BlogChain: Enterprise Blockchain beyond the hype

How Enterprises are building tomorrow's 'Internet of Value' today

With all noise about blockchain, how do you know what is real and what is not? If you still believe in gravity and want to understand and fully appreciate what is currently happening in blockchain for Enterprises, just continue reading.

Why Enterprises are getting into blockchain

Blockchain is an open, distributed ledger technology (DLT) that can record transactions between parties efficiently and in a verifiable, secure and permanent way. It facilitates direct exchange of value between parties without needing a trusted intermediary. Therefore, blockchain could be considered as the 'Internet of Value': equivalent to the internet enabling direct exchange of information.

In essence, blockchain holds the promise of delivering Value and Trust.

Trust in blockchain is intrinsic. No external third party is required. Its design features a distributed, time-stamped and immutable consensus ledger of all past transactions. There are a variety of mechanisms in establishing consensus in a blockchain. Examples include Proof of Work, Proof of Stake or Proof of Elapsed Time. 

Taken in combination with IoT and AI, blockchain technology has the potential to be more than a transformational force. It could change value chains and the way people and organisations create value together in a fundamental way.

Strategic considerations for Enterprises entering blockchain

Enterprise solutions commonly have stringent requirements regarding scale, speed, confidentiality, compliance, security and legal enforceability. This triggers several questions for companies when devising a blockchain strategy to capture the value potential for their business and customers.

• Ecosystems - Blockchain ecosystems are based on a protocol. The function of a protocol is to take the input, verify the address and in a given period of time convert a set of actions into a hash (a block). It is the foundation upon which blockchain solutions are built. Well-known protocols are Hyperledger, Ethereum, MultiChain and Corda. The first three are industry-agnostic, whilst Corda is being developed by financial services industry consortium R3. Blockchain ecosystems could be focused on an industry, use case basis, geography or Enterprise-specific. This could lead to different market places for products and services through decentralised applications (DApps).
• Partnerships - Blockchain is a team sport. Enterprises can opt to adopt themselves one or more of the larger ecosystem platforms such as Hyperledger, Ethereum or R3. That requires making a fundamental choice. Enterprises can also engage a protocol-agnostic blockchain technology platform such as KrypC to enable a business solution for use cases. Moreover, Enterprises could pursue a Corporate Venture Capital strategy, taking direct equity stakes in start-ups or scale-ups active across the three network layers. Recent examples in the energy sector are Shell’s minority stake in Applied Blockchain and TEPCO’s stake in Electron. In addition, many banks and corporates have set up dedicated in-house blockchain teams.
• Public or private blockchains - Although a public, permission-less blockchain such as Bitcoin is often considered the purest form of DLT, most BtB companies currently opt for private, permissioned blockchain solutions. Participants are commonly approved members and existing business partners from within an incumbent value chain. Therefore, a private blockchain is not fully decentralised but rather distributed amongst groups of nodes in the network. The benefits of this are greater speed and privacy compared to public blockchains.

Challenges to be addressed for mainstream blockchain adoption

• Scalability - Public blockchains based on a Proof-of-Work consensus require every node in the network to process every transaction. Coupled with limitations of the block size, this affects the time it takes to complete transactions (as experienced by Ethereum and Bitcoin). The concentration of computer power of the DLT may also trigger geopolitical and security barriers to widespread adoption.
• Energy usage - Consensus mechanisms for public blockchain result in high energy requirements for both calculation by, and cooling of, the computers delivering such consensus for blocks to be added to the chain. For most private blockchain solutions being developed by Enterprises this is a much smaller challenge.
• Legal challenges are represented by the decentralised nature of DLT given the absence of a central authority. What would be the jurisdiction of a global DLT? How will smart contracts be legally enforced? What will be an agreed dispute resolution mechanism? How do we (us imperfect humans) deal with the immutable nature of smart contracts?
• Security is a pre-requisite for trust and it applies equally to blockchain. Reported hacks have affected public blockchains, not by compromising the protocols, but the exchanges where participants kept their tokens. Alternatively, participants in private blockchain solutions are known. Therefore, common off-chain legal agreements and liabilities continue to apply.
• For a distributed, decentralised technology as blockchain the inherent question is how regulators will respond to it. Their recent actions on cryptocurrencies reinforce the material impact on the playing field. Highly regulated industries such as energy, healthcare and financial services know how this affects their value.

It will take time for blockchain to navigate these challenges before mainstream adoption by Enterprises at scale could be realistically expected. At this stage Enterprises are actively experimenting to understand how the technology could benefit their business.

Use cases across different industries

Across industries many players are working on Proof of Concepts (PoCs) or pilots of Enterprise blockchain solutions. The first use cases to move into production are expected this year.

Financial Services

Across financial services, a wide range of business solutions are being developed by incumbent players, start-ups and scale-ups across capital markets, trade finance and payments in particular. In December, the Australian Stock Exchange (ASX) announced it will use blockchain for clearing and settlement of equities. Digital Asset Holdings has built and tested the technology over the past two years.

In January, commodity trader Louis Dreyfus teamed up with banks ABN AMRO, ING and Societe Generale for the first agricultural commodity trade on blockchain. The transaction involved the sale of a cargo of US soybeans to China’s Shandong Bohi Industry. The banks used digitised documents for the deal, including contracts, letters of credit as well as government inspections and certifications. By automatically matching data in real time, document processing was reduced to a fifth of the usual time.

In September, Royal Bank of Scotland (RBS) and the Financial Conduct Authority (FCA) partnered with the R3 consortium to use its Corda blockchain platform to automate the creation of mortgage delivery receipts on behalf of the banks.

Energy

In November a consortium involving Shell, BP, and Statoil announced they were working on the development of a blockchain-based energy commodity trading platform, along with three large commodity traders—Gunvor, Koch Supply & Trading, and Mercuria. The launch date is projected at the end of this year.

Over the past year, energy start-ups across the globe have been using blockchain to power electricity sharing in microgrid trials.

Australia’s Power Ledger is building blockchain platforms to enable commercial operation of microgrids in Thailand, India and Australia, including a 200-customer trial microgrid with power retailer Origin Energy in Sydney.

UK’s Energi Mine built a blockchain-based platform to reward energy saving users with tokens they can use to pay their energy bills or charge their electric vehicles.

Singapore’s Electrify has been running a price comparison marketplace as the country liberalises its electricity market. It plans to launch a blockchain-based exchange for all consumers and producers next year. Japan could be next.

US’s Grid+ will launch its first retail device within the next 12 months in Texas, using Ethereum blockchain to allow users (whether they are traditional consumers or owners of solar panels and batteries) to buy and sell electricity at wholesale prices.

Food

In December 2017 a pilot commenced with a blockchain-based database of small tea farmers in Malawi to improve supply chain transparency. The tool uses a number of different technologies to gather and record standardised information on small farmers and producers, including quality and price. Companies involved are Unilever and Sainsbury’s, together with BNP, Standard Chartered, Barclays, Sappi, Provenance (a firm that provides blockchain supply chain services), Halotrade (which uses smart contracts to convert supply chain data into preferential pricing terms), and Landmapp (which delivers land rights documents to rural communities).

Last summer, a major blockchain consortium including Dole, Driscoll’s, Golden State Foods, Kroger, McCormick and Company, McLane Company, Nestlé, Tyson Foods, Unilever and Walmart started to work with IBM to identify food safety and improve food traceability by providing trusted information on the origin and state of their food.

Over the past year, Walmart completed several blockchain pilot projects to trace and track every step of their food supply chain to make it more efficient and safe. It creates trust how food flows from the farm to the table. Before using the technology, Walmart conducted a trace-back test on mangoes in one of its stores. It took six days, 18 hours, and 26 minutes to trace the fruit back to its original farm. In comparison, by using blockchain Walmart can provide all the information the consumer wants in 2.2 seconds.

Diamonds

In December, De Beers announced investments in a blockchain-based diamond tracking platform to augment supply chain transparency and diamond traceability to avoid conflict diamonds. It will create a highly secure digital register, building a tamper-proof and permanent record of interactions that traces every diamond’s path through the value chain. Such transparency will help identifying counterfeits and conflict stones or ‘blood diamonds’.

Real Estate, Public Sector, Power & Utilities

The Swedish land registry authority, Lantm?teriet, is exploring ways to digitise the currently onerous process of real estate transactions. It is prototyping a mobile app that would provide a blockchain-based transaction interchange for sellers, buyers, real-estate agents and banks, recording detailed information about its properties and each step in the transaction process.

The Dubai Land Department, as part of the Smart Dubai initiative, launched a blockchain powered system in October to help secure financial transactions, record all real estate contracts and connect homeowners/tenants to key utilities such as water, electricity and telecoms providers.

Insurance

The Blockchain Insurance Industry Initiative, B3i, is prototyping a natural catastrophe excess-of-loss product. Its focus is on B2B interactions between the insurance companies, the reinsurers and the brokers.

Shipping

In January Maersk and IBM announced a joint venture to deploy a blockchain-based electronic shipping system that will digitise supply chains and track international cargo in real time. It will enable a single view via a virtual dashboard of all goods and shipping information for all parties involved, from manufacturers and shippers to port authorities and government agencies. Over the past 18 months, Maersk has been piloting the blockchain platform with various customers, including DuPont, Dow Chemical, Tetra Pak, Port Houston, Port of Rotterdam and Dutch and US Customs.

The road ahead

It is evident that tangible Enterprise solutions using Decentralised Ledger Technology are being developed across industries today, albeit at a small scale. Blockchain technology will not be a solution for everything, with inherent challenges still to be addressed. However, blockchain has the potential to be a key driver of the Internet of Value, in combination with IoT and AI.

Irrespective of your blockchain strategy, trust will always be priceless.

Paul de Kroon is an investor in, and advisor on, Blockchain for Enterprises through KrypC and 34 Capital.