There’s an old adage that it’s glamorous to say you’re in law school, but nobody wants to admit they’re a lawyer. As Bitcoin has slumped from heartthrob to depressed asset, it could similarly be said that everyone likes to talk about blockchain, but nobody wants to admit they’re into cryptocurrency.
However, the reality is that cryptocurrencies are enabling compelling business cases across several industries (regardless of Bitcoin price) and that blockchain is starting to deliver on its potential.
First off, what is blockchain? Blockchain is a decentralized ledger that uses distributed peer-to-peer consensus to verify and authenticate all information recorded within the ledger. All parties participating in the blockchain have access to the ledger to transact with each other which helps ensure security, transparency and auditability of the underlying ledger information.
Historically, ledgers were held by a single entity that controlled all participants. Blockchain takes the opposite approach, establishing an open ledger system where information is shared equally among all participants within the chain. Ledgers move from being held by a single entity to being held by everyone.
Some of the guiding principles of blockchain include:
- No central authority. Information is stored across a network of computers (nodes) making the chain decentralized and distributed—a “shared ledger.” No one entity owns the system and there is no single point of failure.
- Consensus driven. Like the traditional ledger, past data is not permitted to be altered or changed. Instead, blocks are added to the end of the chain in chronological order, with each block linked to the previous one through a hash pointer, using consensus among the connected nodes to verify each new block. Disputes are resolved based on consensus of the information held by all participating entities, and no one party can alter the blockchain without gaining access to 51 percent or more of all nodes.
- Trust enabler. The distributed and consensus nature of blockchain ensures the integrity of that data, eliminating the need to find a “trusted third party” to facilitate and validate the transaction. Blockchains can be implemented in three different ways, based on who can view the information and who can participate.
- Public. Public blockchains, like Bitcoin, are open to everyone and all information held within the chain can be publicly viewed, with no specific permissions needed.
- Private. Private blockchains are open to only those invited to participate, and information held within them can only be viewed by those entities. These blockchains are gaining momentum with most supply chain proof of concepts, but they do limit full-scale adoption by all potential participants within a required network.
- Hybrid. Hybrid blockchains combine features of both public and private blockchains, providing control on what information is kept private or made public.
Cross Industry Benefits of Blockchain
While the promise of blockchain is significant and surrounded by hype, if successfully deployed, there are benefits that could apply to all industries.
Data visibility & reconciliation. Blockchain transforms the traditional model of data stored by single entities by placing the data in a shared ledger, so that every participant receives a copy of the data.
To manage this democratization of data, two functions are necessary:
- Synchronization: Data is simultaneously and securely shared as nodes within the blockchain to verify and “memorialize” transactions.
- Validation: New nodes are only added when consensus on the validity of the information (transaction) is verified by the majority of the participants. If a new node fails to follow the necessary blockchain protocols, it is rejected. Through this function, disparate systems with incomplete, conflicting or unreliable information are eliminated for all participants.
- Traceability. Blockchain enables organizations to track products across the entire supply chain, with every action recorded and verifiable records securely attached and stored.
- Dispute resolution. Through its ability to provide distributed delivery records and consensus-driven transaction verification, blockchain can simplify the dispute resolution process and identify in real time misalignment of information during the verification process, reducing costs and time. Theoretically, this could move beyond simplifying dispute resolutions and eliminate the occurrence of disputes in the first place.
VALUE CHAIN DISRUPTOR
Blockchain’s early disruption of traditional industry value chains has been particularly salient in the consumer-packaged goods, retail and logistics industries.
Read Next: Blockchain is the New Supply Chain
Tracing how goods are made. Supply chains are global and growing more complex. Materials and products travel across multiple geographies before they reach the consumers’ hands, while governments and consumers are demanding greater visibility into sources of the materials used in manufacturing. This requires data to be both captured and aggregated.
1) Data capture: All industries have realized the compelling advantages to software-driven data analysis, which has led to the proliferation of data-capturing sensors on a wide variety of products as they move through the production floor and the supply chain.
2) Data aggregation: Prior to blockchain, data captured across the supply chain was trapped inside disparate enterprise systems, making it difficult to string together in an actionable way. Today, several companies are recording blockchain-powered, end-to-end product journeys that are forming the basis for overall brand messaging.
Ensuring the authenticity of goods. According to the 2018 Global Brand Counterfeiting Report, the global counterfeit trade is estimated at roughly $1.2 trillion annually or 3 percent of all global trade. Counterfeiting impacts almost all product categories across all price points, posing significant risk (including consumer product safety concerns) to brand owners. Blockchain enables product authentication at the unit level, allowing individual items to be tagged with unique identifiers for tracking and validation, providing full visibility into the product life cycle.
Paying for goods. Once a shopper decides to purchase, payments have traditionally involved credit cards, but this approach has two important weaknesses:
Transaction fees for credit card purchases (typically in the 2 percent range) are rather high, negatively impacting retailers.
Not all shoppers have credit cards.
Blockchain-based cryptocurrencies typically offer lower transaction fees and remove the credit card requirement for purchasers. These advancements both expand the universe of buyers and reduce the financial cost for doing business.
Streamlining cross-border tractions. Blockchain is also playing an expanded role in global commerce. Twenty-eight banks—including Deutsche Bank, JPMorgan Chase and Société Générale—are participating in a proof of concept to “validate whether blockchain can help banks reconcile their international nostro accounts in real time.”
Shipping purchased goods. As goods move through the supply chain, entities rely on logistics operators to transport goods between parties, with hand-offs requiring bills of lading which historically have used a combination of written forms and disparate IT systems, introducing a tax on participating companies and impeding the sharing of data for issues like tracking and fraud prevention.
How to Get Started
Given the ambiguity in the future technological landscape for blockchain, interested parties should explore and experiment with both public and private platforms. Early adopters will be given the power to set standards and drive the blockchain ecosystem, so time is of the essence to get involved now.