A few definitions and descriptions
So, what is blockchain, exactly?
In some ways, blockchains are analogous to very secure Google Docs. Think of a blockchain as business ledger, collectively updatable only by mutual agreement of the parties involved, always open to an interested party to inspect.
As a quick aside, there is a lot of confusion of blockchains with “cryptocurrencies” like Litecoin and Bitcoin. Cryptocurrencies do use blockchain technology. But blockchains can be used in many other situations.
Blocks. Each record, or bundle of records, in the ledger is called a “block.” The blocks are time-stamped and organized in a chronological chain. Each block has a reference to the block before it and the new information that is to be recorded.
Hashes. You will frequently hear references to “hashes” or “hash code” in conversations about blockchain. A hash is a unique representation of a set of data—you can think of it as a dataset’s fingerprint. They are created by passing the data through a particular type of algorithm. Blockchains use hashes to confirm the relationship of one block to the next.
Cryptography. And each block is secured by cryptography. Cryptography is a mathematical method for making information unreadable to anyone who does not have a key for translating the encrypted information back into a standard format.
Distributed. This ledger is not stored on any single computer. Rather, it is stored across a network of participants’ personal computers—a set up that is called “distributed.” No central entity or person owns the system. No centralized third-party authority (like a bank or a government) needs to validate the data in this ledger. All participants help run the ledger and can use it. In the case of Bitcoin, there are thousands of users. They assess transactions’ validity (if half of participants agree a transaction is valid, it is considered valid) and earn a small fee for this service.
Use of hashes, cryptography, and distributed data make blockchains just about impossible to, fake, game, tamper with or destroy. What’s written, is written—accurate, enduring.
And they are fast—transactions are almost instant; recording them may take minutes.
Blockchains at Work
Here are some examples of blockchains at work.
Making and Receiving Payments. When a client of our firm, that processes billions of international transactions a year, integrated Bitcoin as a payment option, they benefited from increased sales spurred by customers interested in using the cryptocurrency.
The client also found that it is possible to reduce fees. Fees associated with processing cryptocurrency transactions can be lower than third-party fees incurred by traditional transactions—like payment processor and merchant services costs and charges for multi-currency transactions.
Note use of the word “possible.” This past December, Bitcoin’s fee reached $34 per transaction. Soon after the credit card processor Stripe, among other firms, stopped accepting Bitcoin as payment. The transaction fees have declined some 97 percent since that peak. It is worth noting that other cryptocurrency options are available, such as Litecoin. And there is Ether, which is tied to particular blockchain platform.
“Your organization’s choice of whether to accept a cryptocurrency for payment—and which type—will hinge on a number of factors specific to your business,” advises Stuart Murray, project manager, WebINTENSIVE Software.
Secure Recordkeeping and Accurate Analytics. Here are two datapoints with something in common:
- About USD 461 billion counterfeit goods are imported worldwide, according to a report by the Organisation for Economic Co-operation and Development (OECD) and the EU’s Intellectual Property Office. Fake goods range from footwear, perfumes, and handbags to machine parts and chemicals to bananas and strawberries.
- Before they make a purchase, 91 percent of U.S. consumers want transparency into the good’s “source of ingredients, manufacturing, handling, and shipping…” according to a 2017 market study.
Both situations point to a need for a clear, trustworthy record of a product’s provenance. This need can be met by blockchains.
For instance, Forbes reported on Chinese ecommerce firms’ use of blockchain, integrated with other technologies, to track products in an effort to counter counterfeiting.
A digital identity is created for each product and coded in the first block of a new blockchain. Then, every time the product moves along its chain—from farm to truck to warehouse to freight train to warehouse to cargo ship to warehouse to supermarket—personnel scan an RFID or QR code to add that event to the growing chain. The product’s entire trip is visible to all interested parties, all along the way. Counterfeiting now takes more than mimicking a product and forging packaging. Each product is backed by an entire digital history that is nearly impossible to fake.
It’s important to note that data can be exported from blockchains to perform analytics and for visualization.
“Seeing a clear map of a product’s movement in detail can provide many insights for process improvement,” notes Marlon Feld, Ph.D., one of WebINTENSIVE Software’s lead UX/UI specialists. “More solid managerial decisions can be made when one is more confident about the accuracy of the data being presented.”
Smart Contracts. If you spend much time at all researching blockchains, you will soon come across mention of “smart contracts.” Most simply put, these are automated agreements for buying and selling goods or services. The terms of an agreement are embedded into lines of code and distributed on a blockchain.
Smart contracts can be a useful means for supporting routine transactions at relatively low administrative cost. Various firms are pioneering use of this approach to reduce their customers’ reliance on lawyers and banks. Use of smart contracts also can reduce the impact on cash flow of late payments or disputed payments and reduce the cost of collections and arbitration.
A word of caution, however: platforms supporting smart contracts have been subject to bugs, hacks, and to human error, trapping currency in accounts without the ability to extract that currency. Sometimes the platforms reimburse their customers, sometimes they do not.
Growing Numbers of Platforms. One positive trend: a number of firms are emerging that offer platforms and to speed and standardize blockchain development. “This will allow barriers to entry for midsized firms,” Murray notes. Like players in this space, the platforms are experiencing some growing pains. For instance, human error last fall caused one to lock up several million dollars in a block—and they have yet to devise a way to release those funds.
Assessing your Specific Opportunities
Innovative uses of blockchains to solve business problems and to realize opportunities are coming up with great frequency. Yet thoughtful guidance is necessary to mitigate risks. If you have an idea for using cryptocurrency or some other blockchain application, you can set a time for an informal, informative talk with one of our specialists.