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Blockchain Comes of Age: Part 1 of 2

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In terms of public awareness, blockchain has made a long journey from being solely associated with Bitcoin – along with its controversy and misunderstandings as the world’s best-known “crypto-currency” – to, this month, making the cover of FORTUNE and being crowned by the magazine as “the actual next big thing in tech” (emphasis added, because this is far better than being the usual, frothy, hype-driven, soon-to-deflate “next big thing”).

It’s probably safe to assume that today, almost everyone in the business and technology community considers blockchain to be important (in fact, if you haven’t had a visit yet from your boss asking you to look into it, you’re probably in the minority). We think it’s important too. So let’s start this conversation with the simplest question: what is it?

In its most stripped-down conception, blockchain is an advanced form of ledger – and a ledger, of course, is just a system (in a book or in a database) for tracking money and other assets. Historically, every business has used its own ledger to keep track of the assets it bought and sold, along with its payables and receivables and other important information. When a car part, for example, is manufactured in China, sold and shipped to a distributor in the United States, and then sold and shipped again to a retailer in Canada, each of those three participating companies in the supply chain update their own ledgers to record the car part (and the money flows they associate with it) as it passes through their hands.

A “siloed” system like this works well enough in principle, but in practice it generates all sorts of additional costs and risks.

Because each ledger is independent of the others and completely proprietary, errors will go uncaught and often uncorrected until a dispute or investigation – a search for a part that went missing, for example – propagates slowly up the supply chain: customers phoning vendors, vendors checking records and then phoning their own vendors, and so on. Fraud can similarly go undetected, and the risk of fraud and errors naturally engenders spawns a costly sprawl of overhead: clearing houses, auditors, paperwork, insurance, cost premiums, holds on cheques.

In marked contrast to today’s system of independent ledgers, a blockchain is a network of computers (and the organizations that own them) with a single shared, distributed ledger. As a new transaction is entered on one company’s copy of the ledger, the transaction is propagated to all of the peer computers on the network, and added to a “block” of recent transactions (think of it as a single page in a ledger book).

Once full, that block of transactions will be immediately voted on by all participants to those transactions – effectively “approving” it as the truth, and rendering it immutable – and the block is then added to the “chain” of previous blocks of transactions, which all participants have an exact copy of.

While the first blockchains – like the one powering Bitcoin – were public, “permissionless” networks, the most cutting-edge versions of blockchains today are permissioned, private networks. Such blockchains connect participants known to the blockchain provider, and grant permissions to transact or to see transactions based on who the participant is and what role they play in the network.

This architecture addresses the natural concern of businesses to keep their private information – which often includes pricing or order sizes – limited to those who have a right to know, rather than made transparent to the entire participating eco-system. IBM Blockchain, which is powered by the Linux Foundation’s Hyperledger Fabric, is one of the best-known examples of a permissioned blockchain architecture.

With features like these, blockchain’s potential impact on commerce – and even on how industries are structured – is significant. As a software-based network, it makes industry participation easy and cheap for new entrants of any size. As a system of secure, transparent, and immutable transactions, it should make it easier to do business with much wider and more flexible scope. As a shared, distributed ledger, it eliminates most of the costs generated by the risk of single-party mistakes and fraud – since all participants have to agree to a transaction in a blockchain, logging the wrong part number will prevent a block from being added to the chain in the first place, saving countless hours of downstream investigation and dispute resolution.

A wide range of businesses and institutions are now investigating the nature of blockchain’s potential on their own industries and domains, and many of them are joining consortia, running hackathons, and launching pilot projects to gain valuable experience and insights as quickly as possible. Manufacturers and shippers see its potential in making supply chains easier to manage and much more efficient; banks and insurance companies see blockchain transforming trade finance, insurance contracts, securities trading, and more; and even governments are looking at how the technology can improve their ability to serve their citizens more securely and at lower cost.

Another industry that stands to benefit greatly is the energy sector. In our next post, we’ll look at how energy production, distribution, and storage may be radically changed by blockchain, to the benefit not only of producers, but of consumers, commuters, and the environment. And we’ll look at the role we think Interac will play in this transformation.

We worked with TMX Group to present a documentary on how the financial industry is being impacted by blockchain. Click here to watch the video.

 

 

*Photo by Samuel Zeller on Unsplash

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