To blockchain or not to blockchain
A blockchain is a distributed, unalterable ledger system where transactions and information are verified by all participants maintaining and updating a copy of the ledger, rather than by one centralized authority. Since it was first described in a 2008 whitepaper, interest in and implementation of blockchain technology has greatly surpassed what most would have expected. Blockchain networks are appealing because of their security, transparency, and efficiency at reaching consensus across large geographically separated parties. These systems build consensus among key stakeholders, scale globally, and can be relatively inexpensive for large transactions when compared to current centralized systems.
The two key costs that will affect the proliferation of blockchain technology are the cost of verification and the cost of networking.
The cost of verification is the cost of ensuring that a record, when first recorded on a blockchain, is accurate. A blockchain’s trustless, distributed ledger can provide greater visibility into the history of an asset, but can only fully succeed if you can verify the authenticity of the asset at origin. For example, there is currently a large market for conflict-free diamonds. Unfortunately, it is difficult properly and subsequently track them through the diamond supply chain. Vendors want assurance that their diamonds are properly mined, so they can be sold at the highest price. To do this, vendors needs verification from the mining operations. If the authenticity of the origin cannot be verified, it is unlikely vendors will pay the cost to update to a blockchain solution.
The second key cost is the cost of networking, which is the cost of organizing network participants to interact without a traditional intermediary. Historically, systems have operated by using a centralized entity to verify transactions. There are many advantages to utilizing a trustless, distributed network, however, it is important to remember that deploying this technology does not suddenly resolve poor business processes. A good example of this is the banking system. Banks are trusted to not allow fake currency to be sent through them. The bank acts as a centralized validator between two parties during a transaction.
In a blockchain system, there is no centralized body and market participants must agree to certain subset of rules by which they will validate all transactions. Comparing public blockchains and permissioned consortium blockchains demonstrates this dichotomy between how the technology is not necessarily the most important part, it is the consensus of the network. On a permissioned consortium blockchain, the initial validators have to set and agree to the rules that each of them will follow. On a public blockchain, the rules have already been set and companies can choose to opt-in or opt-out at their discretion. The important difference though is public blockchains are notably limited in transaction through-put and privacy, whereas permissioned consortium blockchains are a lot more flexible.
The key to understanding whether a blockchain solution is appropriate though, is for a company to understand and identify its current shortcomings. A business that is debating to blockchain, or not to blockchain, will need to ensure that they have adequately reviewed the two key costs discussed. Sound, detailed and secure internal controls over business processes are vital to accurate data input to a blockchain and a comprehensive, open dialogue about rules, segregation of duties and privacy between networking participants is integral to creating an efficient and effective blockchain network.