Blockchain Disruptive Elements

What makes blockchain so disruptive? Blockchain intrinsically bridges the trust gap in our business networks and our societies by co-developing a shared copy of the truth. Five critical elements of the blockchain technology drive this disruption: transparency, immutability, security, consensus, and smart contracts. How you see these disruptive elements — that is, your perspective of each of them—suggests ways to transform your business.

Transparency

Blockchain provides end-to-end visibility of your business transactions with a single source of truth that is replicated or shared across the dis- tributed ledger in your business network. Based on the permissions that are given in a private or public blockchain-based business network, you can see the full trail of a transaction. In the past, this transparency has not existed in business networks that involve multiple participants. Thus, the new transparency disrupts many intermediaries or third parties in your business network by enabling direct peer-to-peer connection and exchange.

Imagine a supply chain network with a single source of truth across the value chain.

It is difficult to get real-time visibility of shipments in a logistics and supply-chain business because such a complex network includes multiple participants (users of goods, retailers, distributors, manufacturers, suppli- ers, and brokers), each of which keeps its own record of a transaction, and whose records are never synchronized. A blockchain-based supply chain network provides greater visibility and transparency that drives efficiency and higher value.

Immutability

After you record a transaction into a blockchain, no one can delete it. If you try to modify the transaction, the blockchain appends another update record to the transaction, which is visible to the participants in the net- work. Each transaction in a blockchain is encoded into a data block and uniquely signed and timestamped. Each block is connected to the blocks before and after it. These blocks cannot be altered or modified; they are linked together to form a chain that is immutable and irreversible. An immutable history of transactions eliminates the counterfeiting and fraud challenges faced by many businesses.

The blockchain-driven provenance process eradicates counterfeiting by using immutability and transparency.

Counterfeiting is the biggest challenge globally for legal and financial doc- uments and valuable goods, such as drugs, food products, luxury clothes, and jewelry. It costs companies more than 7 percent of their annual expen- ditures, amounting to almost $4 trillion each year on a global scale.1 The immutable digital record and history of transfer of an asset or good are identifiable and visible to the participants within the blockchain network, so this approach blocks fraud and tampering attempts in a system or process.

Security

Blockchain provides a highly secure transaction system that is almost impossible to hack. Every transaction record on a blockchain is crypto- graphically secured with digital signatures, along with a trail of the trans- action updates. Participants in the network have their own private keys that are assigned to a transaction or any update to an existing transaction. Therefore, security vulnerabilities are easily identified and inherently pre- vented. Every transaction is replicated or shared across the distributed led- ger, which means that hackers must look at every ledger and find the same data or record across all the ledgers, which is difficult.

Security, privacy, and compliance are bolstered by a distributed ledger, transaction integrity, high availability, and auditability.

The security of business-critical data and transactions is a primary con- cern in any organization and across all industries. Digital transformation of such data and transactions, in turn, is the key driving force of further complexity in today’s business world and brings up new security issues. Global cybersecurity spending was expected to exceed $114 billion in 2018, according to analyst firm Gartner, and Statista predicts that it will total more than $234 billion by 2022.

Most organizations keep their business and customer information in a centralized system. Unfortunately, such centralized systems are vulnera- ble to attack. Blockchain applies a decentralized approach, in which the transaction data are replicated across the distributed ledger. Thus, even though one of the ledgers is not active, the other ledgers have a copy of the transactions and ensure availability. Each transaction is validated or consented to by network participants before it is posted in the ledger. Although you can identify the members in a blockchain, they can main- tain their anonymity and privacy, which is important for organizations to ensure trust. Having an untampered transaction history in blockchain delivers readily available auditability for compliance and regulation purposes.

Consensus

The network participants in blockchain use a consensus mechanism to eliminate the need to rely on central authorities and third parties to vali- date business transactions. The foundation of cryptocurrency, for exam- ple, is a public blockchain that requires miners to validate the currency transactions. This process, which is called proof of work or mining over- head, involves a huge amount of computing power and energy. In contrast, permissioned blockchain includes trusted participants on the network and uses consensus algorithms that validate transactions anonymously without mining overhead, and with a fraction of the computing power and the energy costs that are used in a public blockchain.

Consensus drives fair participation in a business network with democracy.

On a global scale, unfairness is more than 50% in economic structures where benefits and burdens are not fairly distributed across the country government according to a BBC poll. Many businesses spend billions of dollars every year to deal with unfairness issues, while others lose billions of dollars every year without being aware of unfairness. Many intermedi- aries in the legal, business, and government arenas take advantage of unfairness and deceptive practices for their own economic or financial benefits. Blockchain technology has the potential to replace the unfairness in government and businesses with a truly democratic and transparent approach toward transactions.

Smart Contracts

You can think of smart contracts as self-executing electronic contracts that state the legal and business terms of an agreement between business partners. Smart contracts in blockchain are business logics that are pro- grammed and embedded into a transaction record that enable business process automation. Such contracts allow transactions and agreements to be executed among various business participants without engaging the services of a central authority, legal system, or arbitrator. Business process automation is possible by using smart contracts because the transactions in blockchain are trusted, transparent, and immutable.

Smart contracts fuel business process innovation with automation, speed, and compliance without hefty costs and risks.

Even though automation and agility are increasing in business or legal contracts management, the average cost of processing and reviewing a basic contract has increased by 38 percent in the last six years and now averages $6900, according to the International Association for Contract and Commercial Management (IACCM).4 The global legal services market alone is expected to top $1 trillion by 2021, based on a Statista report.5 Think how much you are spending on your contract management services and how much potential smart contracts have to save money, enable con- tracts to be processed faster or almost instantaneously electronically, and reduce risks through application of transparency and immutability. Initial estimates suggest that blockchain technology can reduce the execution time of business contracts from days to minutes, from manual to auto- mated, at a fraction of the current cost, essentially without any legal entity becoming involved.

Next, we’ll explore how these disruptive elements from blockchain can uncover new opportunities for your business’s transformation.