Should a company ever consider using blockchain for… anything?

“Blockchain is just a glorified database” is something you hear from self-appointed pundits like Nouriel Roubini. “Blockchain is the future, the solution to all our problems, and possibly the cure for cancer,” says the other side. The truth is, neither of these opinions is correct.

What is a blockchain, anyway?

A blockchain is not a database. It stores data, but the similarities end here. In fact, blockchain mostly fails as a database. Searching it or running queries on it is hugely painful, ruling out many applications. Putting the company knowledge base, client files or the task management system on the blockchain is not innovation; it’s a step back.

Blockchain is a simple technology: a sequential chain where each data block is tied to the previous one through cryptographic hashes. If you want to change a data point in an earlier block, it will change all the cryptographic hashes, and you need to rebuild all the subsequent blocks. This immutability is very different from a traditional database.

However, what makes blockchains truly interesting is not how data is stored, but how the blocks are produced. To add a block to the chain, participants in the network need to reach consensus that the information in is the accurate representation of the truth.

We should assume malicious actors are present in any system, and preventing them from breaking the rules is a big part of how we design these systems. We traditionally solved this problem by employing impartial middlemen like payment processors, banks, notaries public or governmental organizations. Blockchains work differently. Participants adding new blocks are incentivized to act truthfully, as malicious behavior results in losing money (proof of work), their stake (proof of stake) or their right to become validators (proof of authority). Malicious actors can compromise a blockchain, but the economic incentives are set up in a way that an attack is economically unfeasible (except for, maybe, nation states). Blockchain enforces trust through the code, even between parties who don’t even know each other and have vastly different priorities.

To summarize, a blockchain is not a database. It’s a tool for multiple parties who already have a database to agree on a single immutable truth without an intermediary.

The moment you stop thinking of the blockchain as a database and start thinking of it as a “truth machine,” you will have a much better understanding of its potential. There are plenty of applications where a truth machine is useful, especially when the incentives of different parties are misaligned.

(There are other advantages to using a blockchain, but they are not necessarily useful for traditional businesses. Public and permissionless blockchains are not controlled by a central entity, and they are censorship resistant. Corporations might not care much about this, but this is why you see projects like SteemIt and Peepeth building their product on top of a blockchain. Using a database would be much more efficient, but that is not their goal.)

When to blockchain?

I believe there are clear business cases when using a blockchain makes sense, and solves more problems than it creates. Remember, businesses ultimately care about one thing, and one thing only: profit. Anything that makes operation faster, cheaper or less complex have a good chance of being implemented.

Business use case #1: Eliminating the middlemen

Trusted intermediaries cost a lot of money. Attorneys, notaries public, correspondent banks, payment processors, you name it. Many of these can and will be eliminated using blockchain technologies.

Intermediaries providing identification services are probably the easiest to replace. These costs are unjustifiable considering there are blockchain-based identity providers, and some of these cryptographically-secured IDs are legally accepted.

Escrow is another area ripe for disruption. A popular service (escrow.com), charges 3.25% escrow fee and 3.05% payment processing fee for a $5,000 business to business transaction, a blatant display of rent-seeking. On the other hand, you can write a fully-fledged, general purpose escrow smart contract on the Ethereum chain in less than 500 lines of code.

Banks and payment processors are middlemen, too, and very profitable ones. Imagine a company in Chile buying electronics parts from a factory in Vietnam. The payment goes through at least three different banks with two currency exchanges. PayPal charges 2.9% per sale. The costs of moving money around the world are obscene. The same company could directly send USDC or any other regulated stablecoin, for a fraction of a dollar, almost instantaneously.

There are obvious roadblocks. Businesses are not ready to transact in Ethereum or an ERC20 stablecoin because the fiat on and off-ramps are difficult to use. However, these roadblocks are temporary, and many projects work on solving these problems, like OmiseGO. Businesses will be able to convert fiat to stablecoin to fiat without much friction.

Replacing attorneys who often charge tens of thousands to draft a relatively simple contract will take longer, but we will eventually get there. Agrello, for example, is working on a smart contract builder you can use to create legally binding contracts using LEGO-like building blocks.

Eliminating these middlemen is not a fantasy. It will become the business reality in just a few years, and considering the cost savings, companies won’t even think twice to jump on board.

Business use case #2: Creating believable transparency

Companies don’t like to share more information with the public than legally required. However, transparency can be a rational business decision, especially in industries where trust is critical, like in food production. VeChain, TE-FOOD, and others are solving a real problem with their traceability solution. As a consumer, you might not (you should not) take company claims at face value — but blockchain, since it’s immutable, creates believable transparency.

Being transparent is useful in complex cases where many participants (who might not trust each other) work together to deliver a single service. A good example is baggage handling in aviation. Getting a piece of luggage from A to B is a complicated process involving airlines, airports, and ground handling companies; but from the customer perspective, it’s one single service delivered by the airline. Using a blockchain for believable transparency doesn’t just create trust, but also makes it easier to resolve a dispute.

A mislabeled food product or misplaced luggage is just an inconvenience. The misuse of tax revenues, on the other hand, is a real issue (although, strangely enough, people seem to care less about it). This happens all the time with European Union structural funds, money provided by the rich member states like Germany to build infrastructure and generate growth in the less-developed EU countries like Hungary. Less-developed countries tend to be corrupt, and these funds are often abused. Putting the whole process on blockchain using a synthetic Euro stablecoin (redeemable to fiat only by the contractors doing the actual work and backed by the European Central Bank) would solve most of these problems. This should apply to all grants and aid, and taking it to the extreme, eventually to all tax dollars.

Business use case #3: Enforcing trust

There are plenty of business cases where it would be beneficial for competitors to share information about their customers, but they don’t trust each other.

Insurance is a good example. Competitors do share information, like a customer’s motor vehicle record (personal driving history) or vehicle history. It is in their interest. But because they don’t trust each other, they use external services charging as much as $7 for a single report. This is rent-seeking. It should (and will) be replaced by an impartial blockchain, where malicious actors uploading false reports are automatically penalized.

Sharing information can be very profitable between companies providing complementary services. An example would be a vertically integrated “fitness blockchain.” Imagine a group of gyms, supplement manufacturers, restaurants offering healthy food, and sports apparel brands sharing customer information using a secure, trustless system. Can you hear the cash registers?

Business case #4: Connecting silos through a base layer

Communication and data sharing between companies are often problematic even if they actively want or need to share data. Working between different internal systems and different workflows is not trivial. A base layer built on blockchain and maintained by the participating companies can eliminate many of the problems.

Take healthcare as an example. Patient records need to be up-to-date and accurate. Multiple records with different data sitting in the database of multiple different providers can be deadly, literally. In an ideal world, the immutable patient record should exist at one location only, accessible to all authorized parties. The healthcare industry needs a blockchain base layer. (Public blockchains can be used to store sensitive information; this is what encryption and tech like zero-knowledge proof are for.)

The travel industry provides us with another excellent example. When you book your trip to Bali, a dozen companies work together in unison to make your stay as smooth as possible. Travel agents, airlines, airport operators, payment processors, banks, hotels, tour companies, insurance companies, and others. They share data — they have to! — but the system is much more complicated than it should be. A base layer can simplify it, bringing down operational costs significantly.

Ask the right questions

There are countless other use cases, and many do overlap. Somewhat counterintuitively, technology is not the most critical part of blockchain; consensus, transparency and algorithmically-enforced trust have way more far-reaching effects. Blockchain technology is not a silver bullet, but in many cases, it is the right answer. Just make sure you are asking the right question.