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Blockchain 2.0: Ready for Business

The lure of blockchain is irresistible to many companies, especially those entangled in complex relationships and transactions with other organizations. These companies see possible salvation in blockchain’s single, authoritative record of the truth, and nowhere is this more evident than in the supply chain. This is because companies must harvest, manage, and constantly reconcile information from multiple systems and trading partners while sourcing, manufacturing, and moving goods through the supply chain. There’s no doubt that supply chains pose tough business problems, but it’s an area where blockchain can prove its worth and solve some major and longstanding challenges.

However, implementing a blockchain network, onboarding partners, and managing the ecosystem takes significant resources and expertise. Then there’s the risk of diving into an immature technology that is still evolving. But a new approach is emerging which can insulate companies from the effort, complexity and risk of implementing blockchain, while enabling them to experiment and enjoy the benefits now.

The Buzz Behind Blockchain

Ever since Satoshi Nakamoto’s paper on Bitcoin was published in 2008, the underlying interest in blockchain technology has been building. According to a Gartner report, Five Key Lessons to Learn from Supply Chain Blockchain Pilots, many executives feel pressured to embark on blockchain projects for more technological reasons than to solve real business problems.

This buzz also explains why many companies are rushing to launch blockchain pilots. However, Gartner estimates that 90 percent of all blockchain projects through 2020 will be proof-of-concept, and notes that most stall and never reach production due to various reasons, including “technological immaturity, lack of standards, overly ambitious scope, and a general misunderstanding of blockchain’s ability to support supply chain.” In addition, these blockchain ecosystems will face a formidable challenge due to “lack of governance and process design to onboard, manage and maintain trading partners.”

Today, companies are looking to blockchain solutions to deliver real business value now while complementing their current technology. There’s little doubt that blockchain can offer businesses tremendous benefits, but what exactly is blockchain technology and how did it get started?

Many supply chains are still hampered by paper-based processes, cross-referenced with spreadsheets and enterprises systems, and supplemented with ad hoc and inefficient phone and email communications. Blockchain promises these companies a shortcut to digital transformation, by providing a digital ledger in which all parties can share critical supply chain information.

Blockchain is essentially a shared, consensus-driven, distributed digital ledger that is tamper proof and resistant to hacking and outages. The blockchain can be used to record almost anything that can be digitally represented including transactions, values, states, titles of ownership, etc. Each company participating in the blockchain has an automatically synchronized version of the ledger and each can read and write to it. However, before a new block can be added, all parties must agree to add the new block. Once added, the block cannot be changed or removed.

There are various types of blockchains, but the essential difference is between public and permissioned blockchains. Anyone can join a public blockchain and all nodes can read and write to it. With permissioned blockchains, access to the blockchain is controlled, but everyone who has access can read and write to the blockchain.

Blockchain: The Legend Behind the Myth

The major benefit of blockchain is that it provides a single, trusted source of truth around which all parties can agree and align. Recall the old game of “broken down telephone”. Players sit in a circle, and player one thinks of a word or phrase, writes it down on a piece paper, folds it in half, and drops it in the middle of the circle. Then, they whisper it to player two, who whispers to player three, etc. When the last player says the word or phrase, it is usually so far from the original word or phrase that it is funny.

When it comes to global business, particularly well-established companies operating global supply chains, data transfers are not much different. It happens sequentially as data is batch processed and periodically handed off down the chain. As the transfers and the delays mount, the data gets staler and further from the truth that gave rise to it.

This stale data is not so much funny as it is expensive, because it creates all kinds of problems. It’s almost impossible to effectively plan, monitor and manage when you don’t have timely data. Now, imagine if all the players in our game could simply pick up the piece of paper and read it. They would all know instantly what the original word or phrase was without waiting, conflicts, or guessing. Most importantly, there would be no doubt about the data. That’s blockchain, in a nut shell, except each player has a synchronized replica of the record.

Because data is at the heart of business, a steady flow of clean fresh data has a major impact on the efficiency of the business and the trading network as a whole. Knowing what consumers are buying, who and where your prospects are, and what products are available and where, can be used to drive business decisions across the trading partner network; from supply, production, inventory, and logistics.

Blockchain promises to unlock this value by connecting all parties with a trusted, single version of the truth. Being a decentralized technology, blockchain is also virtually tamper proof and resistant to outages.

Another important feature of blockchain (conceived by Nick Szabo and later developed by Ethereum) is the smart contract. Smart contracts are essentially self-executing clauses in contracts. The idea is that once conditions in a contract are satisfied, say a shipment enters a warehouse and is recorded by RFID, the clauses in the associated contract are automatically executed (i.e. the payment is made, and the title of the shipment is transferred).

Smart contracts do not merely automate but, more importantly, they provide an objective and fair means of recording and transferring value. Whenever we make large purchases, for example buying a house, the number of precautions and the steps in the buying process increases. The deal becomes tied up with additional processes and multiple intermediaries with a lot of back and forth between the agents, the buyer, the seller, the home inspector, surveyor, escrow agents and legal representatives.

This is meant to ensure all the data is correct and that no party is wronged. A smart contract can impose objectives and agreed upon criteria on all parties, alleviate the hassle, speed up the entire process, and eliminate many of the associated costs. For example, a smart contract could specify the conditions upon which the house will be bought, and once those conditions are verified and posted to the blockchain, the smart contract can automatically transfer payment and title.

Businesses, especially those involved in global trade where ownership spans multiple parties and jurisdictions, suffer the same type of friction from administration and intermediaries. Blockchain can provide a verified, factual foundation for better business planning and operations, along with impartial execution of pre-agreed contracts. It can remove intermediaries that add confusion, costs and delays and, ultimately, make each business more transparent, trusted and secure.

So, what’s the problem with Blockchain 1.0?

Despite the multitude of benefits, as with any emerging technology, there are problems with blockchain, at least in its original incarnation known as “Blockchain 1.0,”- the first generation of technology underpinning Bitcoin. These include:

  • Lack of Scalability – If blockchain is to make it to the big league and be useful on a large scale supporting global businesses, it has a long way to go. For example, VisaNet processes 5,000 transactions per second, with the ability to handle more than 24,000 transactions per second (Visa). By contrast, Bitcoin manages about 7 transactions per second, and Ethereum, the blockchain network for smart contracts, about 20 transactions per second.One of the fastest blockchain-based payment systems, Ripple, also acknowledges the magnitude of the scalability problem. Reuters reports that, “Banks are unlikely to use distributed ledgers to process cross-border payments for now because of scalability and privacy issues, according to Ripple, one of the most prominent startups developing the technology.”
  • Lack of Confidentiality – There is a lot of information that companies do not want to make available to all parties that constitute a supply chain or a trading ecosystem. Certain information might be proprietary, or give away a competitive advantage, or expose a weakness, or cast the company in a bad light. This limits the number of companies willing to join a blockchain and the amount of information that they are likely to share.

Permissioned blockchains attempt to solve this by taking the blockchain from the public realm to a private, access-by-permission-only model. Another model creates “micro-communities” around transactions, so that only the parties to a particular transaction have access to a particular blockchain.

While these strategies do address the confidentiality problem to some extent, they do not solve it entirely, and worse, they can create a new problem. Permissioned or community blockchains still include many parties that do not need to see particular transactions including, in some cases, ones that the company would not want them to see. For example, a company may have hundreds or even thousands of suppliers, and it wouldn’t want all of them to have access to transactions and contractual agreements it has with other suppliers. Likewise, for the suppliers who would like to keep their arrangements with the company confidential.

Micro-communities solve the confidentiality problem by further fragmenting the community into trading pairs, or by centering the blockchain around transactions. While this does reduce the severity of the confidentiality problem (but does not eliminate it), it creates a new problem, by obliterating the single version of the truth that was a key value that blockchain promised to provide in the first place. This compromises the usefulness of the network, and makes functions like network optimization extremely difficult, if not impossible resulting in:

  • Lack of Functionality – Blockchain doesn’t have sophisticated, multi-party apps. That might come in time, but it doesn’t help companies now.
  • Sub Optimal Optimization – For effective AI and optimization, algorithms and intelligent agents need access to all data across the network. Partitioned and permissioned blockchains create the very silos that are a major obstacle to efficiency in today’s supply chains.
  • Immaturity – Ethereum was described by blockchain evangelists Michael Casey and Paul Vigna as “young, underdeveloped, and buggy.” From a company’s perspective, the blockchain landscape is constantly changing, with new startups springing up daily, and others waning. If they want to reap the benefits of blockchain, how are they to decide which network to use?

These are, by no means, all the challenges facing blockchain. The difficulty of directing and achieving consensus around the direction of a decentralized technology remains formidable, as the 2017 Bitcoin “civil war” showed. This disagreement led to a “hard fork,” a split in Bitcoin versions, creating a new, incompatible version of Bitcoin called Bitcoin Cash. Agreement on standards and interoperability, which are both important for widespread adoption, are further problems. Then, there’s the lack of legal maturity around the technology, which clearly shows that the law has to catch up with the new decentralized world of blockchain if it is to become the backbone of finance, business, and global trade.

But these are the challenges that many new, radical technologies face, and many very competent minds are working on solving these and other problems. For example, companies like Lightning and EOS are making significant progress on the scalability problem.

Enter Blockchain 2.0: The Hybrid Blockchain

The toughest challenges that blockchain faces, such as the confidentiality and scalability issues, are ones that are inherent in the technology. It is the distributed nature of blockchain that limits its scalability, as every (full) node must process every transaction and maintain a copy of the entire state. Thus, the transaction rate of the network is capped at the processing power of a single node or computer. And as the network grows, latency between nodes drags down the transaction rate. In this regard, a centralized system (such as Visa) is much more efficient.

Blockchain is a form of multiparty network, albeit a decentralized one. More mature, real-time multiparty networks have already solved most of these problems. It makes sense to exploit the solutions pioneered by multiparty networks and marry them with the benefits of blockchain, creating blockchain-enabled multiparty networks.

These hybrid networks have the strengths of mature multiparty networks, while simultaneously exploiting many of the benefits of blockchain.

Multiparty networks are:

  • Scalable – As they are built on horizontally scalable grid architecture and able to support over 50,000 trading partners with the transaction volume that entails.
  • Confidential – With robust, multiparty permissions frameworks with granular and role-based permissions, these networks ensure that companies and users only access the data they are authorized to access.
  • Functional – Because they include powerful, multiparty apps relevant to a wide range of functions and industries.
  • Community Master Data Management (MDM)– This built in capability is important in that it manages and synchronizes changes across different systems to ensure information is correct and up-to-date.

In short, multiparty networks are built from the ground up to be flexible, scalable, and to ensure privacy. Unlike traditional enterprise systems architected primarily for the enterprise, multiparty networks embody the multi-faceted and relational nature of multiparty processes, from the data model, MDM, transactions, and workflows. The applications that run on the network are also specifically designed for multi-enterprise business processes. For example, they support complex yet common scenarios, such as transactions involving buyer, seller, fulfillment and logistics partners, while showing only the relevant authorized slice of the data each needs to transact with another partner.

As with blockchain, there is a real-time, shared, single version of the truth at the core of the business community, eliminating data discrepancies and delays.

These multiparty networks agnostically embrace blockchain networks and write sliced and hashed intersections of multiparty data to (orchestrated) blockchain networks like Ethereum and Hyperledger Fabric. This opens up a new avenue for connecting and transacting with business partners; one that is decentralized, robust, and enhances trust and transparency within the business network.

Multiparty networks provide the powerful benefit of network-aware, multiparty apps that can orchestrate transactions and workflows across the entire network of trading partners. But, perhaps the most important benefit of the hybrid or “Blockchain 2.0” approach is that it provides a low risk and relatively frictionless transition from the enterprise-centric technology world to the decentralized world of blockchain.

Multiparty networks do not require the jettisoning of current technology and practices. They are also multisystem and recognize that each party joining the network will already have any number of existing systems in place, many of which remain useful and function as systems of record in the network ecosystem. Thus, a true multiparty network embraces a myriad of technologies via adapters, and coordinates and synchronizes them with other legacy systems and network apps.

This strategy is not the only way to tackle the challenges that blockchain faces in the business world. However, marrying multiparty networks with blockchain networks fuses the many strengths of multiparty networks with the undeniable benefits of blockchain. The end result is a solution that is much more scalable, conserves confidentiality, and exploits the best of both worlds, while remaining flexible and low risk in the face of the ever-changing blockchain landscape.

Nigel Duckworth is Marketing Strategist for One Network Enterprises. He can be reached at nduckworth@onenetwork.com.