Everything You Wanted To Know About Blockchain (But Were Afraid To Ask)

This ain't your daddy's ledger.
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By Cecile & Presbrey advertising agency for International Business Machines. [Public domain], via Wikimedia Commons

By Cecile & Presbrey advertising agency for International Business Machines. [Public domain], via Wikimedia Commons. Modified.

2016 was the year of blockchain. Increased interest from the mass media, corporate titans across America, and the U.S. government all spurred innovative approaches to using the technology. If anything is certain about blockchain, it's that 2017 heralds much the same trend. By the end of this year, experts predict early adopter financial institutions will have blockchain firmly ensconced in their business models.

Popularized by its use in bitcoin, blockchain is a distributed or decentralized digital network that enables the exchange of value or the ability to confidently share data—including financial assets and contracts—in a secure environment. The core design of blockchain builds trust into every transaction and shared data source by creating a sort of open ledger that can be used to track assets. This ideally enables greater security, cost efficiency and optimized reconciliation processes.

At its core, blockchain is about going from a scenario where companies manage their own copies of a set of data to a world where all parties have access to a shared immutable set of data. Opening up data beyond a single organization requires using cryptographic techniques that use public and private "keys" to ensure confidentiality and privacy. Blockchain is simply a way to verify and order transactions in a distributed ledger which represents a record of consensus. Records in that ledger can be added but not deleted, and all transactions have an auditable trail and a traceable digital fingerprint. The data in the ledger is encrypted by individual transaction, meaning that while a hacker could break into a single transaction and alter it, hypothetically they could not change any other entries in the ledger.

Perhaps the simplest analogy for blockchain is a Google drive spreadsheet with individually protected rows of data that records all transactions and associated information going forward on a real time basis. That concept may seem simple in theory, but it's much more difficult to implement in practice.

Thus far, blockchain has gained the most traction in the financial services industry. In fact, according to a 2016 Santander InnoVentures report, the technology could cut bank infrastructure costs for cross-border payments, securities trading and regulatory compliance by up to $20 billion a year by 2022.

More importantly, blockchain also has the potential to become a general-purpose technology— perhaps similar to double entry bookkeeping or GAAP accounting – that changes how society and the economy work. Indeed, the World Economic Forum has predicted that, by 2027, 10 percent of global GDP is likely to be stored on blockchain platforms.

Skeptics abound when dealing with any new technology, but the potential with blockchain is real. In particular, blockchain has the potential to:

  1. Enable new business models using public “contracts”
  2. Streamline backend operations
  3. Reset the use of intermediaries in asset transfers.

Perhaps the most interesting of these opportunities is the creation of potential new business models. Accenture offers this example:

Blockchain can make commercial contracts programmatic, triggered by predefined events and conditions. One result? Machines that buy and sell like people. Imagine the following scenario: Currently, smart meters are used to record and report energy consumption. In the future, a blockchain-enabled utility market could allow customers to authorize those meters to buy electricity—even automatically switch providers—on predefined terms. For their part, utility companies could then sell electricity to the highest bidders, whether machine or person. A number of promising experiments are moving toward making this hypothetical situation a reality.

Blockchain can also aid firms with streamlining of operations. All companies have to coordinate resources in order to sell products and services, and that typically involves processes such as accounting, data management, and workflow approvals. Blockchain can smooth that process such that it reduces the need for reconciliation and verification. For example, a blockchain-based invoicing network could create a permanent and unchangeable invoice record for a business relationship that allows real time invoicing and settlement. Think of it as a sort of shared real-time point of sale system between two parties.

But there are caveats.

First, the technology and standards are still evolving. Blockchain is still an emerging concept and changes on the security and even the design side could occur in the future.

Second, some of the best applications for blockchain may be in-house at firms. While sharing data between external parties presents unique challenges, many organizations have recognized the value of being able to confidently share data and benefit from immutable data lineage and powerful security. An example of this is internal processes around client onboarding efforts.

Third, many types of blockchain models rely on network externalities because the more participants there are in a blockchain, the greater the value of the network. As a business deal grows to include more and more participants, verification and consolidation of transactions across participants gets exponentially more difficult and time consuming. Blockchain reduces this complexity by putting all transactions in one place. Getting everyone to agree to that requires stakeholders to cooperate on standards and governance challenges.

Finally, the economic model for blockchain is still evolving. The current market is now split between solutions aimed at making existing business processes more efficient, and the development of new products and services. Where the industry will go from here is an open question.

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