What if payments could be sent instantly, at near zero cost, with an unchangeable record visible to anyone with permission?
Can patient health care records be securely and immediately shared among health care providers, insurers and anonymously to researchers?
How can securities be trade with near real time settlement and all positions visible to regulators and market participants?
Each example is live today using blockchain. Ripple, an open source payments protocol, has reached agreements with US regulators to transfer funds. In Estonia, health care records and data for many other public services are shared on blockchain. In capital markets, NASDAQ’s Linq market enables transparency for shareholders of public companies.
Blockchain, also known as distributed ledger, has moved remarkably fast from concept to adoption by sophisticated companies. Blockchain began as the foundation for bitcoin. Bitcoin and ethereum, a related cryptocurrency, are gradually moving past early scandals with the bankruptcy of the Mt. Gox coin exchange and illicit commerce on the Silk Road market. Blockchain has evolved separately, and may likely generate value on a scale similar to innovations such as open source software or smart phones.
Blockchain can be viewed as a new way to store information: an unchanging, transparent, and immediately updated database updated identically across many independent nodes. It provides a virtual notary and timestamp for data. Fundamentally, blockchain enables trust between parties who do not know each other.
Blockchain works by first grouping transactions together to propose a new block. Each transaction goes through a mathematical formula that creates a unique value called a hash. The hashes are combined with data about the prior block to form a cryptographic problem. The problem is difficult to solve but easy to confirm. All the computing nodes on the blockchain cycle through guesses at an answer, which aids security by making it theoretically impossible to know which node will solve the problem. The solution becomes the identification for the new block. Each node then confirms the solution and uses the answer to sign the new block.
Any attempt at changing data in a blockchain is immediately evident. The number used to sign a new block is based on the number from the prior block, which in turn was derived from the preceding block. Any changes to prior data will break the chain and be readily apparent.
Business value for blockchain centers on providing a real time, shared view of data that cannot be changed. Blockchain works best with a network of users. Current applications within a single business include:
- IBM applies blockchain to irrefutably record data from thousands of vendors, which accelerates and reduces risk to accounts payable.
- BHP, the mining giant, uses blockchain to record rock and fluid samples from its partners.
Business to consumer applications currently focus on lowering cost and time to validate information, and preventing fraud. These are in earlier stages of development as of early 2017. Examples:
- Blockcerts provides an open source platform for employers to rapidly confirm job applicants’ academic credentials.
- Everledger stores data about diamonds to limit fraud and illegal payments.
Business to business applications center on trusted and low cost transactions:
- Global payments, such as Visa’s recent preview of their B2B Connect service.
- Trade finance is starting production use. Barclays recently began using distributed ledger in global trade, which removed paper documents and enable immediate verification. Maersk, the world’s leading container shipper, indicates that supporting business processes often cost more than moving freight. Maersk is piloting blockchain.
Life sciences supply chain integrity fits well, such as certifying chain of custody for medical devices and preventing drug counterfeiting.
Capital markets shows strong progress. Distributed ledgers can reduce costs and operational risk for post-trade clearing and settlement, while also providing immediate transparency to regulators and market participants. Banks have formed multiple consortiums. For example, Hyperledger, sponsored by the Linux Foundation, seeks to standardize blockchain technology. Key contributors include Digital Asset Holdings, led by JPMorganChase’s former CFO; IBM; and Intel. The largest banks are creating their own coins and block chains including Goldman’s SETLCoin, for post-trade settlement, while Citi is testing a possible “Citicoin” offering.
Distributed ledgers may ultimately produce the most value in healthcare and the public sector. In the US, a fragmented medical value chain complicates sharing data while inhibiting accountability for results. Many analysts expect blockchain to contribute to solutions. Blockchain also enables anonymously providing the large data sets necessary for precision medicine, such tracking how environmental exposures affect genetic expression.
Public sector applications include voting (Estonia), recording title to land (Cook County in Illinois [Chicago], Georgia, Ghana, Sweden), and validating public records (Kenya, including academic credentials). Some countries, like Senegal, are considering a blockchain-based currency.
Adoption risks include rapidly evolving technology, and cautious regulators. US financial regulators recently expressed concern. The B2B marketplaces of the dot com era may offer an analogy: hundreds of startups ultimately produced only two enduring winners in Alibaba and eBay. Also, while researchers generally respect blockchain security, nation-state actors and their hacker proxies can find ingenious means to penetrate systems.
Looking forward, blockchain, and a related category called distributed applications (DApps), may evolve into open source business processes that are not controlled by any central company. Consider the market for car sharing: currently, companies like Turo or Zipcar serve as hubs showing availability, certifying quality, and enabling insurance and payment. An open source business process could disintermediate these functions by aggregating car availability, attesting to quality through user reviews (like rating Uber or Lyft drivers), and enabling payment. Insurance may need to adjust, but ultimately regulation follows real value creation.
Blockchain adoption has moved rapidly because of clear business value. Currently, uses center on certifying information about people and the provenance of valuable items, as well as simplifying supply chain communication within a single company. In the next few years, companies now performing pilots in groups and industry consortiums will shift toward using blockchain as the primary way to perform certain business processes. Most activity centers on financial services, and post-trade clearing and settlement in particular.
Further out, lessons learned in smaller countries and local government will engender broader adoption for public records at the national level. Ultimately, blockchain’s ability to enable trust across people and parties will lead to open source business processes that disintermediate many current business models without any central, for-profit company.
Blockchain’s business value is simple: transparency and trust. Blockchain, and its successors, is evolving to bring the same widespread interoperability we expect from email, cell phones, or web sites to performing transactions and sharing information between companies.