Selling Blockchain as Other Than Blockchain
The Economist ran a cover story back in 2015, calling the technology behind Bitcoin a “trust machine.” Nothing can be further from the truth. Blockchain is a machine that will lower the cost of trust in trade and economy of $23 trillion.1 Blockchain is a trust layer for platforms and applications. It is a trust protocol for networks. It is not a database layer or a storage layer. In fact, blockchain doesn’t perform well in any of those areas and was never conceived to be either of the two. It is a ledger, a truth ledger, that stores transactions between two parties, two machines, two human beings, or two enterprises anywhere in the world.
With the possibility of reversal, the need for trust spreads.
–Satoshi Nakamoto
All blockchain does is record who gave what to who and when. That is all it does. How can such a simple concept be so powerful? The simple answer to that simple question is that all we do every day is give and take something to and from somebody else. It may be physical goods, information, data, algorithms, reports, e-mails, songs, money, and many others.
That is what commerce consists of. It runs on manufactured trust. Did you notice that the first word in Satoshi Nakamato’s famous white paper is the word “commerce”? Trust is foundational to commerce, trade, supply chain, and lemonade stands. Yet maintaining trust is expensive, time-consuming, and inefficient. It seems ironic that as digital transforms the world, one of its more promising building blocks is a throwback to our decidedly analog past.2
In every transaction, trust is essential. I would not buy lemonade from a kid if I did not trust him or her. Sometimes I do take a risk and forget about trust because I’m super thirsty. But that is rare. The second part of trust is verification. If I am buying lemonade, then before paying for it I will ask if they are from the neighborhood, and if so which house, and which school he or she attends. Asking those questions is another means of verifying trust.
Companies similarly verify trust by ensuring the counterparty has the appropriate documents such as social security, permits, insurance and line of credit. For being a trusted third party, government agencies, insurance companies, and banks are paid commissions. Increasingly, if you have not noticed, trusted third parties have started to encroach on customers’ identity and privacy. The worst case is attempted control of the market.
Blockchain as an Evolution of Ledger
One of my favorite things when explaining blockchain to businesses is to describe blockchain as a new kind of ledger, perhaps an evolution of the ledger. From early clay tablets to Sumerion cuneiform tablets in 7000 BC to double-entry accounting systems around 1300, AD ledgers have evolved in a way that has arguably changed trade, supply chain, banking, and other aspects of the market.
Fast forward to the 1960s. With the advent of computers, and later the World Wide Web, we saw digital banking in which accounts receivables, debits and credits, and ledgers became digitized. From there, ledgers evolved into spreadsheets, relational databases, and web-based read and write databases. The last one contributed to global electronic commerce.
Not only banks, but governments too started to maintain digital ledgers with transactions about property transfers, voting records, stock transfers, and more. Banks started to maintain ledgers for the financial transactions of its depositors. Individuals maintained ledgers in personal computers and later in servers and cloud-based applications.
Hence, ledger-recorded entries became a digital representation of assets. Ledger entries in banks became money,3 which also became a centralized system of trust, allowing people who didn’t know each other to trade and exchange goods.
When blockchain introduced the concept of decentralized ledgers, it also challenged the centralized system of trust and our overreliance on a trusted central authority and powerful intermediaries, or keepers of the ledgers. Bitcoin exemplified how ledgers, distributed over multiple independent nodes and secured using clever cryptography, made it possible for decentralized trust. Ledger entries became a digital representation of assets but without banks’ involvement.
Similarly, the evolution of centralized ledgers, for lack of better a phrase, facilitated and revolutionized modern-day trade and finance. The question we should ask ourselves is “what kind of opportunities will the decentralized ledgers create?”
Do Not Sell Blockchain, Sell Transparency
A few months back, I was invited to present blockchain 101 to a group of firms and government agencies moving containers in and out of a maritime port in Mexico using ships. The business innovation manager at one of the terminals at the port articulated his vision of how blockchain technology could potentially improve port operations.
The process of loading and unloading a container onto and off a ship involves brokers, port operators, port authority, federal and state government, an exporter, an importer, a trucking company, and so forth. The process is subject to numerous oversights from national government agencies such as federal tax authorities and customs agencies.
Government must make sure each container contains goods that can be exported and imported and that proper tax and duty has been paid. Even within government, there are agencies, each with a different scope of oversight over what can be exported and imported. Then there are customs agents working on behalf of exporters to fill out paperwork requesting the government to let them load the container. The terminal operator must then make sure the container has been sealed and authorized by the government. If an incident occurs, then insurance companies and banks may get involved as a provider of credit or lien holder on the container.
In brief, after I finished blockchain 101 and explained the power of collaboration, senior executives of the port said that we see the power of blockchain is increasing efficiency and accountability by forcing the stakeholders to be about who did what in the process of loading or unloading containers. Light bulbs went off in everybody’s head in the room. They said, “We can create a platform where all the agencies are part of a circular network with no hierarchy, making it a flat, circular network.”
It was clear from the workshop that blockchain was not about creating an application to prevent agencies from entering misinformation but about holding them accountable for entering that misinformation and then collaborating to prevent it from happening. That is what transparency in the network does. It holds individuals and agencies responsible for irresponsible behavior.
At the same time, the participants should also be rewarded for being part of this transparent network. The reward to the port community in this case was being able to reduce the container export/import process from 4 hours to 1 hour, saving the agencies millions of dollars in customer service and back-office operations.
You must remember that blockchain technology is not about preventing wrong or erroneous information from being added by participants in the network. It is about creating a network with a shared ledger by which individuals are held accountable when that happens and discouraging them from doing so by instituting a penalty.
Blockchain is a counterintuitive, albeit new, form of transparency.4 It is new in that transparency in the past has been achieved through nondisclosure agreements and gentlemen’s agreements. Sharing an electronic ledger is unheard of and is hence also counterintuitive. Paul Martyn claimed, “Collaboration through distributed databases will make the supply chain more transparent,” as an inevitable event. Mr. Martyn thinks that companies should get on board to avoid consumer liability, because that is inevitable too.5
Blockchain Is a Risk Management Tool
Blockchain’s key value propositions of immutability, no single point of failure, and tamper resistance have implications of risk reduction for individuals and businesses alike. Bitcoin, and other cryptocurrencies, has proven to be a reliable means for individuals to transfer fungible assets without the need for intermediaries, which can be compromised or can create price barriers. For businesses, risks exposed by third-party intermediaries can be alleviated by using smart contracts. Businesses that are highly dependent on intermediaries can gradually and completely wean themselves off by using decentralized platforms, distributed applications, and smart contracts.
Intermediaries are a point of risk on a value chain. However, this is far from being a black-and-white issue. Many intermediaries provide services to their customers who, among other things, lack the expertise or resources to aggregate information, choose from multiple providers, or negotiate on behalf of insurance brokers. There are also issues related to outright fraud and scams that blockchain has the potential to eliminate. However, this requires horizontal collaboration with companies.
In 2014, companies controlled by a Chinese-born Singaporean businessman were alleged to have used invoices for the same metal stockpiles several times to defraud Standard Chartered of $200 million. In 2008, a similar incident involving fictitious purchase orders and fake invoices cost banks, including JPMorgan Chase and Co., close to $700 million.6
The same news outlet reported that Standard Chartered, and a few other banks, are experimenting with a blockchain-based solution in which details from an invoice are used to generate a unique hash value stored on the ledger, which appears if another bank tries to register the same details separately. This prevents someone from borrowing multiple times against the same invoice from more than one financial institution. It also allows the financial institutions to prevent fraud without sharing personal identifiable information about the person.
Businesses that receive invoices from hundreds of vendors and contractors have teams of auditors and accountants reconciling these invoices before issuing payments. Every incoming invoice is scrutinized. One executive asked me, “Why isn’t there a system by which only troubled or suspicious invoices are scrutinized instead of all of them?” The rest of the low-risk invoices are automatically issued payments. The executive was hoping the blockchain technology would allow that to happen one day.
One of the use cases of blockchain and the ethos of collaboration through a shared, immutable, tamperproof ledger is sharing threats and other risks with peer companies. I am no expert on this topic but was introduced to these risks by folks I know at a few Fortune 100 companies.
These acquaintances asked for my views about what it would take for companies to collaborate to reduce the time and costs of onboarding vendors and subcontractors. An auto company executive I talked with mentioned that they spend millions in vendor management. Every time a new vendor is onboarded to supply materials, they must go through a tedious process of due diligence about the vendor. He said, “Wouldn’t it be great if we can create a decentralized vendor management system with participation from auto companies and reduce duplicate effort of due diligence”? I said, “Aren’t there already companies and platforms that provide these kind of services”?
He said, “Yes, but we are getting secondhand information. I would rather get firsthand information from another auto company about the vendor.” Frankly, I have no idea what it would take to build such a system, but it seems like it’s worth an effort. Beyond implementing this concept in blockchain, there must be a massive legal implication in case a peer company falsified information about a vendor.
The second use case, as described by a system engineer at a large logistics company, was sharing threat intelligence. As it happens, they are constantly battling cyberattacks from state and nonstate actors. During that process, they have built a database of IP addresses where such attacks originated from. I am sure this is much more nuanced than what I mentioned. His question to me was remarkably like the question by the auto executive. I am sure there are cybersecurity companies and consultants who keep records of these threats. The answer from the engineer was like the one from the auto executive, “I’m getting secondhand information from the consultant and can’t verify if those Internet addresses are a threat. I would rather get that information from our peer company.”
Building a collaborative network where companies share risks and threats is not trivial. This kind of collaboration requires changing the paradigm from “privileged vs. the cyber threats” to “us vs. the cyber threats” in the future.7 This is not a blockchain problem but a human problem.
Outsource Risk and Trust to a Network
If you use decentralized networks to transact with other parties, it would be fair to say that the network is assuming the risk of such transactions, instead of a third party or intermediary. If you transfer Bitcoin to a friend, then the network and the protocol are assuming the risk of transfer. While sending funds from one bank to another, banks and other intermediaries assume the risk of such transfer. Assuming they take responsibility in case of failure to transmit, you may get the money back. If the Bitcoin network crashes, hypothetically speaking, in the middle of the transfer, most likely you will not get it back. The network may hard fork and give the Bitcoin back, but that is very unlikely.
If you use a decentralized platform built on Ethereum, for example, where smart contracts hold transactions that record asset transfers, then you are essentially outsourcing the risk to the Ethereum network. If your customer complains that the asset transfer you initiated over the Ethereum network did not occur, then you cannot call Ethereum customer service, because it does not exist.
Although these are disadvantages of outsourcing trust and risk to a decentralized network, there are also many advantages. The first is that doing so would result in significant cost savings because you do not need to build complex infrastructure to store transactions or resources to secure them.
The question remains: “How long will it take for us to fully trust a decentralized network to hold our assets and outsource risks to these networks?” We still store files in hard drives and in printed form instead of in the cloud.
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1 S. Davidson, M. Novak, and J. Potts. July 24, 2018. “The $29 Trillion Cost of Trust,” Medium Corporation. https://medium.com/@cryptoeconomics/the-29-trillion-cost-of-trust-be8ffbd5788d.
2 E. Piscini, J. Guastella, A. Rozman, and T. Nassim. August 31, 2016. “Blockchain and the Democratization of Trust,” The Wall Street Journal. https://deloitte.wsj.com/cio/2016/08/31/blockchain-and-the-democratization-of-trust/.
3 LLFOURN. February 15, 2018. “A Brief History of Ledgers,” Medium Corporation. https://medium.com/unraveling-the-ouroboros/a-brief-history-of-ledgers-b6ab84a7ff41.
4 Dgwbirch. July 15, 2018. “Supply Chains and Blockchains,” Medium Corporation. https://medium.com/@dgwbirch/supply-chains-and-block-chains-980a7340bcbd.
5 P. Martyn. March 28, 2018. “Does Blockchain Provide the New Standard for Transparency?” Forbes. https://www.forbes.com/sites/paulmartyn/2018/03/28/does-blockchain-provide-the-new-standard-for-transparency/#300af0093921.
6 C. Chanjaroen and D. Boey. May 23, 2016. “Fraud in $4 Trillion Trade Finance Turns Banks to Digital Ledger,” Livemint. https://www.livemint.com/Industry/CXfxl1yePlwTDuokXU3c2K/Fraud-in-4-trillion-trade-finance-turns-banks-to-digital-le.html.
7 R. Shahare. March 02, 2019. “Blockchain, for Threat Intelligence Maybe?”, CPO Magazine. https://www.cpomagazine.com/cyber-security/blockchain-for-threat-intelligence-maybe/.