Introducing and Evaluating Transformation Technologies for mid-sized Companies Part 2 – Decentralized Ledger Technologies (DLT)
As part of our digital transformation projects at medium-sized companies, sooner or later the question arises which disruptive technologies can be used to support achieving the business goals. In short, digital technologies form the basis for digital transformation. A variety of skills are required to develop and to implement digital technologies. In our series “Introducing and Evaluating Transformation Technologies for mid-sized Companies” we present the key technologies that we consider current and discuss their practical relevance in the context of digital transformation projects. In our first article, we looked at the Robotic Process Automation (RPA). In our second article, we look at decentralized ledger technologies (DLT).
What is Decentralized Ledger Technologies (DLT)?
DLT describes techniques for decentralized processing and storage of data. Ledger is English for account book or general ledger. DLT can, therefore, be described as “distributed general ledgers”. By distributed is meant “decentral organized”. A distributed ledger can be referred to as a decentralized database.
Open ledgers are accessible to anyone interested. The blockchain is the best known (with Bitcoin as a network). Within this network, the participants have shared write and read rights. Participants in regulated ledgers must meet certain criteria to gain access. With cryptocurrencies, the accounts are not stored centrally at a bank. They are stored decentral in different places. To protect them, they are encrypted with mathematics, this encryption is called "cryptography". It serves to secure the data against manipulation and unauthorized reading. Transactions with IOTA, Bitcoin, etc. are not "paused" for 1-3 days as is usual with banks. Depending on the technology, different types of consensus confirm the transactions. Open distributed ledgers mainly use the proof-of-work mechanism. Although it requires high computing power, it replaces the trust required. In contrast, regulated ledgers create the basis for trust by checking their customers. This enables them to use the less computation-intensive proof-of-stake process.
The data of all transactions are saved in blocks. These blocks can be described as a single page in a ledger. Whether you think of a ledger as a cash register, land register or share register - the basic principle is the secure and permanent recording of data. The blocks of a blockchain are organized linearly - every new one is attached to the existing chain and enable peer-to-peer transactions that offer users a decentralized platform that is maintained and managed by consensus.
How can DLT be classified and considered within Digitization Projects?
Digitalization requires companies to fundamentally rethink their existing business and operating models against the background of digital technologies. Digital technologies are becoming increasingly faster and cheaper on the market. As an example, the Internet of Things (IoT) is a digital technology that has great potential across various application areas. Within IoT, physical objects are equipped with sensors, actuators, and computing power and linked to the Internet. The resulting smart things become increasingly independent and enable the fusion of the digital and physical world. At the same time, smart things enable completely new interactions between companies, things, and individuals as well as innovative business models based on newly available data and an increased network. Smart things and data they generate or collect will belong to different participants within the network. The existence of data or the interest in using this data as a resource in processes will therefore increasingly mean that data and thus the property of different participants should be brought together. Nevertheless, it cannot be assumed in all cases that the participants trust each other - the less the greater the presumed values behind the information represented by the data.
Even if the added value of the IoT is only manifested at the customer interface or through the use of smart things in operational processes, companies must first create the technological prerequisites internally. In this context, various technology architectures are discussed, all of which have similar levels. All architectures consider the physical object, which is equipped with sensors, actuators and computing power, as the foundation on a so-called “thing level”. Based on their connection to the internet, smart things can interact on a further level with various actors from their environment - for example with individuals, companies or other smart things. An important property of smart things is the potential integration of data from different sources and their processing based on web-based and thus interoperable standards. The data obtained is used, for example, to create innovative services. Since the innovative character of smart things is expressed in particular by combinable (information) services, the top level of technology architecture is usually a service level.
DLT is predestined to make the interfaces between the thing, interaction, data and service level of the end devices in the Internet of Things more secure. In addition to various advantages, the IoT does, however, a. also various risks that need to be solved. Among the ten biggest security risks in the context of the IoT are, for example, identity theft, the installation of malware on the corresponding devices, the modification of (system) information, the theft or manipulation of log data, as well as the theft of private one's information. DLT can often significantly reduce these security risks through their inherent security against manipulation, redundancy, and reliability. The risk of successful identity theft can be reduced; furthermore, the installation of malware can be made more difficult by using the DLT to ensure that only authorized end devices can contact the system. In particular, changing system information is much more difficult if it is distributed on different physical and virtual systems using a DLT layer.
Besides, the manipulation of appropriately decentralized data according to the current state of the art and research is only possible in this scenario at extremely high costs. These points are also given in an industrial context and, like the security risks in a private context (e.g. smart homes), can also be addressed with the help of DLT.
If the risks described above are reduced to such an extent that the Internet of Things is secure enough for productive use in both private and business contexts, the IoT can, in turn, provide the basis for the use of DLT in the physical world. In the course of this, the DLT can map the transition between machine/person and a ubiquitous service level. The main focus is on the possibility of using DLT to increase the trustworthiness of the data generated in the IoT. While DLT is currently used in particular for the implementation of cryptocurrencies and capital market transactions, it is already foreseeable that the technology can and will also act as an enabler for the Internet of Things. This is the case because the DLT can significantly reduce the security risks of machine-to-machine communication in the IoT described in the previous section. Therefore, the widespread use of DLT in this environment is extremely likely. In combination with the currently drastically falling costs for IoT devices, this could also be the first “real” contact of the majority of the population with DLT. Should technology succeed in entering the market as a result, it will be a central aspect of many people's daily lives in the future. The long-range that can be achieved by combining DLT with the Internet of Things will increase thus also the relevance of the DLT. The core task or function of DLT in this context is to create trust in the interaction of smart things with individuals, actors and other smart things that usually do not know each other before the start of the interaction. Theoretically, the IoT can be used without DLT and DLT without the IoT. Nevertheless, both technology bundles appear to be very synergistic overall.
How can DLT be classified and considered within the usage of other disruptive technologies, e.g. AI?
Artificial intelligence (AI) is increasingly becoming an important driver of digitization. AI is an umbrella term for the simulation of human intelligence by machines and includes skills such as thinking, learning, and self-correction. A distinction is made between two types of AI: A “strong” AI refers to a system that possesses or even exceeds a person's intellectual skills. In contrast, the "weak" AI is (initially) more important for solving application problems. Not only methods of mathematics and computer science are used to construct these systems, but aspects of human intelligence are specifically reproduced. Such systems can perform a variety of tasks and are already used in a variety of areas. Examples can be found in the implementation of autonomous vehicles or personality recognition. In general, by creating trust between previously unknown participants, DLT can increase the uses of AI. But AI will also have a direct impact on the development of DLT in many areas. Due to the complementary properties of DLT and AI, it is to be expected that the intersection of these two revolutionary technologies will grow steadily in the future. This will be outlined in the following using examples. The references to the prerequisites for a "trustworthy AI" become clear.
DLT as a database for AI
When using AI, data is of central importance. The availability of data is an important factor in all AI-related applications (for example, to identify patterns in the data from which contextual conclusions can be drawn). When data is used by AI, there is often economic added value. For private individuals and companies, however, there is also a desire for data sovereignty. H. control over the use of data or at least a corresponding financial or other remuneration. With the help of the DLT, there is now a technical possibility to leave data in the sovereignty of private individuals or companies and to grant access only selectively with prior consent, without granting an actor the right to set, change and revoke these rights. An example to illustrate this can again be drawn from the area of the smart home. A private person creates data in their household (smart home or smart city). This data is personal (electricity consumption, online shopping behavior, television habits), so unfiltered access by third parties, such as companies, should not be possible without consent. On the other hand, the next time you shop online, the private person could decide to allow temporary access to the usage data generated by the television in the past three months, for example, so that a company can use it for AI-based data analysis, DLT can help to selectively grant and log this access to various companies so that the economy can continue to benefit from the data and improve their products. The DLT can also be used to prove the origin of data records and their integrity under various conditions.
DLT as a logging platform for AI
If machines interact with people or other machines, errors will continue to occur in logs in the future. As already described, there is a need for an infrastructure of trust in the integrative interaction between actors. This results from the fact that in the event of damage, it should or must be clarified who is responsible for what. If the risk is (too) high that relevant cases occur and cannot be clarified, actors will show little interest in collaboration. For this purpose, it should be difficult or in the best case impossible for intelligent, increasingly autonomously acting actors (artificial intelligence) to provide data for authorized stakeholders reinterpreted unnoticed or even adjusted retrospectively. At the same time, AI processes are often characterized by the fact that their decisions can no longer be understood by people. DLT makes it possible to log AI activities and decisions. In retrospect, the properties of DLT make these entries manipulation-proof and transparent, so that in the event of accidents, fraud or other errors, information can be found based on independent information sources. The protocol can then be used to investigate conspicuous actions or incidents afterward.
What is the main value proposition of DLT?
Trust
After the so-called Internet of Information, the Internet of Services and the Internet of Things, DLT is seen as an enabler for the fourth generation of the Internet: The Internet of Trust. So DLT comes with the value proposition to create trust. In particular, due to the increasing digitalization and the growing importance of platform economies for our society, the need for security, identifiability, and traceability to create a digital trust increase. Finally, purchased software, for example, can be harmful, an involved party pretends to be someone else than it is, or contractual agreements can be difficult to understand and enforce. In particular, the opportunities for independence that arise from platforms such as Uber or Airbnb are creating an increasing need for trust, as more private individuals and no companies appear as contractual partners. Platforms mostly only act as mediators and mediators on. At this point, the DLT can offer the required identifiability and traceability to create digital trust and thus expand or supplement the previously efficient edge of trust.
Direct peer-to-peer interactions that do not require trust in an institution (a middle man) are made possible by the DLT. Trust in the DLT system itself forms the basis here. Trust is largely generated by the aspects of distribution, unchangeability, and transparency. The unchangeability of entries that are distributed across the nodes of the network ensures that each (or possibly only for participating or authorized) subscribers ensure that information that has been stored cannot be changed subsequently. Depending on the degree of transparency in the specific system (desired), this transparency can be via the stored information further increase trust. Also, the “rules” are predefined for all participants in the system. that is, all processes follow the rules of the DLT protocol and are not subject to the interests of a platform provider. Accordingly, trust in such a network is based on trust in the (technical) system, its rules, and its implementation. Besides, smart contracts offer the possibility of depicting diverse interactions and collaboration modes through implementations, thereby creating comparatively dynamic trust even in previously unknown situations.
DLT offers a new way of building trust, based on trust in technology, its underlying concept, and its implementation. At this point, it should be noted that regardless of DLT, a certain kind of trust is still necessary. However, this shifts from the people, institutions, and organizations involved in the DLT protocol and its consensus mechanism. DLT can thus replace or complement other trust-building mechanisms. It is conceivable, for example, to use DLT to create transparency and traceability with third parties, such as a bank or TüV certification body. It is conceivable that completely new ecosystems will emerge in the future or existing ones will be replaced. It is also conceivable that various confidence-building measures in common ecosystems will complement each other in the future. For example, supplementing DLT systems with reputation systems seems sensible to create the highest possible level of trust.
Process Improvements
DLT can improve existing processes that are already handled without intermediaries via bilateral (peer-to-peer) interfaces (digital or non-digital). The main focus here is on properties that could not previously be implemented at the same level or that were traditionally implemented using paper-based processes. This includes e.g. the retroactive protection against manipulation of stored data in decentralized systems or the digital mapping of paper-based processes using smart contracts. The background to this question frequently asked by our customers is the sometimes very heterogeneous and complex software architecture. The company IT, which has grown over many years, places increasing demands on security, scalability, revision security and change management of the entire software architecture as the company grows.
Transformator
DLT can transform existing processes that were previously carried out with the involvement of classic intermediaries and thus streamline processes. In this case, the focus is on the trust-building property as a system for decentralized coordination and integrated mapping of direct interactions. A hypothetical example of application in which the technology appears as a transformer is the implementation of fiduciary contracts using smart contracts. While third parties have acted as trustees and have given guarantees, the modalities of certain agreements can now be found in the program code of a smart contract implemented and functions such as the distribution of certain amounts of money guaranteed, carried out autonomously and decentrally.
Enabler
DLT can serve as a pioneer for the implementation of innovative systems that were previously not technically feasible. These systems often enable or improve direct interactions between different parties. These often generic services can be used in a variety of different applications. An example of DLT's role as an enabler is the implementation of new (digital) identification systems (digital identity), which can be used to selectively release information across all applications while protecting privacy (informational self-determination). At an inter-organizational level, DLT can enable transactions between non-trusting participants in a network to be tamper-proof. As a result, the DLT can form the basis for establishing controlled cooperation between competitors for the benefit of customers. So far, this could only be achieved through trustworthy intermediaries or strict regulations. Regardless of the lack of trust between different parties, the DLT can technically ensure fair and transparent behavior on a technical level, making intermediaries or strict regulations potentially obsolete. Another, the general classification of different DLT applications is based on the properties of the technology used. Tamper-proof recording of data and the coordination of cross-application processes have priority. Also, the potential of the DLT in connection with access management is about information or commands (access management), the mapping of direct interactions between different parties and the implementation of collective decision-making mechanisms are emphasized.
Does DLT require different Innovation Management?
While the use of DLT was initially primarily discussed in the financial services industry, various companies have become active in the DLT sector in recent months and are developing - often in industry-specific consortia - appropriate use cases and problem solutions. This development shows a fundamental difference between disruptive and traditional technologies. Existing or developing use cases are sought in which disruptive technologies can be used sensibly. In doing so, companies keep trying to counter disruptive innovations with conventional practices and procedures - and threaten to fail.
Past developments around the DLT show clear analogies to earlier disruptions. As a result, it is conceivable that established market participants may experience similar problems if they misjudge the potential and the effects of DLT. When evaluating disruptive technologies, it is important to keep a close eye on the developments in technology, the market and the competition (for example, in the industry environment, in general, technology development). The focus on a particular source of information is not recommended here. If you as a company focus too much on the wishes and expectations of customers - a frequently propagated approach in times of digitalization - this can lead to a loss of perspective “beyond the technological horizon” and the observation horizon is too restricted.
Ideally, companies do innovation in several stages. It is equally important in all industries that both employees with a technical and technical background are involved in the innovation process. This is the only way to ensure that the disruptive nature of technology is also considered across the different levels of a company. Employees with expert knowledge at the infrastructure or application-level often have a different perspective than those responsible for a company's business model. However, these different perspectives are important to grasp the full range of possible applications and their implications.
Companies are asking themselves how they can keep up with developments in this complex environment. A concept that is tailored to these circumstances and the management of disruptive innovations is often missing. The blockchain example shows that technologies are developing rapidly. Even if their full potential is not completely foreseeable, companies should deal with them. It is advisable to actively deal with blockchain as a forward-looking company with a continuous build-up of know-how.
To sufficiently understand the possibilities of DLT and to identify use cases, an innovation procedure is required that combines analytical approaches and creative methods. Companies should watch the market (e.g. using Porter’s Five Forces) and exchange ideas with other companies that are competing in certain areas: It is often worthwhile to keep an eye on current technological developments, both in their industry and beyond.
Conclusion
Overall, it can be assumed that the distributed ledger technology will in the short term not meet many of the high expectations that have also arisen as part of the hype about cryptocurrencies. In the long term, however, many technological hurdles will be overcome and legal problems from a technological or legislative point of view will be solved. Accordingly, an interdisciplinary framework is necessary for in-company funding that has staying power and promotes the formation of cross-departmental structures. Companies should see themselves as profiting from the advantages of distributed ledger technology and take all necessary actions to prepare the use of the technology. Otherwise, the advancement of technology will migrate to other companies. In Germany, the best conditions are created both from a social and a technological and creative point of view to shape the development of DLT and to take advantage of it. If German or European companies miss this opportunity, there is a fear that the development of DLT will shift, but will ultimately be adopted in German or European companies in the aftermath.