In the last few years, much has been made in the world of technology and finance about blockchain and its potential impact on business, economics, and society. Depending on your sources, blockchain will do everything from eliminate the need for banks and equity markets to solving global poverty to ensuring food is safe to consume. Blockchain’s applications are quite expansive across industries.
As a businessperson, you have a specific set of problems you need to solve each day and perhaps in the upcoming fiscal quarters. Trying to figure out which parts of blockchain technology are actually applicable to your problem and which are, well, better suited for a world of unicorns carrying pots o’ gold to the ends of rainbows can be…challenging, to say the least.
This is the first article in a series to help businesspeople understand fundamentally how blockchains work, what their key advantages are to a business (any business), and how to think about applying the value principles of blockchain technology to actual business problems. We’ll start with some foundational principles here, and in future articles we’ll expand into how to do some simple automation, and then we’ll dive into more complex automation using industry-specific examples.
This Article is About Blockchain… Not About Cryptocurrency
OK, one item to disposition right from the start. I am NOT going to say anything here about cryptocurrencies. This is not YAPAHBWDCB (Yet Another Post About How Bitcoin Will Disintermediate Central Banking). This is a practical overview of blockchain for the enterprise. Real businesses, like yours.
It’s the fundamental way that blockchain technology stores data, and what that means to a business process, that makes it so powerful.
Bitcoin and other cryptocurrencies are examples of a very specific type of blockchain. As we all learned in geometry class, “all squares are rectangles but not all rectangles are squares”. Cryptocurrencies are implementations of blockchain technology, but not all blockchain implementations look like coins, tokens, or other means of storing value for the public. You can store ANY sort of information on a blockchain. Or, links to information in other places. It’s the fundamental way that blockchain technology stores data, and what that means to a business process, that makes it so powerful.
Traditional Business Processes: The Contracts Example
OK, let’s jump in. We’re going to start with an analogy that most of you will immediately have experience with in business: contracts.
Why do we have contracts in business? The basic contracting process in business has three steps:
- We agree to terms
- We gain consensus
- We memorialize the terms in a document
Step 1, agreeing to terms, obviously is the key step. The parties in a business arrangement, before the contract writing process starts, agree to the nature of the arrangement. Who’s doing what for whom, when, and how they’re doing it. Usually why the parties are doing it is implicit, but not always.
In step 2, the parties refine the details and achieve consensus. That is, they agree that the terms are the terms, and they’re mutually bound to those terms for the period of the agreement. Again, not complicated (in principle).
In step 3, we start the lawyering. Rubber starts to meet road. This is where the parties get specific regarding the language, with the intent of capturing what they agreed to in a way they can review and confirm it reflects the agreement faithfully. It provides us the parties with a reference that anyone, party to the contract or not, can review anytime in the future. And, critically, when the parties provide a legal signature, it provides reference that none of those parties can repudiate in the future. Said more simply, they signed it, they agree to what’s in it and they can’t go back later and say they didn’t. It’s right there for all to see.
Note: pay close attention to the terms “consensus” and “non-repudiation” in the process described above. In the world of blockchain, they’re enormously important.
OK, so we now have a contract that is mutually executed (signed by both parties). It says what it says, for all to see. Now, the parties get on with actually operating their respective businesses under that arrangement. The first step is the parties now have to implement processes to review the activities that are done under the contract over time. If it’s a normal service contract, the vendor has to perform services, and the customer has to pay for those services. If the vendor doesn’t perform, they likely won’t get paid, and if they do perform, they should get paid in a timely manner. You do you, I’ll do me.
That presumes that the parties can see the activity with enough clarity to evaluate who’s doing what and when. Often organizations can’t or won’t instrument those processes to know, or the IT investment to instrument the processes aren’t cost-effective. So non-performance happens in a vacuum.
Let’s say for this example that the costs associated with non-performance are plenty material to both parties. So, both invest heavily in internal systems, reports from those systems, and people resources to review the reports. Then both parties get together on a regular basis, say, in a quarterly business review, to go over those reports.
If all those people reviewing all those reports from all of those systems review that information and all is 100% going great, then all of that investment in time and systems, on both sides of the arrangement, is 100% non-value-add cost. 100% throwaway to both businesses.
So, what if all is NOT well? Terms of the agreement are being broken, on one or both sides. We then get into the wonderful world of cure and remedy, which can be painful and expensive depending on how long non-performance was going on.
Given that, what if every time something happened in a business process, be it a sale transaction, or a shipping status, or any other business event that implicates a contract or a regulation, or a critical relationship, that we knew that…
- the parties’ systems can all see it happening in real-time
- the parties can immediately agree that the event is consistent with the terms of the contract(s)
- the parties have the opportunity to prevent the event from happening if it’s not consistent with the terms
That would be enormously powerful.
And, once the parties agree and commit to the event, it’s recorded with the parties’ signatures in a way that no party can ever dispute:
- what happened
- when it happened
- who participated in it happening
Promise of Blockchain
This is the promise of enterprise blockchain and what makes the technology fundamentally different than technology before it. Enterprise blockchains are a shared version of the truth, with built-in consensus, and once the parties all agree to something, it gets recorded permanently, automatically, and in a way that none of them can dispute that truth in the future. Every stakeholder that should be able to see it can, and the records are completely tamper-proof.
Imagine then how much cost your organization could save if you could dramatically reduce or wholly eliminate time spent reviewing and reconciling reports with internal or external stakeholders. Imagine being able to instantly prove to auditors, regulators, customers, and vendors that you did what you said you were going to do.
This is the true business value of enterprise blockchain. In the next article in this series, I will get a little more technical regarding how blockchain accomplishes this, and what other supporting technologies are involved in getting started.
Interested in learning more about Quisitive’s approach to blockchain development? Read more here.