grow. But what if a piece of plastic was worth the right price? The result is the elimination of plastic litter, and the scavenged plastic can be exchanged for other goods. Plastic Bank aims both to clean up the ocean and to lift millions out of poverty across the globe by turning citizens in the world’s poorest countries into recycling entrepreneurs. Plastic Bank realized that everyone—even families in disadvantaged areas—had mobile phones that could handle digital transactions and collect digital credits -plastic waste as a currency for change -that is safe on blockchain to help lift people out of poverty and keep plastic out of the ocean. PB sells the social plastic collected & recycled to brands to use as ethically sourced plastic in their products

Blockchain Application Governance

Public blockchains promise to transform the way economies are organized. They would achieve this by elimination of centralized third parties used to provide trust. There are already blockchain solutions in place that are solving the problem of cooperation – ie, establishing trust without a third party by codifying the rules of engagement as Smart Contracts such as the ones used by Slock.it to automate renting of rooms on Airbnb, or renting of cars, and unlocking of other physical assets in the real world. However the rules of how the blockchains operate, how the smart contracts are written, managed and updated, and the changes that are made to the blockchain infrastructure, can sometimes be unclear.

For example, in Bitcoin, the earlier protocol rules were developed by the person acting on the pseudonym of Satoshi Nakamoto and thereafter managed by a small team of core developers. Bitcoin Core has a large open source developer community and many more who contribute in other ways (such as research, peer reviews, etc.) and thus there is an arcane form of governance around bitcoin. The human element has not been eliminated, and the rancor between various stakeholders such as miners and some technology companies that contribute to bitcoin development has led to several controversies: for example, the debates over Segregated Witness for scaling of the Bitcoin Lightning Network, and the block size increase problem. The sometimes conflicting interests of the stakeholders have resulted in “warfare” on social media and other discussion forums.

Regardless of the promise of the technology, the human aspect of governance cannot be ignored. This brings us to an interesting point – we need formal governance which is somewhat centralized by nature, in order to deliver on the promise a decentralized world. In other words, this is the paradox proposed by Vili Lehdonvirta – once you address the problem of governance, you no longer need blockchain.

The paradox in permissionless blockchains is as much as (or no more than) the paradox of trust in existing intermediaries in today’s business systems – the very same intermediaries that were culpable in the financial crisis in 2008 and were all bailed out. Other blockchains such as Ethereum already have well-defined governance to ensure that there is full visibility and community-based agreement on changes in the core code.

The World Economic Forum has published a more holistic document that provides Strategic Blockchain Governance Guidance at three levels and in seven Global Solution Networks as depicted below.

World Economic Forum: Strategic Blockchain Application Governance Guidance

World Economic Forum: Strategic Blockchain Governance Guidance

The WEF posits that “Governance means stewardship, not government or regulation” – a view that is indeed required in permissioned blockchains. No blockchain solution can be successful unless there is a clearly defined, published and accessible governance process.

For solution built on permissioned blockchains, following considerations must be taken into account to develop a governance framework:

• Agreement on a shared and automated process on blockchain – What component is being automated? How is it automated? Where is it being hosted? How will it integrate with all members? What is the member participation/endorsement mechanism?
• Membership management – How to invite members? Verify identity? Announce new members (discovery)? Membership approval, denial, and revocation process?
• Network operation & fee management – How are new nodes deployed? How do new member nodes affect the network (if at all)? How to setup fees? How are they collected?
• Change management – Changes to the membership rules? Smart contract updates? Release management?
• Dispute resolution – What is the framework for disputes? How is it tied to smart contracts? How are disputes escalated & to whom?
• Network regulation – Who regulates the network? How is a decision agreed upon?

The figure below illustrates an example blockchain application governance framework:

Blockchain application Network Governance Model

What can enterprises do for application?

Find specific opportunities or use cases: Blockchain is a team sport that requires involvement not only from within your company but also from your business partners and clients. In three recent surveys by the IBM Institute of Business Value of those surveyed, 14 percent of government institutions, 14 percent of financial markets institutions and 16 percent of healthcare respondents, all plan to have blockchain in production at scale by the end of this year. So how will businesses get there? The answer lies within one word: collaboration. No one person or business controls blockchain technology, and no one person or business can or should develop all of the promising distributed ledger applications that can ultimately create the “Internet of Transactions”. Identify areas of inefficiency in your business, identify the network members and areas where there is lack of trust.

Continue Proof Of Concepts: For any new technology the general rule of thumb seems to 90:9:1 – 90% of organizations obtain basic information about the new technology, 9% try it as a Proof Of Concept, and 1% go on into production. For a technology like blockchain which is in its infancy, start small by choosing the right starter use case or segment of a bigger use case. It’s a great way to get hands-on experience and become comfortable with the technology. Next, use an agile approach to iteratively expand your project as more resources become available. You can prioritize solution features across agile sprints to accelerate the development and deployment of a minimum viable product.