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Digital Leaders North East and Invotra attracted a broad range of businesses to their Blockchain event earlier this year. The audience ranged from those who are already actively exploring blockchain solutions in their business to the majority who are still feeling their way on the potential of the technology.
One of the most interesting aspects of blockchain technology is the encoding of complex business rules and processes in ‘smart contracts’. A smart contract is a piece of software within the blockchain which defines the language of transactions. To break this down further, think of a game of chess. Every move is a transaction, something which changes the state of the two players in the game. Every move has very specific rules. A smart contract for chess might define the number of spaces that a piece can move. If you tried to move your pawn five spaces diagonally across the board, the smart contract would reject the move as invalid. Only once the pawn has moved correctly according to the strict rules of the game would the transaction be completed.
The original smart contract sits within the Bitcoin blockchain. This snippet of code ensures that when one user chooses to send coin to another user, the transaction is recorded in the ledger. From the outside we can see that an amount of money was transferred from wallet A to wallet B. This doesn’t feel particularly groundbreaking. After all, we can see transfers recorded on our own bank accounts. However, our bank accounts rely on a trusted central intermediary – the bank itself – to maintain the ledger and process the transactions we initiate. Transfers can take days to clear, even if we see them reflected in our records straight away.
The smart contract on the Bitcoin blockchain enables a transaction to be recorded on the ledger without any need for a trusted intermediary. It is known as a ‘trustless’ transaction. The consensus-based validation process confirms the transaction within a few minutes, and the structure of the blockchain itself ensures that the ledger cannot be altered or subject to fraud (in other words, and to introduce a favourite piece of blockchain jargon, the transactions are immutable). Smart contracts are an elegant method of reliably decentralising a function.
Smart contracts are not the first software to encode business rules, but they place trust in the process itself, rather than relying on individuals. They enable multiple stakeholders to transact confidently without having first to establish a commercial trust relationship. Repetitive processing can indicate potential for a successful blockchain implementation. Securities exchanges, property transactions, export finance, identity registers, aspects of healthcare, and supply chain management and regulation are all obvious candidates for business improvement using blockchain technology.
The most advanced systems are supported by states or large NGOs. Estonia has taken the plunge with its e-Estonia identity register and is considering a national cryptocurrency ‘estcoin’. The United Nations has recently formed a blockchain coalition on climate change, and the World Food Programme trialled a token-based system for the distribution of food aid to Syrian refugees in Jordan throughout 2017. Over $1.4m of aid was provided to 10,500 refugees with a significant reduction in administrative costs and fraudulent activity. The project is currently scaling.
Commercially, in December 2017 the Australian Securities Exchange announced the adoption of blockchain to record shareholdings and manage the clearing and settlement of equity transactions. Using a smart contract to update registries is a very clear application, and the Swedish land registry, Lantmäteriet, has launched a concept blockchain for managing, securing and verifying property transactions. Asset provenance applications include tracking in the diamond trade ‘from mine to customer’. Shipping giant Maersk trialled a blockchain application for real-time insurance in 2017 which proved so successful that it is now moving to full production.
Blockchain is an exciting development and has the potential to solve business problems that existing technology cannot handle. It’s essential, however, to clearly define your business goals and processes. Often this analysis reveals other ways of making the business more efficient: in our experience, the blockchain application is a small part of a working business system. You must make sure that your business rules are properly reflected in the smart contracts. Immutable transactions work both ways: you can’t change them even if you want to. Bear in mind too that developers are not infallible, so don’t rush implementation.
There are some excellent software consultants out there with deep understanding of this new technology and its benefit to business. Choose your partners wisely, grasp the opportunity, and let the blockchain take the strain.