Excitement about blockchain—the revolutionary cryptocurrency technology—has triggered a wildfire of public and private proposals to adopt industry-based blockchain solutions.
But like putting a jet engine in a car, changing fundamental assumptions of where blockchain is implemented will change outcomes. The reason is, many proposals fail to address how key assumptions will change when the technology is deployed in a new environment. And there is scant literature for executive supporters to educate themselves on potential pitfalls. Blockchain may hold the key to propel an industry to new heights. But the technology also could cut you off from your customers and create a serious business liability.
Blockchain 101: What is it and what is it used for?
Blockchain is a highly disruptive technology, which first became popular with bitcoin, that has empowered its cryptocurrency users even when governments have sought to shut it down. Bitcoin is one of many cryptocurrencies now based on blockchain technology. Cryptocurrencies can be used to pay for goods and services, transfer money across borders, exchange for dollars and other currencies, and store wealth, though it is highly volatile. It is all done without rules or permissions other than what is coded into the blockchain. Industry insiders and outsiders are actively looking for ways to disrupt most every other industry out there with blockchain.
Setting aside cryptocurrencies as the biggest single use, you can Google most any industry along with the words blockchain to find companies either using an industry blockchain or to find people investing and building one. Governments that were once highly skeptical are now getting involved as well. Just a very small sample: Our U.S. Federal reserve is now interested in it for monetary transaction. The Indian government recently announced interest in using blockchain to curb financial fraud. The UN is interested in blockchain to bring identity to people as a humanitarian right, and the list continues to grow.
“blockchain activity could
become a window for competitors to
see into your company. Consider
how the BLOCKCHAIN proposal addresses intelligence your competitors will glean.”
Bottom lining it for you
Benefits of an industry blockchain solution include:
- Distributed, so all participants have access to all the data on the blockchain
- Reliable, with no single point of failure
- Transparency, as participants can see all blockchain activity in real time
- Ability to transact on a blockchain without intermediation of a third party
- Potential for significantly lower transaction costs
Benefits of cryptocurrencies include:
- Distributed, with no borders, so no single government can shut them down
- Highly reliable and redundant, with no single point of failure
- Governments cannot change how they work without a consensus of its participants
- Permission and registration are not needed to use them. You can simply download a cryptocurrency wallet app on your phone or computer and begin accepting cryptocurrency.
- More and more companies are accepting cryptocurrencies as a form of payment.
What you need to know to move forward
Prior to implementation, asking your CIO these 5 crucial questions when considering or shaping a blockchain proposal can help reduce risk and improve success.
1. Will the proposal empower competitors to disrupt my business? Blockchain works by packing transactions into blocks of data. Transactions in one block are used to verify the validity of the next block and thus form a chain. All blocks in the chain must be present for it to work. “Miners”—people who maintain the blockchain—put transactions in a block and then solve complex algorithms to “win” the right to add that block to the blockchain. This picture isn’t as simple as some literature would have you believe. Add to this mix that miners don’t always agree who won and newer blocks get dropped all the time. Ultimately, the more computing power a miner has, the more chances s/he has to win the right to put a block on the blockchain and keep it there. It’s also equally important to know what is the blockchain audit log.
If you consider a blockchain proposal with other industry participants, manipulation by competitors becomes a serious concern. Your smallest competitor could rent additional cloud computing power at key moments to “win” the right to cut you out. Imagine failing to service customers during key times, or failing to release a liability at a crucial moment because your competitor has cut off your ability to add transactions to the blockchain.
This isn’t an issue in the cryptocurrency world because users know that their transactions are a commodity to blockchain miners. In an industry setting, however, transactions are not a commodity and competitors will not behave the same way. Miner misincentives are a serious issue that should be addressed in any proposal.
2. Will the proposal hand competitors real-time intelligence about my business? In blockchain environments, everyone shares all the data so that new blocks can be verified. In an industry setting, competitors will see blockchain activity in real-time. That real-time activity will tell them who owns certain transactions and how much traffic is attributed to your business. As such, blockchain activity could become a window for competitors to see into your company. Consider how the proposal addresses intelligence your competitors will glean from an industry blockchain.
3. Does the proposal address regulatory issues? For a blockchain to function, every miner must receive a verifiable copy of all the data. Blockchain complicates protecting data because copies of the data will be spread across every blockchain participant. So you may assume liability if your competitor is mishandling your data. Also, you may lose the ability to remove data as may be required by law.
Encryption schemes that attempt to address these challenges cause two problems: 1) A breached encryption key would irrevocably release the data and 2) the quality of encrypted data cannot be verified. You will not be able to verify that your competitors are acting in good faith.
4. Does the proposal address data quality? The world’s best contributory databases require competitors to contribute data to use contributory services and they have implemented rigorous industry-wide analytics to check data quality before adding new data to the database. Blockchain is a poor substitute because it mimics the poorest-quality contributory databases. Blockchain has no allowances for a centralized authority to enforce timely updates or data quality.
The need for timely updates is easily understood. Data quality is a difficult and nuanced topic. Stopping data quality issues in a contributory environment requires complex analytics performed in a centralized location. It may only take one IT mistake to pollute the data for everyone and ruin a blockchain solution. How a proposal addresses data quality is key.
5. Does the proposal force you to share too much? Many markets in which participants share critical data use an intermediary who limits the data shared, the risk and liability. Frequently, only conclusions are shared. A proposal that asks you to use the blockchain to share critical data must address how it maintains data privacy, limits risk and limits liability.
Well-examined risk belongs in any successful business. This applies to blockchain proposals as well. I continue to be enthusiastic about blockchain, and I am optimistic that shaping new proposals is the crucial step to disrupting the next industry with blockchain.