BUSINESS BLOCKCHAIN

1. BLOCKCHAIN BASICS

Blockchain is a new method of recording transactions within a business network which adds efficiency and trust to the exchange of assets between network members. There are five fundamental components of business blockchain:

  • The shared ledger records who owns what;
  • Smart contracts determine when transactions occur;
  • Privacy services control who can see what and make transaction records tamperproof;
  • Consensus is the method used to determine if transactions are valid;
  • Business network connects the different organizations.

When applied to the right business use case, blockchain can save time, increase efficiencies, reduce risk, and increase trust.

1.1 WHAT IS BLOCKCHAIN?

Businesses always work together in a network with other businesses, banks, and government departments. Ownership of assets – tangible (e.g., a car, a house) or intangible (bonds, intellectual property) pass across the business network in return for payments and governed by contracts.

Each network participant keeps their own ledger (or book of record) – recording all assets they own and any changes to those assets.

Although well tried and tested, this process is very inefficient, vulnerable to fraud or cyber attack, and often piling cost on cost. In particular, the need for separately managed ledgers to all be updated correctly across the business network often leads to disputes and costly reconciliation.

Blockchain gives participants the ability to share a ledger which is updated every time a transaction occurs. Privacy services ensure that business network members see only the parts of the record that are relevant to them, and that transactions are secure, authenticated, and verifiable.

Blockchain also allows the (smart) contract for asset transfer to be embedded in the shared ledger to govern the execution of the transaction. Business network participants agree how transactions are verified through a process called “consensus”. Regulatory oversight, compliance, and audit can be part of the same network.

1.2 HOW DOES IT WORK?

Suppose our business network consists of Peter, Susan, and George who share a vehicle ownership ledger, recording who owns which vehicle. Peter has decided to transfer ownership of his car to Susan when she pays him £500. Once the money is received, Peter tells George and Susan that he wants to make this transfer. If they are in agreement, the ownership change is written into the ledger in a way that it cannot be changed and all copies of the ledger are updated. If they are not in agreement, the money is returned to Susan. Privacy services ensure that Peter and Susan can see full details of this transaction, whilst George sees only that the transaction has occurred but does not have access to the full details.

Table 4: Technology building blocks

Blockchain feature Technology
Trusted agreement of a transaction(ownership change) Consensus algorithm, details are highly dependent on the use case
Once money is received, car ownership transfers. Smart contracts will specify the conditions for asset movement
Transaction cannot be changed once written to ledger. Privacy services - cryptography used to lock transactions details once written
Ledger is shared between parties in business network. Peer to peer replication technologies
Control over who can see transaction details. Privacy services - cryptography used to control visibility of transactions on ledger

This leads to the five key components of a business blockchain:

  1. Shared ledger - recording who owns what.
  2. Privacy services - making transactions tamper proof and controlling access.
  3. Smart contracts - determining when a transaction occurs.
  4. The business network - connecting the different organizations.
  5. Consensus - the method used to determine that a transaction is valid.

1.3 BLOCKCHAIN BENEFITS

There are four fundamental benefits from blockchain usage, as listed in Table 5.

Table 5: Blockchain benefits

Blockchain benefit How is benefit realised?
Saves time, through near instantaneous transactions. Complex, multi-party transactions can be agreed between relevant parties and executed efficiently.
Increases efficiencies, by removal of costly overheads and intermediaries. Appropriate access to shared ledger granted to members of the business network.
Reduces risk of tampering, fraud and successful cyber attack. The ledger is distributed to members of the business network, thus increasing resilience.
Increases trust across business network. Business network members share business processes and tamper proof records of asset ownership on the shared ledger.

1.4 EXAMPLE BUSINESS USAGE

This is exemplified in Table 6, which lists example business usage for each blockchain benefit.

Table 6: Realising blockchain benefits

Blockchain benefit Example business usage
Saves time, through near instantaneous transactions. Shared ledger of asset ownership and location, with smart contracts governing payment.
Increases efficiencies, by removal of costly overheads and intermediaries. Controlled access to the shared ledger reducing cost of audit, whilst improving reliability of result.
Reduces risk of tampering, fraud and successful cyber attack. Shared ledger of asset ownership, location and authenticity removes risk of counterfeit goods in a supply chain.
Increases trust across business network. Dispute resolution by maintaining a trusted record of asset status with a complete audit trail of changes.

1.5 REFLECTIVE QUESTIONS

1. What are the three most important organisations in your business network?
2. What are the main assets that you transfer?
3. What asset transfers take the most time, and/or are the most inefficient?
4. What's the current level of trust across your business network?
5. What personal experience/opinion do you have with bitcoin?