Blockchain technology is not widely understood, but its implementation as part of digital transformation could have far reaching benefits for people, companies, and other organizations.
Among the technologies and processes most closely associated with digital disruption and transformation, blockchain stands out as being both the least understood and the one with greatest potential to secure data and transactions that demand trust.
Blockchain combines the openness of the Internet with the security of cryptography to give consumers and companies a faster way to verify key information and establish trust without the need for third parties and other intermediaries. It was initially developed more than a decade ago to provide the technical underpinnings for Bitcoin, the cryptocurrency with which it is sometimes mistaken. As Pat Bakey, president of SAP Industries, noted a year ago, “Early horror stories about bitcoin, the most famous digital currency to use blockchain, prompted its mainstream dismissal as a dubious tool of the dark web.”
At its core however, blockchain is simply an open and secure method of recording transactions, just like a traditional ledger. Because blockchains establish trust, they provide a simple, paperless way to establish and track ownership of money, information, and objects by individuals, companies, and other organizations.
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value,” wrote Don and Alex Tapscott in their book, Blockchain Revolution.
By design, blockchains are inherently resistant to modification. The data stored in a blockchain exists as a shared and continually reconciled database hosted on millions of computers around the planet, so that no single version of it exists in one single place. In addition, each block of data in a blockchain is linked and secured to the next in a sequence using cryptography.This makes it virtually impossible to add, remove, or change data without alerting others in the chain.
Today, most ordinary transactions are verified by a central authority, such as a government or a credit card clearinghouse. Blockchain applications replace these centralized systems with decentralized ones, where verification comes from the consensus of multiple users.
These features mean that blockchains could offer a number of key benefits to users. First, it could dramatically speed up and simplify a wide range of transactions for individuals and corporations. In particular blockchains make it much easier to identify ownership, verify authenticity, and reconcile processes.
So for example, blockchain-enabled ‘smart contracts’ — modular, repeatable scripts that extend blockchains’ utility from simply keeping a record of financial transaction entries to implementing the terms of multi-party agreements automatically — could help streamline procurement and supply chains.
Second, blockchain implementations could lead to the disintermediation of many of those entities that currently provide trust and verification services, including banks, clearing houses and trust firms, and supply chains. In a recent article, Deloitte Consulting noted: “Blockchain’s ability to replace intermediaries is precisely why this technology matters. It can reduce overhead costs when parties trade assets directly with each other. Its ability to guarantee authenticity across institutional boundaries will likely help parties think about the authenticity of records, content, and transactions in new ways.”
Third, it could hasten the digitization process by making it easier tag and track physical goods by providing them with highly secure digital identities. For example, London-based Everledger has placed more than 1.6 million diamonds on a blockchain, recording attributes for each diamond, including the color, carat, and certificate number to help reduce fraud and combat the sale of blood diamonds.
Digital Cinderella Comes of Age
Understanding what blockchain can do and enable is part of the process of understanding both the challenges and opportunities for innovation, afforded by digital transformation.
Data is at the core of this transformation — it is truly the ‘new oil’ of business. The companies that survive and thrive in this new hyper-competitive environment will collect and curate Big Data using IoT sensors and other tools, process that data to discover patterns and insights through machine learning and analytics, and secure and streamline their operations using blockchains.
To date blockchain has been the Cinderella of digital transformation, but this is changing. Awareness of blockchain capabilities — and investments in blockchain startups — are growing rapidly.
Blockchain may still lack the star status and recognition among business executives and consumers of artificial intelligence, machine learning, or Big Data, but it is an integral part of major initiatives such as SAP Leonardo and blockchain is rapidly coming of age.
Like the other technologies that help enable digital transformation, blockchain still faces a number of hurdles. These include the relatively slow speed that blockchain-based transactions can currently be processed compared to, for example, ATM transactions, and questions over the ultimate security of the cryptology that underpins it.
As Goldman Sachs noted in an animated infographic, “Blockchain is protected by business-grade cryptography, but no technology is 100 percent secure. And when large sums of money are involved, hackers will try to follow. So security concerns could also slow blockchain adoption.” Nevertheless, most analysts and technologists believe these concerns will be addressed and that blockchain or blockchain-type technologies will eventually achieve mainstream adoption and help transform business and other activities where trust is a key factor.
“Blockchain could be a revolution in the way everyone — businesses, governments, organizations, and individuals — work together,” says Goldman Sachs. “It provides a simple, secure way to establish trust for virtually any kind of transaction, helping simplify the movement of money, products, or sensitive information worldwide.”
The Wall Street investment bank concludes, “It’s a transformation that’s already begun. And organizations — both the ones that it can help, and the middlemen at risk of disintermediation — will need to be prepared as the technology matures.”