Decoding Blockchain: Opportunities for Businesses
Some experts say blockchain will be as revolutionary as the Internet. In this article and podcast, learn how businesses are applying blockchain to streamline existing processes, create cost savings, and securely exchange information and value.
There’s been no shortage of hype and attention around cryptocurrency—and now its underlying technology, blockchain, has entered the mainstream conversation. Many businesses are exploring the technology and potential use cases that will likely enable transparency and help drive efficiency in existing processes. Blockchain is still in its early stages—widespread adoption may still be 5 to 10 years away—but some predict it will be as transformative as the Internet. Just as the Internet upended how we share information and connect with one another, blockchain has the potential to revolutionize how we exchange value, transfer ownership and verify transactions.
The technology is already being developed across industries from financial services to manufacturing; other sectors, like retail, are also beginning to experiment with possible applications. Existing use cases can help you consider how blockchain-based applications might be applicable to your business—and how to mobilize resources to start preparing for the future.
What Is Blockchain?
In the simplest terms, blockchain is a secure and encrypted digital database shared by all parties in a distributed network. Any transaction that occurs in the network is recorded, verified and stored in the database, and is visible to all participants—creating an unalterable transaction log. It uses existing technologies, such as cryptography and digital signatures, to authenticate and authorize the data that gets written on the blockchain. It essentially results in a “golden” source of truth that all participants in a network can trust, which enables them to transfer value or information with each other without the involvement of a central intermediary or third party.
What makes blockchain unique and groundbreaking is that it is decentralized. Blockchain is a form of distributed ledger technology in which multiple copies of data exist across a network rather than a single centralized server or database. Because no centralized authority owns or controls it, participants access the same version of the data in near real-time. The decentralized management allows for faster, less costly processing of transactions, which can lead to efficiencies and cost savings for businesses.
A transparent ledger of transactional activity that happens in a given network. The network is open and anyone can run the open-source software on their computer and join the network. Digital currencies like Bitcoin and Ether utilize public blockchains.
The owner of the blockchain can be a utility, company or consortium of enterprises. Participants have to be authorized to join the network, and they cannot change the ledger without receiving access. One example is Quorum, developed by J.P. Morgan, which enables data privacy and higher performance through consensus that does not require proof of work.
Benefits of Blockchain
Blockchain could disrupt traditional business models and automate certain processes so businesses can redeploy time and resources toward more value-generating opportunities.
By design, blockchain enables multiple participants to view the entire life cycle of the digital ledger, and it also provides an auditable trail of all transactions on the blockchain.
Blockchain can enable shared infrastructure between counterparties. In business, some processes require duplicating information and many rounds of reconciliation. If parties were able to share infrastructure and trust in the technology, they could save time and money.
Smart contracts allow for the synchronized execution of a transaction between participants. This means many processes can be automated, freeing resources for other opportunities.
Network participants can trust in the distributed ledger, because transactions in the digital database are encrypted, and the transaction history itself is immutable. Cryptography and hashing techniques are used to create unique electronic fingerprints that must be verified when changes are made.
Blockchain Enterprise Solutions
Blockchain is still early stage, but businesses across a number of industries are examining use cases to see how it can simplify and automate processes, reduce costs and speed up transactions.
Blockchain is being developed in manufacturing to track the supply chain life cycle of any product or physical item, from large shipping containers to machinery. This can help to speed up the delivery process, reduce production errors and identify when items are sitting idle or underutilized. Retail giants like Walmart are testing blockchain to improve food safety by tracking food provenance—it provides a timestamped audit trail from the time the food is produced to when it is packaged, shipped and purchased.
Fintechs and financial services companies are developing blockchains to reduce transaction settlement times and create operational efficiencies. J.P. Morgan, for example, is partnering with its debt capital markets business to create a native debt issuance on blockchain. The debt instrument would be automated through its entire life cycle—from settlement to interest payment calculation and maturity pay down—using smart contracts. The firm has also introduced a blockchain-based prototype, called Dromaius, which will simplify transacting or issuing financial instruments within capital markets.
A blockchain-based infrastructure could help make the transfer of information between correspondent banks more efficient using the Interbank Information Network (IIN). Today, correspondent banking involves multiple intermediaries and redundant processes, often resulting in increased costs for clients and slower settlement times. IIN aims to make the exchange of sanctions screening information more efficient by connecting the correspondent banking network directly in a peer-to-peer way. Eventually this could evolve into new and unique approaches to information sharing, like Know Your Customer processes. Future-state correspondent banking could be faster, smoother and more cost-efficient for businesses.
Purchasing a property usually requires a lengthy title search process, and it can be difficult to uncover whether the property has liens or any other encumbrances. Blockchain applications could create and maintain a clean digital record of a property, which would enable easier settlement and transfer of commercial or residential real estate.
Blockchain can be used to fractionalize ownership of an asset or property, essentially creating liquidity around typically illiquid assets, like real estate or artwork. The potential for blockchain tokenization can be a powerful tool in enabling the transfer or division of assets so revenue can be distributed to investors.
What’s Next for Blockchain
Blockchain is still in its nascency, but it’s advancing quickly, driven by both public and private use cases. While the buzz around it is growing, there are still limitations to widespread adoption. The developer tools that are needed to build robust enterprise-grade blockchain applications are not yet widely available—and we’re seeing a number of opportunities to advance blockchain-based solutions for various markets.
Blockchain requires setting standards among entities, which can be a challenge—especially in highly regulated industries. There are also technical challenges related to scalability and data privacy. A cyber threat could be disruptive and corrupt the blockchain network. Developing the right tools and addressing these limitations will take time, but with continued investment, blockchain promises to solve many business problems.
The focus on blockchain in the enterprise today is on gaining efficiencies and cost savings by streamlining operational processes. In the future, there’s potential for value creation—from new assets and revenue streams to the possible creation of new industries. While promising on a number of fronts, blockchain is likely to be an optimal solution for only certain types of problems. Organizations, starting with the C-suite, should plan for the potential disruption to their business. It’s important that business leaders learn about the technology and how it can apply to their business, so they can be prepared when the next stage of value creation begins.
- Assess and understand how blockchain might impact your business. Consider the broader strategy of the company and where blockchain falls on the priority scale for your leadership team.
- Make a plan for any potential use cases that can be explored or tested, and engage the teams that will be integral in helping to create value from them.
- Identify emerging in-house experts on the topic, and determine the value in creating a blockchain lab or working on any proof of concepts.
- Identify strategic partnership opportunities for blockchain applications, both inside and outside the organization. There are many blockchain working groups and enterprise consortia that can serve as a resource, including the Enterprise Ethereum Alliance and the Linux Foundation Hyperledger Project . You can also engage business and technology consultants or vendors who have experience with blockchain applications in your field.