The mention of a blockchain‑based approach, to many, invites notions of industry technology hype – an effort to be seen as innovative even visionary. The true question, however, relates to substance, i.e. is this real progress or another fad or phase? Proof-of-concept (PoC) has finally arrived for several blockchain initiatives, with models applied across a huge range of industries including Volkswagen looking at global supply chain management, a number of banks applying blockchain to payment systems and the diamond industry tracing origin and sourcing to reduce the risk of fake or unethically sourced diamonds. Gartner reported that blockchain technology will create more than $176 billion dollars’ worth of business value by 2025 and $3.1 trillion by 2030. In its 2019 Blockchain Survey, Deloitte found that 53% of senior executives listed blockchain as one of their top five priorities

Each of these applications, if applied widely across the industry, would have the potential to significantly alter relationships within the industry and to change operating models that have been in effect for many years. This already wide range of industry applications enables us to ask what is it about blockchain that is driving this? The answer lies in the confluence between the technology and its ability to shift the dynamics of human interaction. This is about how people relate to each other, realized through interactions between users via blockchain-based applications.

Open, shared, and multi-point information access

Blockchain innovations are fundamentally changing the process of handling information between users. Typically, we – the user – entrust a person or company to hold, communicate and transmit accurate, up-to-date, and reliable information (accounting software; financial-reporting tools, and file sharing systems for example).

By contrast, when this data is entered onto a blockchain ledger, this human-software trust relationship subtly changes. Instead of implicitly trusting the entity we are dealing with to have acquired and operate appropriate software and hardware systems, trust is placed in being able to identify and track the information itself thanks to the data being shared in a way that is consistent, identical between users, and open to multi-point access.

In other words, information on a blockchain ledger can be checked to ensure it is up to date in real-time and therefore once confirmed it is from that point on necessarily accurate, and immutable. Changes and modifications are time-stamped and fully traceable. In a business context, this has far-reaching implications to improve processes and transfer trust from the entity operating the software platform to the data contained within it. This is arguably where trust should fundamentally lie.

Innovation and the human element

In developing blockchain solutions, it is not the blockchain architecture in the sense of its software or programming that are the most challenging components.

In its simplest form, blockchain is a decentralized, distributed ledger on which transactions are anonymously recorded. The transaction ledger is maintained simultaneously across a network of unrelated computers or servers called “nodes”, like a spreadsheet that is duplicated thousands of times across a network of computers. The ledger contains a continuous and complete record (the “chain”) of all transactions performed which are grouped into blocks: a block is only added to the chain if the nodes, which are members in the blockchain network with high levels of computing power, reach consensus on the next ‘valid’ block to be added to the chain. A transaction can only be verified and form part of a candidate block if the percentage of nodes on the network needed by such network’s protocol confirm that the transaction is valid; the method of determining this issue is called the “consensus” protocol. 

A block generally contains four pieces of information: the ‘hash’ of the previous block, a summary of the included transaction, a time stamp, and the “Proof of Work” (the consensus protocol for several of the major public blockchains) that went into creating the secure block. Once information is entered on the blockchain, it is extremely difficult to alter: a blockchain network lacks a centralized point of vulnerability for hackers to exploit and each block includes the previous block’s ‘hash’ so any attempts to alter any transaction with the blockchain are easily detectable because every block in the chain is affected. However, new blockchain platforms are using different “consensus protocols” such as “Proof of Stake” and “Proof of Authority”.

In other words, blockchain is a self-maintaining database which typically has a “functionality wrapper”, or app development platform, on top. Blockchain can be thought of as an operating system for which useful applications, particularly “smart contracts” can be written. Assets and information about transactions can be stored and tracked without the involvement of a typical intermediary, such as a bank, or a central authority or some other trusted third party in “permissionless” blockchains.

A blockchain network may be public and open (“permissionless”) like the internet or structured within a private group like an intranet (“permissioned”). The blockchains that have captured the imaginations of many insurance companies are known as “private” or “permissioned” blockchains because only certain pre-approved participants may join them. These blockchains use a variety of means to ensure the identity of parties to a transaction and to achieve consensus as to the validity of transactions. The entities creating the “private” blockchain agree on rules that govern how entries are recorded and under what circumstances they can be modified. Only specific authorized participants are given access and are known within the network.

The challenge — as experienced in numerous technology innovations — often lies in the human element. Realizing the benefits of innovation often requires changing the mindset of people to adapt to a change in processes. This may require evidence of the success of the new system before wide-scale adoption. In some ways this is similar to the introduction of computers which required people to learn new skills to operate relevant hardware (eg using a keyboard) or development of software, operating systems (the success of Windows) or the development of an effective internet to enable people to communicate in a new much more efficient electronic form.

Innovation in finance

One of the earliest and most high profile uses of blockchain technology was (through Bitcoin) in providing a secure payment system as an alternative to depending on a bank in a post-global financial crisis era. This is highly significant as the holding and transfer of financial assets is one area where individuals need to believe that the holding of their personal assets or wealth is secure and accurate. Since its introduction in 2012, Bitcoin as a system has not been successfully hacked. Concerns around its operation have all been based on human elements concerning its application.

The cryptographic process based on “Proof of Work” consensus protocol and ability to identify the information on a real-time basis has been successful thanks to an effective process and a developing realization of the immutable nature and accuracy of the information. This is a strong proof case for the technology maintaining the accuracy and security of the information.

International financial transactions have required more streamlined processes for some time, especially when dealing with international payments at affordable rates. Here, the traditional banking system has failed to innovate. Remittance costs for cross border funds flows are comparatively high, particularly in the context of small payments.

The use of technology has therefore been a focus for financial payment networks, such as IBM’s World Wire which supports Stellar Lumens (XLM) settlements. This improves on the existing system with faster transactions at a fraction of the cost. As we see from Facebook’s announcement of Libra Coin as a global payments system, this is likely to continue to be an area of continuing innovation.

It is in the hands of traditional banks to recognize and deliver if this system provides a less cumbersome means of transacting which benefits end-users while providing an overall improvement to the economy through low-cost, simple, and transparent transactions.

Mitigating risk

Unlike centralized banking systems and centrally governed currencies, blockchain systems typically lack a single point of failure. Following the current centralized model of economics and commerce, countries can potentially go bankrupt, currencies have been known to crash, and financial institutions that were previously considered too big to fail have, occasionally, done so.

Moving towards a decentralized and distributed model for future dealings mitigates these risks inherent in centralized models. Therefore, trusting a decentralized and distributed network contributes to risk mitigation. However, this risk mitigation requires a deep understanding of how the system works: for example, commentators have noted that the mining power in the Bitcoin ecosystem (which controls which blocks are added to the change) is not truly decentralized because it is controlled by five mining pools in the PRC.

Adoption, however, must go hand in hand with widespread acceptance. This requires that users are confident that the system is secure, effective, cost-efficient and does actually operate to store accurately and immutably the information entered into the system. Perhaps unsurprisingly, advances vary from industry to industry.

Transformative impact: supply-chain management

Blockchain systems have made significant steps in supply chain processes and handling. Somewhat surprisingly, given the importance of international trade, applying traditional systems, there is little present-day understanding of where goods are at any given time and little sophistication in tracking methods.

Where blockchain applications have been employed to track goods, the information is consistently available to all users. When using blockchain-based track and trace systems, all parties from transporter and financier, to buyer and seller have access to data. They can track the location of goods in real-time with goods shown at each point, such as when they disembark at a given destination.

This completely overhauls and replaces older systems of weighbridges, destination checks, and the cumbersome habit of adapting each businesses’ process to this obsolete framework.

Transformative potential: insurance and pensions

Large pools of assets and capital are always in need of efficient systems and effective management. Blockchain applications show great potential to reduce fraudulent and duplicative claims, even within the same organization. Multi-point accessible shared databases are updated in real-time, which minimizes erroneous information and significantly reduces organizational risk.

Smart contracts manage the flow of information to check and verify details against policies, claims, and payouts while protecting personal data and complying with privacy laws. Similar applications can be rolled out sector-wide for enhanced process management, such as in the pensions industry.

Looking ahead

To say that enterprise is rapidly adjusting and preparing for the coming technological evolution would be overly optimistic. Innovation using blockchain-based systems is creating disruption, but it is early days where mass-adoption is concerned.

Conversely, to say that nothing has changed is a gross understatement. The benefits of adopting blockchain-based platforms are persistently being realized among specific groups within enterprise.

The fundamental benefit of a global information and value network and its ability for cross-collaboration, maximizing means of exchange, and patching flaws in the fiat system will however only be realized over time through widespread acceptance and use.

Preparing for change

For keen early adopters, the potential benefits include unified data handling and transfer, while eliminating duplicate systems. Internal consultations across enterprises are identifying opportunities, especially in cross-party benefits.

It is important, however, not to assume that adopting a blockchain-based system is essential simply because it is currently trending. It is vital to first recognize if there are potential opportunities and industry-specific benefits in relation to the applications that are being considered. For instance, opportunities for enhancing processes and improving efficiency as a result of multiple users having a need to trust in the information and requiring a mechanism in real-time that is based on that information being transparent and consistent might provide a good case for using blockchain technology.

Evolutionary change doesn’t occur overnight. It will accelerate as adoption escalates to industry-wide levels. Organizations which then choose not to participate, or participate too slowly, will put themselves at risk of being left behind later, but then this is the nature of evolution.

Ultimately, realizing this process change to its fullest extent demands organizations and bodies across sectors collaborate and accept, trust, and subscribe to the new system.

Finally, we return to the human element; adopting new ways of conducting daily activities takes time and usually involves a degree of concession. As with all new technology, there is a learning curve. For businesses, the shift in processes is often the greater challenge than learning the platform itself and adapting current practices accordingly.

Explore the frontier of technology and its place in the future of enterprise at our fourth European technology summit this October.

Visit the European Technology Summit 2019 website for more information and to register your interest.

More on blockchain from DLA Piper:

Adding tokenization to the toolbox

Legal issues of blockchain and how to deal with them