Governments across the globe are experimenting with the blockchain—the technology behind bitcoin—as a way for governments to reduce costs and provide more accountability to the public. But how viable is the blockchain for business?
Most businesses rely on centralised business processes, using enterprise-wide systems that provide software solutions for ﬁnance, sales, supply chain management and many other areas. These systems are proprietary to that organisation, and the captured information is, therefore, private. Of course, the accuracy and integrity of the data are subject to the internal controls and processes established within that entity. But, if the concept of blockchain were to be introduced to the business world, this may all be about to change.
WHAT IS THE BLOCKCHAIN
The blockchain is a distributed ledger system that is stored simultaneously across multiple computers. It enables a single source of information—rather than multiple sources—to be shared across different businesses.
The beauty of the blockchain is that it offers a data system that can fast-track and streamline business interactions, creating signiﬁcant efficiencies and, potentially, reducing the risk of fraud.
HOW DOES THIS FIT WITH BUSINESS?
An important part of running a business is the process of recording and settling transactions within ledger systems. But this can be cumbersome and inefficient if the businesses that work together all keep the same data in different places and in different ways.
A secure system—such as the blockchain—offers great appeal. It allows the same data to be stored and accessed across multiple sites and multiple organisations, if that is what is required.
HOW WOULD IT WORK?
The idea of the blockchain is that instead of each organisation having its own ledger system, transactions would be processed through a single system. Buyers would enter their side of the transaction, sellers would enter their side. Multiple legal entities would input their records of their transactions—either purchases or sales—and these would be pooled together, reconciled and then grouped into a block (hence ‘block’), usually around every 10 minutes. Each block of transactions is chained (hence ‘chain’) to the previous block to produce a continuous set of blocks of transactions that are linked together, akin to traditional centralised purchase and sales day book ledger systems.
This chaining process depends upon the role of ‘miners’ who authenticate each block of transactions, leaving an indelible mark that validates the ownership and existence of the transactions. The chain provides a history of these transactions, irrespective of the jurisdictional location or originator of a transaction.
The ledger’s accuracy is corroborated through the consensus process of mining. In this process, the blockchain is veriﬁed (‘mined’) to create a digital signature that can be seen by everyone involved. And, in order to authorise blocks of transactions, the miners will use complex, mathematical algorithms.
For the blockchain to work there needs to be many miners; they compete with each other to verify each block of transactions and they get paid for each successful solution. This mining process creates a consensus that veriﬁes the accuracy and integrity of the data. Notably, it requires trust in the miners as gatekeepers of the blockchain.
HOW RELIABLE IS BLOCKCHAIN?
The question of trust centres on the type of blockchain that is developed. There can be ‘permissioned’ (or private) blockchains that are owned, for example, by a government or an industry (such as banks). In these blockchains, the gatekeepers are appointed by, and represent, the owner.
In an ‘unpermissioned’ (or public) system, the miners are anonymous—anyone can become a miner. But the large number of miners, even with anonymity, ensures trust and integrity as they cannot be bought or bribed. Unpermissioned blockchains are open, transparent records of transactions, and, irrespective of the organisations that undertake the transactions, they are publicly available for all to see.
BLOCKCHAIN IN ACTION
The transparency of the blockchain is its great asset, and an important driver that ensures the integrity of the business concerned. For example, Everledger is a blockchain set up for the diamond trade. As a diamond is mined from the ground, it’s encrypted with a digital signature. Every time an individual diamond moves through the supply chain—from the mining company, to wholesalers, to retailers and ﬁnal sale to the public—it is possible to see from which mine the diamond was sourced, and its whole transaction history: the era of conﬂict diamonds and the black market could be gone forever.
The most famous example of the blockchain is the cryptocurrency known as the bitcoin. Released as open software in 2009, bitcoin is the ﬁrst decentralised digital currency and the largest of its kind in terms of total market value. There are quoted prices of bitcoins to major currencies, and they can be bought online and stored in electronic wallets. The exchange rate of the bitcoin has been extremely volatile, and would be a very risky investment, but they can be used as currency for certain transactions, such as buying shares in Google or Apple. Importantly, as blockchains develop, each may rely on speciﬁc cryptocurrencies, or tokens that are not based on any particular currency. These tokens are integral parts of that blockchain.
KEY CAPABILITIES OF THE BLOCKCHAIN
One important development of the blockchain technology is its ability to incorporate a ‘smart’ contract, one that lets all the legal and financial details of a transaction be embedded within it. In conventional database systems, rules are often set for a database as a whole, or within a particular application, but not for individual transactions. This new feature allows the contractual terms of each transaction to be recorded—in a computer language—that could encompass any legal terminology agreed by the parties to the transaction, thereby overcoming barriers to international trade rules that may relate differently in different international jurisdictions, or be subject to national peculiarities.
Another beneﬁt of a blockchain approach is that it moves across many nodes or computers, and so provides a much more consistent source of information than current proprietary systems that use single centralised databases. This makes business processes safer as well. In the blockchain, multiple shared copies of the same data co-exist, and any cyber-attacks or hacking would have to be applied to all nodes in the blockchain simultaneously in order to have any impact. Data records are therefore less likely to be compromised by hackers.
Overall, the blockchain has many repercussions for business. It may be that blockchains develop for a speciﬁc industry—such as the art world or ﬁnancial services sectors—or for particular supply chains within business, resulting in a variety of blockchains being used within one organisation.
The blockchain concept is set to revolutionise the business world. The recording and veriﬁcation of processing transactions are made more efficient and accurate by this process. The repercussions for business efficiency, transparency and trust are quickly apparent.