Blockchain. The panacea to all problems, right? As many of us have seen over recent months, blockchain has its obvious uses and benefits. But, is it always the right solution?
What exactly is a blockchain?
A blockchain is, unsurprisingly, exactly as it’s described – a database structure consisting of a chain of blocks. Each block stores transactions or code functions (known as smart contracts) that are all linked together using cryptographic methods.
Blockchains are unique as they are not stored in a single place, but rather distributed to many users creating what is known as a distributed ledger (DL). DLs are digital databases maintained and updated by independent participants connected in a network where information requires consensus to replicate, share and synchronise. Together blockchains and DLs create something incredibly powerful – they remove centralised stores of information. This is key, as a single store of information can be fraudulently tampered with, while a distributed and verified store of information has no single point of failure.
Ok, great, so do I actually need a blockchain?
There are many situations where there is no real benefit in having a blockchain solution as it isn’t really a technological improvement on a typical database architecture (which would ultimately be enough…) For example, you wouldn’t really need a blockchain if you didn’t have multiple contributors to the data or if you truly trusted them.
“Blockchains are unique as they are not stored in a single place, but rather distributed to many users creating what is known as a distributed ledger (DL).”
To cut through the hype, we’ve created a simple flowchart to help you think through the use case and work out whether or not a blockchain solution would be beneficial to your business.
It is clear from this chart that there are certain characteristics where a blockchain solutions wins – when significant data sharing is required, when there is a lack of trust in contributors and their information, and when 3rd party data verification and integrity is needed. For firms operating in such complex environments, blockchain is a potentially highly disruptive technology that will significantly improve the way you do business.
Where will blockchain hit the hardest?
Blockchain has the potential to hugely disrupt traditional industries and conventional ways of working. It is especially powerful when adopted by firms with either trust-based business models that lack cheap, scalable and transparent alternatives (such as provenance tracking for diamonds) or high unit cost businesses with multiple intermediaries (such as asset managers).
Two industries where we’re excited about the application of blockchain are…
- Wholesale/retail supply chain management – the ability to track goods from their origination to the customer on a system that cannot be altered and is fully transparent for all parties to see. Imagine a diamond mined in Africa and tracked through to the sale of a jewelled ring in a retailer. Currently, diamonds travel through many international intermediaries, such as diamond sorting, laser cutting and grading craftsmen who have previously fraudulently switched out expensive diamonds for cheaper lookalikes. With blockchain, each diamond can be tracked from the moment it was mined through to the retailer with certainty that the information and labelling is reliable and trustworthy.
- Buy-side financial services – the current asset management industry is almost entirely outsourced and for good reason. Fund investors want an independent book of records to be kept for the fund. They don’t want their cash to be managed directly by the fund managers and they want to access funds through many different distribution channels. This results in an industry that has multiple intermediaries to cater for an investor’s ‘Chinese wall’ and accessibility requirements. With blockchain, many of the intermediaries will be removed with investors directly investing in a fund, which removes significant costs. In addition, by exchanging blockchain tokens for fiat currencies (tokenisation), settlement of tokenised fiat currency can be completed in real time, reducing friction for the investor.
So, in answer to our original question, do you need a blockchain? The answer is maybe – its completely dependent on your specific use case and the type of environment you’re operating in. Although blockchain is a highly disruptive new technology, traditional databases and workflow management tools will probably be able to do just a good a job under many circumstances.
However, if you’re one of those businesses that has a use case that satisfies all our criteria around multiple untrustworthy contributors verified by a common centre of trust, then it is certainly worth considering.
We are here to help you navigate this new world – get in touch…