Blockchain - A Business Transformation Catalyst
By Aayush Bhatnagar on ALTCOIN MAGAZINE
Getting Started…
With the advent of every new technology, there are “opinions” and “opinion makers”.
Then we have early adopters, who try to find novel ways of applying technology to real-life use cases.
We experience a fair share of success stories and failures – with objective analysis by early users. In the same breath, we also come across “fans” for whom the “new shiny toy” is sacred.
In such an uncertain ecosystem, opinions can change with a blink of an eye – and for decision-makers, the “attractiveness” of a new technology may fade away as easily as it had enamored them.
In this article, we try to discuss the usefulness of Blockchain for business operations. Investment decisions are however left to one’s own discretion.
First, we start with some background…
Public Blockchain: Here Is Where It All Started….
Blockchain shot to fame a decade back, with the introduction of Bitcoin in 2009, followed by Ethereum in 2015.
Initially, it was believed that Blockchain can be used only for trading cryptocurrencies and commerce. However, as the understanding of Blockchain matured, it made its way to a more wide spectrum of use cases.
Let us briefly understand how Blockchain works.
We can visualize a Blockchain as a “string of pearls” weaved together, where each pearl is synonymous to a “block”.
Each block has a hash value, and these hash values help us to link the block ahead of it and behind it – hence forming a linked blockchain.
Every block consists of transaction metadata which is persisted on them. It is due to this reason, that we sometimes interchangeably use the word “Blockchain” and “Distributed Ledger of records”.
Ethereum and Bitcoin networks are an example of a public blockchain platform on the internet, where any individual or a corporate entity can participate and transact, without seeking prior permission to join the network. This network is available to everyone across the world and follows the democracy of the internet.
These platforms work on the principles of the “Proof of Work” consensus algorithm.
Simply put – A participant has to “do some computational work” to arrive at the hash value of the next “block” on the blockchain in order to get a “reward” in the form of cryptocurrencies.
As the “reward stakes” and the number of miners increase, the computational work required to derive the next hash also increases. If you successfully compute the next hash value, it is implicitly regarded as “proof” that you did some work to arrive at it!
Hence, an individual or organization has to invest significantly in compute power to mathematically arrive at the next block’s hash in the “least” amount of time to “win the race” and “mine the rewards” in the form of “Ether” or “Bitcoin” – depending upon which blockchain network you choose to transact on.
This process is known as “Proof of Work”!
While Bitcoin and Ethereum blockchain networks were expanding, many more “networks” launched on the internet with their own cryptos such as Ripple and Litecoin.
Each network innovated with its own consensus algorithm also known as a “protocol” and created its own cryptocurrency rewards system to encourage more transactions on its network.
Hiccups...
These cryptos were being used extensively for commerce, Initial Coin offerings to raise money and P2P payments on the internet until government regulations cracked down on them due to the “anonymous” nature of the public network. There were ups and downs in the crypto space – but it seems that they are coming full circle as countries have started publishing the regulatory regime for the co-existence of cryptos with normal currencies. However, this process may take more time and would depend on individual governments.
Today, we have a wide spectrum of regulatory policies – with Estonia & Switzerland on one side as being most liberal, while India, China, and Vietnam on the other side where cryptos are banned as legal tender. China also bans bitcoin mining.
The US and Canada are somewhere in the middle, where cryptos are allowed, but the regulatory policies are still evolving.
While public blockchain use cases continued to flourish, mostly in the areas of tradable cryptocurrencies, a silent revolution of private blockchain networks was also brewing.
Private Blockchain And Enterprises…
Blockchain soon found its way into the enterprise space in the form of private and permissioned networks.
A private blockchain network is not open for “all” on the internet. It is usually controlled by a group of entities and individuals who form a consortium.
Each of the “founding members” of such a private network has a “stake” in the blockchain network.
In order to add or remove members from a private network, consensus (permission) has to be sought across all members – which is usually implemented by an algorithm known as Proof of Stake (PoS). Similarly, other transactions on the network also follow the same methodology.
However, Proof of Stake can lead to a monopolistic Blockchain network if by some means one of the participants gathers a 51% stake in the network. This is also known as the 51% attack problem.
For this reason, PoS is not a preferred consensus mechanism.
Pluggable Consensus & Smart Contracts
In private blockchain networks, it is required to have “pluggable consensus algorithms” which reflect enterprise policies and contractual obligations across participants.
This is a more pragmatic approach, and the pluggable consensus algorithms provide more predictability for transaction acceptance on the network.
Hence, private blockchain networks support custom algorithms for consensus and do not rely on a single algorithm – as one size cannot fit all needs.
As business needs change, more policies may need to be applied for transactions – which paves the way for additional consensus mechanisms in a private network.
For such requirements, consensus needs to be reached through the execution of smart contracts by multiple Distributed Apps participating in the network.
In order to understand this better, we can take some examples of consensus as follows:
a) A simple voting mechanism that may require more than 50% of votes to reach consensus. This does not require a complex smart contract.
b) Cutoff based consensus where at least 75% of the participants should sign the transaction.
c) Weighted Consensus based on economic pointers such as a number of nodes installed in the network as a direct pointer to the Investment made in the network. This is more popular in public blockchain consensus (Proof of Work, Proof of Activity, Proof of Storage etc)
d) Strict Contractual Consensus governed by the policies of a smart contract and regulatory needs. Such scenarios need to be evaluated by distributed Apps.
Eg. A banking transfer transaction shall be executed only if –
(i) It is made on weekdays between 9 am to 9 pm.
(ii) The minimum account balance from the donor account should be $ X in order to proceed with the transaction
(iii) The recipient account should have a recent KYC done which should not be older than 6 months
Business Policy Enforcements
Business policies are usually written, “on paper”. The enforcement of these policies is carried out manually or through internal workflow systems.
Some decisions are even made over e-mails, which tend to get lost as time goes by.
Blockchain presents a traceable and automated medium for fully automating business policy enforcement.
Due to the auditability of blockchain, businesses can automatically check for compliance by participating in the ecosystem with no middle-systems involved.
Some examples include:
a) Budget approvals through consensus & spending approvals
b) Commission disbursement processes for partners
c) Performance Linked Incentives
d) Taxation Reports
e) Procurement processes
f) Compliance Audits
Blockchain-powered systems can bring complete transparency in enterprise business operations. Decision making, contract management, procurement processes, and approvals can be written to the ledger with end to end traceability.
Depending upon the nature and criticality of the decision, consensus can be sought from key management stakeholders across the organization.
For routine & day to day decision making, a delegation of authority can be implemented through pluggable consensus rules.
Such a system will eliminate ambiguity in the overall process and amplify “trust” across stakeholders in the organization.
Another important use case is in the domain of Human Resources. Candidate selection processes can be made more transparent if the interviewer’s decisions and ratings are captured on the blockchain. This would enable independent auditing by the management and ensure fair and uniform hiring standards.
In case of exceptional approvals, hiring managers can seek “consensus” on the blockchain-based system from the management, so that arbitrary decisions are not taken & all approvals are timestamped and linked on the ledger.
Other Programmable Crypto Assets
We have heard about cryptocurrencies as a means of performing transactions in lieu of money/currency.
However, blockchain has revolutionized many industries through programmable crypto assets.
Crypto Tokens representing Physical Assets have opened up use cases across industries and have led to increased liquidity while doing business.
Crypto tokens are entities which can be bought either through money or other cryptocurrencies. Tokens can also be “awarded” basis smart contract execution.
Tokens represent a “unit” of a tangible enterprise asset – such as loyalty points, rewards, credits, goods inventory or other enterprise assets.
These tokens can be redeemed on the blockchain, and the proceeds can be disbursed to the participants of the network depending upon the smart contract logic.
Crypto tokens help enterprises have a “common language” for executing transactions across lines of businesses & representing their assets.
With the advent of tokens, it has become increasingly possible for different businesses to collaborate on the blockchain without the need for proprietary systems integration.
The applicability of crypto tokens is across industries. Presenting a wide spectrum snapshot below -
In the energy industry, barrels of crude oil can be represented as tokens. As the barrels change hands and ownership across the supply chain, these tokens can be traded across stakeholders (oil company, supply chain partner, bank and buyer). There would be no paperwork required, as the ownership change is determined by a smart contract.
For the telecom industry, tokens can be used in lieu of prepaid recharge vouchers. These tokens may represent talk time, data quotas, or both. Tokens may be awarded to loyal customers and redeemed on-demand through wallets.
In the Real Estate industry, micro-investments can be made in land holdings, housing etc in the form of tokens. This opens up new avenues of valuation, as well as makes it easier for real-time micro trading as the land prices fluctuate without the need for an outright sale/purchase.
The e-commerce industry can use tokens rather than giving cashback to customers. The token wallet can be used for unlocking discounts once the balance reaches a certain threshold.
In the Retail industry, tokens can be a common language for maintaining loyalty points across brands. This will help customers maintain a single wallet for loyalty tokens all their purchases. Multi-Brand collaboration and joint offers are also possible as the token economy would be common.
For corporates looking to raise money, Secure Token Offerings (STOs) can be issued, backed by tangible assets of the company such as stocks, bonds or immovable assets such as real estate. These tokens can be purchased by investors on the market.
Green Environment Tokens can be issued to represent green credits issued by the government to citizens. This would incentivize citizens to save more power. These tokens can be redeemed at the end of the year to avail of tax benefits.
Conclusions
The possibilities of blockchain are infinite, and in the coming years, it will come of age -
From PoCs to real deployments.
From demo use cases to practical business catalysts
From hype to reality
From a “fashion” to a way of doing business
However, it is also imperative that we use blockchain responsibly and only if it is adding value to our business needs.
Hence, having a blockchain vision is important rather than “jumping in” just for the sake of using the technology.
If we take a narrow and technical view of blockchain – we may end up asking this question –
“But can’t this be done without Blockchain?”
The answer to this question is “yes”.
Anything is possible in software, and even before blockchain existed – businesses were running well.
The real questions that we should ask while planning to use blockchain are -
Will it bring in more transparency in business operations?
Are we struggling with implementing Delegation of Authority (DoA) in our organisation?
Do we need more liquidity for our assets?
Can I find out the provenance of all enterprise transactions independently without hiring an external auditor?
Do we need a standard architecture to bring in accountability across business processes?
Do we need collaborative decision making which is transparent to all?
Are we tired of custom systems integration every time one line of business needs to collaborate with another?
Do I need a standard security layer for enterprise data and transactions?
Do we need tamper-proof transaction data which is internal fraud-proof?
If the answers to most of the questions above are affirmative, we can explore the use of Blockchain.
There is another article I wrote sometime back which tries to throw more light on when to use Blockchain.
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