Blockchain in enterprise: first steps

This is an article about the blockchain technology and its initial applications in enterprise, including Barclays and S7 Airlines.

In 2008 someone under the name of Satoshi Nakamoto launched Bitcoin — a digital payment system and the first implementation of blockchain.

Bitcoin helps to transfer value to another party. Every network member downloads a database with the history of transactions and the current account balances. To prevent the double spending, every new record is validated by others using the rules of consensus — a set of cryptographic and mathematical principles.

Blockchain removes intermediaries from untrusted relations. The network participants are equal, the transactions are irrevocable and the open architecture makes the system impossible to control by a single entity.

However, these pros come with cons. Bitcoin consumes a lot of energy (information is essentially duplicated by every member), the transactions are slow (since they have to be verified by everyone) and the interface is highly unintuitive.

Second Wave

Over time, people realised the advantages of the decentralised systems and tried to improve on their weaknesses. After the initial wave of clone digital currencies, developers started to use blockchain beyond the payment systems.

In 2013 Vitalik Buterin introduced Ethereum. It is a new type of blockchain, which allows to create decentralised applications called ‘smart contracts’: software, which is executed remotely by a distributed virtual machine.

Smart contracts automate common tasks. They control the transfer of data (money or documents) based on the predetermined and unchangeable conditions. Obligations can be fulfilled automatically, and the failure to comply with the rules causes liability (for instance, fines).

Smart contracts act as autonomous agents. They perform credible transactions without third parties and trustless parties. After the launch of Ethereum in 2015, smart contracts have started to change and improve business processes.

Proof-of-concept stage

Blockchain still evolves. Big companies are building proofs-of-concept: early prototypes and beta software designed to test the feasibility of an idea. Banks were among the first to research blockchain: after all, they are the intermediary decentralised systems are supposed to make obsolete.

Source: https://www.flickr.com/photos/dahlstroms/20611247081

In 2016 Barclays and Israeli blockchain startup Wave created one of the first enterprise projects based on blockchain.

Ornua (the Irish dairy manufacturer) and the Seychelles Trading Company used the digital letter of credit to make a deal on exporting cheese and butter. Letter of credit was opened and closed based on the records in blockchain, and money transfer was performed via Swift, a global payment system.

Documents which confirmed the fulfilment of obligations (certificates of origin, insurance certificates, invoices and waybills) were also stored within the distributed ledger. Partied decreased the verification costs and improved the efficiency of the trading process.

Usually it takes 7–10 business days to process the relevant documents. Encryption and verification mechanisms allow to perform the entire operation in less than 4 hours.

Source: https://commons.wikimedia.org/wiki/File:S7_Airlines,_VQ-BCH,_Airbus_A320-271N_(37008676393).jpg

A few months later a similar project was tested in Russia by S7 Airlines and Alfa-Bank.

Ethereum smart contract was used to make a settlement between two companies using a digital letter of credit. Alfa-Bank used blockchain records to perform settlements between S7 and its counterparties in fiat money.

Proof-of-concept was designed to prove two hypothesizes:

  • that the Bank of Russia would be fine with the unconventional way of creating and closing of the letter of credit;
  • that the Alfa-Bank IT system could be linked to public blockchain.

This concept proved that it is possible to protect the companies of the non-performance, while reducing the transaction costs and increasing the speed of deals using the letter of credit. IT systems of all the parties were linked to blockchain.

Next steps

Large corporations have started to realise that blockchain is going to change the traditional business processes. They founded well-financed R&D departments to analyse the technology and apply it internally. They have also acquired shares in startups in order to secure their market advantage.

Blockchain pioneers include Barclays, Credit Suisse HSBC, Royal Bank of Scotland, UBS, UniCredit, Wells Fargo, Goldman Sachs, J.P. Morgan, Citi, Bank of America, Morgan Stanley, Santander, etc.

They experimented with blockchain in funding, insurance, letter of credit and so on. Banks were among the first to recognise the opportunity to increase their profits by implementing blockchain. However, it is still early for the mass market usage: mainstream audience has a vague understanding of what blockchain is.

The early projects opened up opportunities for the future applications and proved that cryptocurrencies are not the only way to use blockchain. We are going to explore newer cases in our future articles about blockchain in enterprise.