Blockchain for the industry — Part I
Thinking of kicking off a blockchain product, testing the technology out in a pilot or transitioning part of your operations into an implementation of the trusted, decentralized technology everyone is talking about but no one is really extra clear on what it can do? This is the resource for you. In this series of posts, we’ll explore what blockchain is, what it can and can’t do efficiently, what are some of the most interesting projects out there and how we think the technology will progress over the coming years so that you can make decisions based on what it can do for you right now, and how it will allow you to scale as time moves forward.
What can it do for you?
Let’s kick off by exploring the key advantages you can expect from your blockchain projects:
Solving transaction-transparency-problems
One of the most important things blockchain can do in any industry right now is to solve a transaction transparency problem. When there are misaligned incentives for transparency (i.e. the economic cost of keeping a knowingly accurate record of that transaction exceeds the benefits of doing so for the transaction provider), both parties can use a decentralized mechanism where the information that will be exposed is known by both entities upfront and is part of the contract for their interaction.
This is the case, for example, with supply chain applications. Whereas before the use of the technology any handover of a good or service would require trust in that third-party, that settled it, trusting that they could not be interfered with based on an economic externality, blockchain allows complex networks of stakeholders exposed to different regulatory frameworks to interact and transact transparently, keeping a record of those interactions based on those pre-agreed-upon assumptions that are codified in the contract and governance mechanism.
Resistance to soft-single-points-of-failure
This same logic applies to the enforcement of national rule of law to the transaction provider. Say for example a legal entity in the US and another in Europe want to do business. They need to select a business and legislative background in which to conduct their affair. If that business happens online, say with the purchase of a service via an online platform, they’re also subject to data protection and the KYC regulatory framework affecting that intermediary. This means the intermediary can be a soft single point of failure that goes beyond the known boundaries of both business stakeholders, and can be exposed to enforcement and other forms of social pressures that only make sense locally to that provider. The blockchain ensures that the contractual framework and the storage mechanisms are clear from the onset and that the data will be kept, unadulterated and securely auditable from its initial recording.
Auditability by default
Both of the previous advantages also mean that the chain needs to be auditable by any of the involved parties, and potentially even third-parties (different protocols will register varying levels of information on the blockchain to allow independent actors to validate transactions without having to access sensitive information).
The ability for information to be auditable by any party involved in the transaction solves the transaction-transparency-problem, and the ability for third-parties to audit select transaction information is a gateway to solve important consumer trust issues, by making sure that compliance auditors, quality management institutions and everyday consumers can verify the authenticity of the information being provided.
Codified governance mechanisms
One of the next obvious benefits of a blockchain architecture is that its governing mechanisms, i.e. the algorithms that rule how it reacts to any stakeholder interaction, can be codified into the chain. This means that participants do not need to rely on the incentives of the intermediary, and if they disagree with the direction of its governance, they can defect (as an example, they could either hard-fork — create a replica of the chain with a subset of its participants — or convince most existing participants to take a different direction and vote that into the existing chain-governing code). This degree of participant control and low barrier to exit given enough economic benefit incentivizes participants to be cooperative since they can pick the protocol up and run with it.
Unequivocal identification & signature
Finally, for all of this to be manageable at scale, you need to trust that each participant is who he says he is and that it is very hard for him to be impersonated by a fraudulent agent. In this case, that is guaranteed by the fact that each transaction needs to be signed with the participant’s private key, an extremely hard to guess code that is tied to the participant's node/device and that guarantees they are the unique issuer of their participation. This makes sure they cannot hand over responsibility for their actions on the protocol to anyone other than themselves.
What’s it good for?
So this is all well and good but what do these capabilities amount for in the industry? What are they being used for now, apart from creating virtual currencies, and what can we do with them once we solve some of the technical hurdles that are still being worked on at the protocol level?
Supply chain tracking// One obvious application of the principles above is the supply chain industry, where multiple complex networks of stakeholders interact to bring products to the hands of consumers and where tracking the entire process is untenable even for the savviest of business owners.
Quality management/compliance services// The ability for agents to store data unequivocally dated and identified on-chain and have it openly auditable allows existing quality management and compliance processes to happen in a decentralized form, giving auditors access to a stream of unaltered evidence that can be examined and assessed in a trustworthy manner by indepedently verified third-parties.
Procurement processes// Any time an entity, be it public or private, wants to standardize their contractual procedures, they vet a third-party platform that guarantees necessary documents are submitted in a timely manner, that candidates are well identified and are not fraudulently impersonated and that necessary documentation is stored safely and is available for evaluation on demand. All of these features are available in most of the blockchains that support nodes with the computational power required to run smart contracts.
Asset ownership and investment// Structuring asset ownership (whether its physical such as real estate property, luxury item or rare material) and investments, so that individuals can transact a % of that item in an open market and keep a ledger of its ownership and holding history is another case for a decentralized ledger that keeps this information in real-time and depending only on the continued participation of its members, those with a stake in the system and skin in the game.
Decentralized asset usage// Another interesting use case is when we need to control and keep record of usage of decentralized assets. Cloud platforms, DNS records, distributed/replicated file storage, financial bookkeeping, edge computing, electric vehicle charging stations, and other highly decentralized assets can be controlled in a reliable and timely banner by local agents by keeping them in sync in a decentralized ledger.
Multi-player value transfers// Similarly, whenever we need stored and sensitive value or assets to be transferred between players in a safe manner, we might want to use smart contracts requiring multi-signature (i.e. more than one actor needs to authorize them) in order to make them scale without any reliance on the fragility of third-parties. For example, transferring ownership of a piece of property might require the current owner, the prospective owner, and the lender to sign the contract before the asset is released and ownership is effectively transferred.
Coming up
Next up in this series of posts, we’ll explore:
- Blockchain as a strategic asset that grows and compounds in value as technology evolves and acts as a hedge against adverse political & business conditions
- Limitations of the technology today and what shouldn’t you use blockchain for
- How to start a blockchain product and what the user-facing limits are
