Blockchain – Fad or Fail?

 

Tod Cooper
Member with delegated authority for
Procurement/ Online Training/ Whistleblowing

By Tod Cooper

Member with delegated authority for Procurement

Initial version appeared in Employers and Manufacturers Association BusinessPlus Magazine

What is Blockchain?

Blockchains provide a distributed and decentralized ledger of encrypted transactions, or bundle of information, called a ‘block’.  Each block records all transactions independently of others but in sequence, establishing a strong failover resilience and data sharing validation.  These transactions could be tangible such as for a car or house, or intangibles like copyrights or patents.

“The blockchain … can be programmed to record not just financial transactions but virtually everything of value.” – Don & Alex Tapscott, authors Blockchain Revolution (2016)

Distributed Entries

Similar to working simultaneously on a Google Doc instead of sharing a Word document by email, all parties update a common entry rather than individual copies.

The blockchain database isn’t stored in any single location. The records it keeps are truly public and easily verifiable. No centralized version exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.  (See What is Blockchain Technology? A Step-by-Step Guide For Beginners.) 

Cryptocurrencies such as Bitcoin sit on top of a blockchain platform. Their consensus-keeping process is secured by strong cryptography – secured by math not by people or by trust.

Is Blockchain Legitimate?

There are so many views for and against ‘blockchain’ it’s hard to know who to believe and what it is actually all about. 

Business people need to understand it as it may well be the next wave to revolutionise the way we do business, as was the introduction of the internet by its inventor Tim Berners-Lee in 1990-91. Blockchain is likely to impact anyone who deals in data or transactions of any kind.

By all appearances, it is here to stay; companies such as IBM, Oracle and Walmart are embracing blockchain technology.

Disruptive Technology

Blockchain is ‘foundational disruptive technology’ with huge potential to create opportunities for both our economic and social systems.  Being ‘disruptive’ means it will enter at the lower end of the value chain and move up, displacing existing traditional business models – much as Artificial Intelligence will do, and Uber and AirBnB already do. 

How does it work? 

A block has three key parts:

  1. Data  What you need to store information in a record, eg in the case of a transaction this would include a buyer, seller, amount of transaction, terms;
  2. Hash  A unique identification of the block and all its contents.  Think of it like a fingerprint;
  3. Previous Hash  This creates the chain and ultimate traceability back to the ‘genesis’ block (first block in the chain).

A transaction occurs within a distributed Peer-to-Peer network.  When a new transaction occurs, the ‘nodes’ on the network (probably millions) all use cryptography to verify that the block has not been tampered with.  Only after consensus is achieved that the block is genuine, is the transaction ratified.

Who controls it?

No one, but everyone!  People all over the world automatically check and validate blockchain transactions using servers, personal computer and smart devices.

Impact

Potential applications for blockchain include smart contracts, the sharing economy, governance, file storage, prediction markets, protection of intellectual property, Internet of Things (IoT), neighbourhood microgrids, identity management, Anti-money laundering and know your customer, data management, land title registration, stock trading. – blockgeeks.com

Three particular areas of business and procurement lend themselves to blockchain applications:

  1. Smart Contracts:  A distributed contracts ledger, implementing a series of rules, all within the blockchain.  This removes the need for initial and ongoing trust within the transaction and business relationship.  Since the rules are on blockchain they are immutable (i.e. unable to be changed/tampered) and distributed (i.e. the output of the contract is validated by everyone on the network).  This significantly reduces the likelihood of tampering (thus fraud and corruption, either planned or opportunistic) and builds a high-trust business environment, giving confidence to both businesses and customers.. 
  2. Supply Chain Management: Transactions are documented in a permanent and decentralized record, with total transparency.  This will verify authenticity of environmental standards and/or fair trade by allowing irrefutable visibility of the full supply chain. Every transaction from origin to final destination will be secured e.g. from the Colombian coffee plantations to your triple shot soy latte.  This in itself will provide assurance within the transaction – not only will it mean the cost of doing business is cheaper (bypassing traditional intermediaries such as banks and brokers) but it will also highlight the inefficiencies in a supply chain. 
  3. Banking and payments:  Essentially blockchain will do to banking what the internet did to media.  It has zero-discrimination on wealth by providing open access to banking for developing third world countries. It is borderless as anyone can send money across borders. It is instantaneous because transactions are immediate, i.e. real-time digital, removing intermediaries (banks, agents and others) between transactions. 

Risks

Blockchain is the platform on which cryptocurrencies such as Bitcoin, Neo, Monetha, Ethos, operate to achieve transactions. The market is very young and so still very volatile.  As with anything in its infancy, we still need to watch for people taking advantage of our unfamiliarity for their own fraudulent purposes. Though scams are certainly not isolated to blockchain, sadly it is a human behaviour to exploit the vulnerable.  Heard of Jordan Belfort? 

Blockchain’s strength is also its weakness.  Its borderless underpinning of cryptocurrencies also means that it can, and is, used to transfer and launder money by corrupt organisations and states, evading normal controls and monitoring by government agencies and regulators such as the US Securities and Exchange Commission (SEC).  On the flip side, we also need to be wary of those lobbying against it, say banks, which have a huge amount to lose as intermediaries, as discussed earlier.  They will fight to hold back the tide which threatens their business. 

Ignore at your peril

As I am in Hawaii as I write this, I feel the need to quote Vice Admiral William S Pye on 6 December 1941, when asked about all the warnings of imminent attack by the Japanese on Pearl Harbour: “The Japanese will not go to war with the United States.  We are too big, too powerful and, too strong.”

We need to listen to advice of coming change, or ignore it at our peril.  People who believe blockchain is already a ‘fail’ probably don’t really understand it. They may be confusing the flaky sensational cryptocurrencies with the underlying blockchain technology. 

I have a strong feeling that blockchain is here to stay.  We still have time to understand it and how it will directly and indirectly impact our lives, and to prepare for it to take advantage of its huge possibilities. Businesses for example do not want to let their competitors steal a march, while at the same time they must understand its risks.  

Coming, Ready or Not….

While still in its infancy, blockchain’s growth is reinforced by many large and start-up tech companies, all rapidly developing capability in this underlying foundation technology.  Blockchain will offer major opportunities to conduct business with increased assurance and trust, faster and at lower cost, and by by-passing traditional business chains of actions and intermediaries.  It will undoubtedly also be used for malign purposes and we should all be on our guard for that, but it is essentially a neutral, forceful technology which will change the ways we do things – an opportunity and a basis for better business. 

Transparency International New Zealand is particularly interested in technologies which offer higher integrity and trust to society, and reduce opportunity for corruption and fraud, whether in business or in any walk of life.

Transparency International New Zealand, PO Box 10123, The Terrace Wellington, 6143 New Zealand admin@transparency.org.nz. Copyright © Transparency International New Zealand 2009 - 2019.
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