#2 Distributed Ledger Technology For Business
Bilal EL ALAMY
Redefining Ownership - CEO @PyratzLabs & Chairman @Intercellar & BBSchool
Day Dreaming
I’d like to thank every person who kindly gave their input on this article prior publication.
We have seen in the previous article that one of the most fundamental concepts about Distributed Ledger Technology (DLT) is that it avoid the necessity to trust an intermediary (individuals, legal firm, banks…) by placing that trust into the actual mechanism of the network. Additionally, DLT also guarantee cutting edge degrees of Security, Efficiency and Transparency. But what does it mean for businesses? How can they use it and why should they? To understand it, remind yourself that DLT is a computer science breakthrough, i.e. in the end just a new kind of database. Except of vertical and horizontal integration, you have “Virtual Integration”. So let’s investigate the kind of databases businesses have been using:
Databases are the epitome of everyday in our digital society and yet few people like to talk about it. It is definitely not sexy, but truly essential to every business.
With the explosion of information in the computer era, we had to rethink the way we structure information. I’m sure that everyone remembers the archives of your company, and the young boy sorting everything during the summer, that was not so long ago - I used to be this young boy.
However, we started having more and more on-premise servers to keep our information numerical. Then, in order to decrease cost & time of installation and the ‘risk’ associated with it, cloud-based database offerings gained traction.
Note that on-premise databases centralize information which make it riskier in case of an DDoS attacks (hacks) compared to the cloud service providers that have more means to assure the security, but then pool every customer’s information which also raises data privacy as well as security concerns among business leaders.
So what are the innovation with Distributed Ledgers now? Security, Efficiency, Transparency!
As their name indicates, those databases are distributed meaning that information is fragmented and stored among all the nodes multiple times in a redundant fashion. This database architecture makes it practically impossible for a malicious agent to 1) freeze the whole system and 2) get the information he is particularly looking for. There is no way to exactly locate specific information unless this agent has full information, i.e. he is in control of the whole chain. For example, in Blockchain each new node is encrypted based on the previous one. In order to obtain information in block N you need to hack the N-1 blocks before that. Given the current processing power this would practically not be possible even if you had a few billion years for this computational task.
The bigger the network, the more transactions and the less information are stored in every node. As a consequence the risk is Inversely proportional to the network size and the number of transactions.
In the case of DLTs, the equivalent of traditional service providers like AWS or Teradata are the various networks I introduced in the previous article like Ethereum or IBM Hyperledger. Hence, the use case determines largely the associated cost and complexity. If you use a SaaS (Software as a Service) or a PaaS (Platform as a Service), setup time is short and cost depends on the service. If you want to build your own software or platform, it will naturally require more a higher investment. In terms of maintenance cost, they are ‘90 to 95% cheaper than the data center model’ (‘blockchain reaction’, EY), while using the same consumption-based pricing models.
Now, that we have investigated the security aspect, let’s take a look at the efficiency dimension of DLTs. The answer is pretty straight forward: we mentioned earlier that all the information is distributed many times among the nodes (in an optimal way). Therefore, the path to any information is shorter in DLT than in any traditional database (specifically, because it avoids useless copies, bi-nationals in an inter-governmental database or simply the same printed contract that various companies can have when there’re involved in the same deal). Since it is distributed you can check many nodes at once, so you’re looking into many places of the database at the same time. DLT applies what we commonly call Parallel Computing. If you ever downloaded a torrent, you might have noticed that the software downloads many parts of the file at the same time to optimize speed. The same applies to DNA when it copies itself. Another wonderful example of biomimetic. All of this helps the underlying Consensus Algorithm to provide competitive performance.
Finally, DLT offers “Transparency”. Intuitively, transparency and confidentiality of information can be conflicting dimensions. DLTs are secure because they reduce risk for information to be stolen or altered ( - i.e. they ensure integrity of data - ). What is more, DLTs also conceal the identity of a user behind powerful cryptography. Linking a public address to individual users is particularly hard to achieve.
So how is it Transparent? The ledger where all transactions are stored is accessible for any agent of the network. However, as aforementioned the agents concerned by each transaction are protected thanks to the public address. Basically, at each line (of the ledger) there is complete information about a given transaction, yet it is encrypted. As a consequence, so you can’t understand what happened unless you are equipped with a user’s private address: only then you’ll be able to see their holdings (whether it is their balance or assets) and prior transactions.
Actually, this property applies only to public ledgers. Full visibility of transactions on the network is not necessarily good. Imagine an Investment Bank using DLT for some aspect of their operations where confidentiality is a critical aspect of its business model. It is called Information asymmetries, which entails patents to customer insights extracted from big data analytics. In this case, companies would prefer private networks (which is possible) or use open source projects like HyperLedger that empower developers with the protocols they need to design uniquely private “blokchains” that can be tailored to meet regulations and privacy requirements.
Now that we understand the competitive advantage of DLT and how it achieves this advantage, We realize now that every business requiring an intermediary will eventually disappear. But keep hope! Schumpeter theorized the concept of ‘Creative destruction’! Of course, I’m being ironical. Even if it held true, we would still have to face major challenges in terms of employment during the next 50 years.
To get a better idea of the potential of Distributed Ledger Technology, let’s have a look at sectors with intermediaries.
The technology can allow for immutable tracking of anything across the supply chain. This means that consumers can know exactly what their food contains, whether it is fair trade or organic food. But it is also good for the companies, as such transparency helps to maintain the integrity of a company by reducing scandals in productions (remember the kind of scandal where people discovered they were buying horse meat instead of beef from the super market? Even though we were indirectly paying “label companies” to certify the food – by using DLT companies can pre-empt such a risk). It can also track the exact waste during the whole supply chain for perishable goods which can be up to 60% allowing companies to better know where to focus their efforts or to identify a fraudulent collaborator. Walmart already uses IBM Hyperledger to track food along the supply chain from China to the US. A perfect example of how DLT can handle high volumes in large markets.
DLT have also the power to improve Healthcare by providing a secure database allowing patients to safely access their medical records if required. For example, if you move from one state to the other, you would be able to easily obtain the information in a secure manner. DLT can also be used for regulation and compliance of drugs to accelerate the process of issuing the drug for the market by tracking the drugs on the supply chain whether it is the molecules or the end product.
‘Smart’ contracts can revolutionize the legal industry. The entire industry is based on advisory and intermediaries. Therefore, you can forget about notaries when you sell your property, forget about brokers, forget about auction houses. Costs for tax audits could be dramatically reduced when every transactions is certified as soon as it is recorded.
What makes such contracts ‘smart’? Traditional contracts are a binding agreement that usually hold information about a product or a service that is to be delivered; legal obligations; means of exchange and other conditions. A smart contract performs the exact same functions but with an entirely different structure, as they are adaptive. They track parties, terms, transfer of ownership, delivery of goods or services without legal intermediary. How do they work? A major assumption is that you can not trust everyone. DLT is used to solve this issue while using a set of computer-driven activities to enforce the complete execution of a contract. In other words, there is a set of actions (who, how, when, what happens) and conditions that are coded (for; while; if; else, return) and the transactions is validated only once the program is entirely executed.
For governments, DLT could store personal identity information, criminal records and citizens’ biometrics. By placing an electronic chip under our skin (with unique private key), similar to RFID chips. Therefore, security checks at airports will be history as well as passport abuses.
Another example are Loyalty programs. Imagine being able to use your points from the local fast food restaurant for buying a perfume, or simply use “miles” acquired with Airline Company A to buy a ticket with company B; the same applies to hotels. It is definitely possible if the merchants tokenize their loyalty points and put them into a marketplace or an “exchange” so that the consumers exchange points across the loyalty exchange platform. Thanks to DLT anyone can store his points in the ledger without the risk of losing them since there is no central authority involved that could tamper with the account balances.
The same applies to land registries. In a lot of corrupt countries, they don’t function properly because people can’t trust the authorities not to tamper with their real estate.
Remember, the Ponzi scheme that Bernie Madoff’s demise around 2009. This scandal should convince you that if we can rely on something else that trust (like Mathematical Proofs), we’d better go for it. Sometimes, people or organization act in favor of their interest without disclosing it to you, i.e. the essence of corruption or the agent-principal problem. Agents can even be erratic or susceptible to collapse in some regions. Distributed power is essential for long term stability as seen in many democracies.
By the way, do you know the difference between centralized, decentralized and distributed?
DLT has a lot of disruptive potential. There are many use cases across every industrie and sector: from smart grids in utilities to the storage of credentialing data (degrees and transcripts) in education. I really advise you to look what’s happening in your sector, because like all hints of disruption, it usually takes more time to gain critical mass than what “evangelist” anticipate (Good for you, you can learn about it). However, once it starts, it happens always quicker than expected (“Exponential Growth”).
https://gomedici.com/30-non-financial-use-cases-of-blockchain-technology-infographic/
DLT holds the potential to deliver a radically different and more efficient way of processing business transactions and associated documents. More than 40 different industry consortiums have been formed by the world’s largest and most important financial, legal, shipping, healthcare, accounting firms to map the future. In fact, many of them are slow to develop or leave aside implementation because skilled workforce in that context is very scarce. I mean, people need to wake up, Salaries are around 180K per year, everything has yet to be done.
Companies are not asking themselves “what is my blockchain strategy?”, they are asking themselves, “How will my business operate and make money in a Blockchain-enabled world?”.
Therefore, DLT will definitively becoming critical for any information professional, and in the front end, you will have Artificial Intelligence running the applications for us. Unless companies start thinking now about what their products and services could look like in a DLT-enabled world, they will not adapt quickly enough to remain competitive with those that do.
The Chinese government predicts that DLT will be ten times more valuable than the internet.
So far, we have only seen one side of the applications of Distributed Ledger Technology, it is called the “Sharing Economy” (because by sharing information, the consensus can be achieved), the part where it is used as a distributed database, with its efficiency, transparency and security. However, there are other applications like the “Token Economy”. This will be the subject of the next article.
Key Takeaways :
DLT Benefits :
Saves Times : Transactions that could take days, finally are almost instantaneous.
Removes costs : Overheads and costs intermediaries
Reduce Risks : Fraud, tampering, cyber crime
Increase “blind” Trust : through shared processes and recordkeeping.
The views and opinions expressed in this article are those of me and do not necessarily reflect the official policy or position of any agency.
Happy to discuss further.
Peace.