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Introduction to Blockchain
Blockchain will do for transactions what the Internet did for information.
—Ginni Rometty, CEO, IBM
Blockchain is a technology that is poised to usher in a new way of conducting business that will change everyday life for the better. Blockchain empowers groups of institutions to achieve better outcomes by creating new growth opportunities that together are greater than the feats that any single member could achieve alone.
Blockchain makes it possible to reimagine many of the world’s most fundamental business interactions and opens the door to new styles of digital interactions yet to be imagined. It is now regularly showing its potential to vastly reduce the cost and complexity of getting things done across industries, government agencies, and social institutions.
Most people who have heard of blockchain associate it with the cryptocurrency Bitcoin. Although they are related, these two concepts are not the same. The potential uses for blockchain are far broader than the applications for cryptocurrency. Also, whereas the Bitcoin network operates on permissionless membership principles and extends anonymity, a permissioned blockchain network governs its membership with known entities.
The full benefits of blockchain will be realized through its broadest use across the broadest set of industries. We have participated in hundreds of blockchain projects across the supply chain government, healthcare, transportation, insurance, chemicals and petroleum, and many more industries. From those experiences, we have developed three key beliefs.
Blockchain Beliefs
We have the following beliefs about blockchain that reveal its vast promise:
Transformative: We believe that blockchain is a transformative technology that can radically change the way businesses interact. At the center of a blockchain is a shared immutable ledger. Each member of a blockchain network has an exact copy of the ledger that is kept current as it updates over time. After a transaction is entered, it cannot be changed. With this shared copy of the truth:
Net new growth opportunities are discovered because new trusted business models are identified.
Sustainable competitive advantage is gained through participation in a new decentralized economy with new business models.
Time is saved because multiparty transactions can be processed immediately.
Costs are reduced because overhead is eliminated by having businesses transact directly with each other.
Risk is mitigated because the ledger acts as an immutable audit trail.
Open: We believe that blockchain must be open to encourage broad adoption, innovation, and interoperability. Organizations such as the Linux Foundation’s Hyperledger Project, with hundreds of members across all industries, have provided a breeding ground for business-savvy blockchain software. Only with openness will blockchain be widely adopted and spur innovation for business.
Ready for business: We believe that blockchain is ready for business use today. A new breed of blockchain technology is now available that has been engineered from the ground up, under the governance of the Hyperledger Project, to handle the demands of enterprises and provide a foundation that ensures good ethical business behavior.
Enterprise Blockchain
The basic blockchain concept can be defined quite simply: It is a shared, decentralized, cryptographically secured, and immutable digital ledger. However, enterprise blockchain enriches this definition with a few key attributes:
Accountability: Network members are known and identified by cryptographic membership keys with assigned access permissions by business role. Without such accountability, compliance with regulations such as the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and General Data Protection Regulation of 2018 (GDPR) would be nearly impossible to achieve.
Privacy: Although members are known to the network, transactions are shared only with those members that need to know about them. Enterprise blockchain uses various techniques to achieve privacy, including peer-to-peer1 connections, privacy channels,2 and zero-knowledge proofs.3
Scalability: Supporting an immense volume of transactions is critical to enterprise scenarios. Because transactions are not typically throttled in enterprise blockchains as they are in networks like Bitcoin, they can be carried out immediately. Any particular enterprise’s transaction rates will depend on many factors, including the number of peers and the complexity of the smart contract. Transaction rates measured in thousands of transactions per second are certainly achievable.4
Security: Enterprise blockchains are fault-tolerant. With fault-tolerant consensus algorithms, the network continues to operate even in the presence of bad actors or carelessness. An example of a fault-tolerant consensus algorithm is RAFT.5
Motivational: An enterprise blockchain benefits from a built-in incentive system to help accelerate the adoption curve. You can think of this driver as a “loyalty point” or a “token” that delivers a motivational and economic incentive for network providers and consumers.
Enterprise blockchains are often incorrectly characterized as private networks. In reality, access to an enterprise blockchain is controlled by “the governors,” who set the policy establishing how new members can participate in the network. The visibility (public or private) of the network depends on how it is governed. Thus, it is true that enterprise blockchains are permissioned, but not necessarily private.
Why Blockchain Matters
Blockchain matters because no business operates in isolation. Multiple institutions can achieve more together than any single institution can alone. By implementing business processes that leverage the collective knowledge of the group, processes can become orders of magnitude more cost-efficient. New processes—processes that were not possible before blockchain—can be created. This opens up new opportunities and can create a competitive advantage for many businesses.
For example, the U.S. Food and Drug Administration (FDA) recently adopted food labeling regulations6 that require manufacturers to notify the public of “sugar added” to food. But how does a company that produces protein bars, for example, know with certainty that the ingredients it is using contain sugar—and more importantly, how can it prove that fact if challenged? When it operates as part of a trusted food blockchain, in which ingredient suppliers record food information to a blockchain, the company marketing the protein bar can easily show the provenance of each ingredient, from farm to convenience store. This approach saves both time and money.
Additionally, the same blockchain can be used to prevent foodborne illnesses and to enable the participating companies to trace bad ingredients that might be causing such illnesses. Because the food industry must follow numerous regulations (for our own safety and well-being), you can easily imagine how an enterprise blockchain would be essential to making this scenario work. In particular, blockchain can address the following concerns:
Accountability: The blockchain means that you can prove your institution is who you say it is to the FDA and other companies.
Privacy: Your competitor will not know from which vendor you are buying your sugar and at what price.
Scalability: You can track many food records.
Security: You must trust all the information, and information access must be resilient.
Motivation: Economic incentives provide an incentive for members to contribute data.
The Trailblazers
The blockchain trailblazers are off to the races, having implemented live networks that are demonstrating real business value today. Consider these examples of early trailblazers:
The Trade Finance solution7 that is convened by We.Trade
The Identity Verification (verified.me)8 solution that is convened by SecureKey
The Foreign Currency Exchange9 solution that is convened by CLS-Group
The Event Ticketing10 solution that is convened by True Tickets
The Autonomous Car11 solution that is convened by Car eWallet
The Internet of Loyalty12 that is convened by Loyyal
These solutions are real, running applications—not proofs-of-concepts. They serve as production systems with multiple members, adding blocks and exchanging value daily.
Founders
The trailblazers who founded these networks have many things in common. Most notably, behind these solutions you will find a set of imaginative individuals who exemplify the dominant connector archetype.13 For instance, Greg Wolfond14 from SecureKey has an inclusive personality and naturally promotes a culture of working together toward a common goal. As a solution convener, Greg has maven and salesman archetype qualities, which instills in others the excitement and motivation to participate in a multi-institutional solution working toward a mantra of “The group can produce a better outcome than any individual institution alone.”
By working closely with these solution founders and following trends that are observed from hundreds of blockchain engagements, we have learned what it takes to move an idea to a live network. Specifically, these founders have balanced scope, incentives, and governance to produce a live network.
Scope: Dream Large and Act Incrementally
Blockchain solution founders dream large and act incrementally. They aim to unleash the transformative power of blockchain, but realize that their “moon shot” requires an “Apollo program” that lays out a set of steps that ultimately move the solution to production.
Trailblazing founders agree that the solution scope must be business-driven. Most founders set goals that are disruptive, leading to a new way of conducting business. At the same time, their minimal viable product (MVP) goal is more basic, usually focused on demonstrating one facet of the disruptive business model, which is more likely to yield an initial cost savings versus a new revenue stream for solution members. Rather than “ripping and replacing,” some founders initially keep their current business-to-business systems in place while they run their distributed ledger technology in parallel to add new functions to an existing business process; in doing so, this approach enriches—rather than replaces—the process. We call this a “shadow ledger.”
Similarly, although successful solution founders realize that a decentralized solution is the goal, only a minimal viable ecosystem (MVE) of members must participate to launch the solution. Solutions that commence with more members take longer to activate than solutions that start with fewer members. Membership considerations are critical and must be addressed up front. New members might be hesitant to join a network in which their competitors are also participating. However, having competitors participate makes the ecosystem more trusted and vibrant because trust is gained through a diversity of members. The right governance and incentive system can help.
Motivation: Driving Momentum within the Ecosystem
Successful founders understand how to motivate the members of their network. This motivation is often accomplished by creating an economy of buyers (data consumers) and sellers (data providers) within the solution. Motivation is created by balancing obligations and rewards.
For example, the SecureKey solution provides “privacy protecting” ground rules (defined in chaincode) for how data are exchanged. This set of rules also ensures that digital asset providers “get paid” when digital asset consumers “pay” to have identity attributes verified. The ground rules create the backbone of a digital marketplace, which motivates participation through better accuracy, lower-cost verification, greater speed, and a better overall user experience.
Asset tokenization is an emerging technique that is used by enterprise blockchain founders to provide a motivational incentive system. In many cases, the token is native to the solution and can play a role akin to that of loyalty points. For example, one solution introduces a native carbon credit token that is awarded to a network member when that user conserves energy. The user can exchange the token for discounts on debit card purchases that are made via a debit card provider that, like the local energy company, is also a network member.
Governance: The Total Is Greater Than the Sum of the Parts
Governance is mandatory within a blockchain network, and a blockchain solution’s likelihood to go live is increased to the degree it is written down. The best founders are “referees” who bring together the group on multiple levels. In each case, a “board of stakeholders” is convened to define the rules that are inherent in the solutions and converge on the scope and motivation.
Workgroups are typically defined to focus on business models, legal concerns regarding intellectual property (IP) rights and liability, technical design, and architecture. Proper business governance encourages participation and removes uncertainty and the risk of business obligations (which are embodied in smart contracts). Proper technical governance ensures that the blockchain solution can be managed in a decentralized way so that deployment of new smart contracts or the invitation of new members happens with consent from the group.
The first graduating class of blockchain trailblazers has already had their solutions go live, with “blocks on the chain.” They are dreaming large but starting incrementally, motivating a group of diverse members to participate in a solution through incentives and an inclusive governance process.
Blockchain for Good
The trust model that underlies blockchain networks provides a natural setting for solutions that are unmatched in delivering social good. Blockchain is poised to deliver strong business returns. Moreover, when used correctly, it can deliver user experiences that are respectful of user privacy and literally save lives.
Here are three examples that illustrate how blockchain for social good is also good for business.
Reducing Foodborne Illnesses
Has this ever happened to you? You are rushing through New York’s LaGuardia Airport trying to make a flight. You are hungry and grab a salad before hopping on the plane. An hour into the flight, though, you do not feel well.
In 2006, a nationwide outbreak of Escherichia coli15 was linked to bagged spinach. It took regulators two weeks to conduct the backtrace and determine the exact source of the outbreak. During those two weeks, many people got sick and one person died. Tons of good spinach was unnecessarily discarded—wrongfully wasted—because we could not tell the good spinach from the bad.
IBM Food Trust Network16 consists of several major food companies, including Walmart, Unilever, and Nestlé. This network enables supply chain visibility across these members (and their ecosystem) to quickly pinpoint the sources of contamination. The network is already showing results that can reduce the impact of food recalls and limit the number of people who get sick or die from foodborne illnesses.
With blockchain, network members can track the provenance of ingredients as they travel from farm to fork. Recently, Walmart did an experiment that traced the origin of sliced mangos from Walmart stores back to the farm. This process showed a radical improvement from the approximately 7 days it took to conduct the backtrace by using traditional methods down to 2.2 seconds by using an enterprise blockchain platform. Frank Yiannas, Vice President for Food Safety at Walmart,17 says, “That’s food traceability at the speed of thought with blockchain.” This is an inspiring example of blockchain changing everyday life.
Eliminating Big Data Breaches
Has this ever happened to you? You are renting an apartment. The real estate company asks you to share information about every aspect of your life—where you live, your mother’s maiden name, your Social Security number, your place of employment, and a credit statement from your bank. You repeat this process when you sign up for a new smartphone and when you visit the doctor for a checkup. You have bits and pieces of information, including user IDs and passwords, scattered all over the Internet. Then, you get a notice from a major service provider that your data were stolen! This scenario is scary and frustrating—and all too realistic: An estimated 15.4 million consumers were hit with identity theft in 2016, according to a Javelin Strategy & Research 2017 Identity Fraud Study.18
The days of big data breaches appear to be numbered, though, with the emergence of the Verified.Me network created by SecureKey.8 The Canadian Verified.me network is live and hosted by the major banks of Canada. With the Verified.me smartphone app, you can take control of your digital identity attributes. The app provides a simple experience for signing up for (and signing in to) Internet-based services. Acting as a digital rights management system for your identity, the app enables you to give permission to the real estate company to electronically ask the questions that are required to rent an apartment. Similarly, you give permission to trusted institutions (such as banks, state or province motor vehicle departments, and your employer) to answer the real estate application questions.
With blockchain, the verification process takes place in real time and with unprecedented respect for your privacy. The solution is designed so that there is no central database of identity information. Instead, the blockchain ledger is used as a digital rights management system, storing permissions and proofs by which the user grants institutions rights to access your identity information. Without a central “data honeypot,” the attack surface of an identity breach is radically changed, making it difficult for bad actors to walk away with a “big score.”
Blockchain also prevents your digital data from being tracked. You might not want the real estate company to know with which bank you do business. With “triple blind data exchanges,” the data requester never knows who the provider is, the data provider does not know the requester, and the network operator knows neither of those parties.
Blockchain enables only the necessary information to be exchanged. If you are using Verified.me to prove your age to enter a bar, you must prove only that your age is 21 or older; you need not show your driver’s license, which also includes your address. The National Institute of Standards and Technology,19 along with other privacy agencies, views this approach as the best strategy for protecting users’ privacy.
Preventing Counterfeiting
Has this ever happened to you? It certainly happened to one of the authors. A friend, who had a headache, asked for an aspirin. I went into the road-warrior aspirin bottle that I keep in my notebook bag and gave him one. Before he took it, he scrutinized the pill and asked, “What are you giving me?” It didn’t look like any aspirin he had ever seen. I said, “I think it’s an aspirin.” He responded with a bit of terror in his voice, “You THINK?” The pill had a number on the side, which I quickly searched on my phone and revealed to be a generic form of Tylenol. Phew!
This sort of issue is rapidly becoming a widespread concern. The World Health Organization estimates that 1 in 10 medical products now circulating in low- and middle-income countries is either substandard or falsified, including pills, vaccines, and diagnostic kits. Examples include cough syrups for children that contain powerful opioids, and fake antimalarial pills made of only potato and cornstarch.
The Crypto Anchor Verifier project20 from IBM Research Lab aims to use artificial intelligence (AI) technology with blockchain to prevent counterfeiting. The technology uniquely identifies a physical asset as a corresponding digital asset to trace provenance. The manufacturer can place a digital cryptographic fingerprint of an aspirin on a blockchain so that the pill can be verified for authenticity as it progresses across the supply chain.
The Crypto Anchor Verifier provides a lens attachment for a standard smartphone. This app leverages AI technology to perform light spectral analysis against a physical asset. It captures microscopic properties, viscosity, and other identifiers, and produces a unique digital identifier for physical goods. When immutably placed on a blockchain, the “fingerprint” of that digital good can be checked again by the Crypto Anchor Verifier at customs, at a point of purchase, or immediately before you swallow your medication.
These examples show the promise of blockchain. It is energizing to see blockchain changing everyday life for social good. With this benefit as a motivation, we continue to solve the business and technical problems that will unleash many similarly inspiring uses of an enterprise blockchain.21
Blockchain Questions from Business and Technology Leaders
Blockchain is both a disruptive technology and a transformational one. As you think about leveraging blockchain for your business, you might have several questions in mind. As we have shared the blockchain technology and its business value with hundreds of business and technology leaders from many different industries, a predominant set of questions emerged. We did our research and rounded up the most searched terms as they relate to blockchain for business. Figure 1.1 shows these terms and their associated volume of interest.
After observing the data from our study, we inferred the top six questions that business leaders might have about blockchain. Each of these questions is introduced here and explored in further detail throughout the rest of this book.
Does Blockchain Apply to My Industry and Business Objectives?
Blockchain will most certainly impact every industry, including yours. In many cases, blockchain solutions will affect specific industries and cross-industries. For example, the trade, financial, and food-supply industries already are connected by blockchain. Blockchain will transform the way many industries do business, but it will not be the answer for every business objective.
How Does Blockchain Drive Top-Line Growth and Competitive Advantage for My Business?
As blockchain enables trust and transparency across businesses, it opens up new opportunities for new business models, new ecosystems, and new economic environments with secure, distributed business transactions. These new opportunities will drive new revenue streams for many businesses and enable them to leapfrog the competition by adopting a transformational technology and potentially disrupting some competitors from the value chain. For example, a digital trade chain can simplify a trade finance platform and provide access to more trading partners and more business, and a “know your customer” (KYC) application can use blockchain to reduce the friction and time to verify and onboard clients faster.
What Value-Added Business Models Does Blockchain Present?
Blockchain will both enhance many existing business models and create new models. To ensure that we have defined a clear path to enterprise blockchain adoption, we must focus on both business and technology models. We can take a singular use case that has an industry and enterprise impact and apply business and technology value analysis that results in a business architecture and technology blueprint, along with requirements for compliance, audit, and enterprise integration. The aforementioned artifacts drive an adoption model that enlists and surfaces hurdles and challenges, and factors in the costs and economic viability of the blockchain solution. Permissioned networks might also need to uncover the correct incentive and economic model to compel enterprises to join a platform that uses the notion of creation, distribution, and sharing of rewards that benefit all stakeholders. It is imperative that industries start the journey to explore the correct business model that enables value creation and elevates the modernization efforts that many industries desperately need to combat disruptive forces.
How Does Blockchain Network Governance and Design Work?
When members join a blockchain network, there must be clear protocols in place to govern and operate the network. In the enterprise space, we must define a simplified governance framework, in which we create a governance model that is inclusive of the principles of game theories, incentives, penalties, flexibility, delegation, and network mechanisms of coordination. These core principles must be included in all governing aspects of a blockchain business network, including the technology infrastructure governance, network membership governance, and business network governance.
Do I Need a Dedicated Blockchain Development Team?
In short, the answer to this question is yes—but you do not necessarily need a new team. Any developer can be a blockchain developer, because a typical blockchain solution is composed of 80% application and 20% blockchain framework. Applications can be written in languages that your development team already knows, such as Node.js, Go, Java, JavaScript, and Python. The framework component can be managed by blockchain platforms. Like the application component, the associated smart contracts can be developed in familiar programming languages. Therefore, a development team whose members use the knowledge that they already have can easily become a blockchain development team, with 80% of the team focused on the application and 20% of the team focused on the framework.
What Is the Cost of Implementing Blockchain?
The cost of implementing blockchain can be calculated by using variables that are specific to your project or use case, participants, technology, business model, and return on investment (ROI) expectations. However, getting started on your blockchain journey is cost-efficient because blockchain platforms such as Hyperledger, Ethereum, Corda, and Quorum are open technologies or open source, and even enterprise platforms like IBM Blockchain offer free tiers to help you get started.
Other Questions
Here are some other questions that might be of interest as ponder enterprise blockchain. All these questions will be covered as you continue through this book.
What are the advantages of adopting blockchain?
What are the top challenges in implementing blockchain?
Are there guides to help with implementing blockchain?
Which scalability concerns arise with blockchain?
Which type of IT infrastructure is needed to implement blockchain?
How do I think about designing a blockchain solution?
Which speed and data acceleration factors must be addressed to meet transactional requests?
Chapter Summary
We hope that this introductory chapter has piqued your curiosity about blockchain and its enormous benefits. Imagine a world where your data are secure, fewer people die due to foodborne illnesses, and counterfeiting is a worthless endeavor due to the instant verification of fakes—to name just a few of the benefits of blockchain.
If these benefits are not enough for you, think about how your business can benefit from showing accountability to governments and other entities, safeguarding its business moves while remaining efficient, scaling the enterprise to new levels, keeping its data accessible while also keeping it secure, and profiting from contributing data to the blockchain network.
If this sounds amazing to you and you are eager to learn more about the opportunities that are provided by a blockchain network, continue with Chapter 2. It explores more of the opportunities that blockchain can create for your enterprise, but also highlights some of the challenges that you must overcome to reap its copious and profitable benefits.
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18. “Identity Fraud Hits All Time High with 16.7 Million U.S. Victims in 2017, According to New Javelin Strategy & Research Study.” Javelin, 2018. www.javelinstrategy.com/press-release/identity-fraud-hits-all-time-high-167-million-us-victims-2017-according-new-javelin.
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