With advances in various Blockchain based DLTs (distributed ledger technology) platforms such as HyperLedger & Etherium et al, enterprises have begun to take baby steps to adapt the Blockchain (BC) to industrial scale applications. This post discusses some of the stumbling blocks the author has witnessed enterprises are running into as they look to get started on this journey.
Blockchain meets the Enterprise…
The Blockchain is a system & architectural design pattern for recording (immutable) transactions while providing an unalterable historical audit trail. This approach (proven with the hugely successful Bitcoin) guarantees a high degree of security, transparency, and anonymity for distributed applications purpose built for it. Bitcoin is but the first application of this ground breaking design pattern.
Due to its origins in the Bitcoin ecosystem, there has been a high degree association of the Blockchain with the cryptocurrency movement. However, a wide range of potential enterprise applications has been identified in industries such as financial services, healthcare, manufacturing, and retail etc – as depicted in the below illustration.
Last year, we took an in-depth look into the business potential of the Blockchain design pattern at the below post.
We can then define the Enterprise Blockchain as “a highly secure, resilient, algorithmic & accurate globally distributed ledger (or global database or the biggest filesystem or the largest spreadsheet) that provides an infrastructure pattern to build multiple types of applications that help companies (across every vertical), consumers and markets discover new business models, transact, trade & exchange information & assets.”
While some early deployments and initial standards making activity have been seen in financial services and healthcare, it is also finding significant adoption in optimizing internal operations for globally diversified conglomerates. For instance, tech major IBM claims to host one of the largest blockchain enterprise deployments. The application known as IGF provides working capital to about to 4,000+ customers, distributors, and partners. IBM uses its blockchain platform to manage disputes in the $48 billion IGF program. . The near linear scalability of the blockchain ensures that the IGF can gradually increase the number of members participating in the network.
In particular, the Financial Services Industry has had several bodies aiming to create standards around use cases such as consumer and correspondent banking payments and around the trade lifecycle. Some examples of these are R3 Corda, HyperLedger, and Ethereum. However, there is still a large amount of technology innovation, adoption and ecosystem development that needs to happen before the technology is consumable by your everyday bank or manufacturer or insurer.
The Four Modes of Blockchain Adoption in the Enterprise…
There are certain criteria that need to be met for a business process to benefit from a distributed ledger. First off, the business process should comprise various actors (both internal and external to the organization), secondly, there should be no reason to have a central authority or middleman to verify daily transactions except when disputes arise. Third, the process should call for strict audit trail as well as transaction immutability. The assets stored on the blockchain can really be anything – data, contracts or transactions etc.
At a high level, there are four modes of adoption, or, ways in which a BC technology can make its way into an enterprise –
- Organic Proof Of Concept’s (POC) – These are driven by innovation groups inside the company tasked with exploring the latest technology advances. Oftentimes, these are technology-driven initiatives in search of a business problem. The approach works like this – management targets specific areas in technology where the firm needs to develop capabilities around. The innovation team works on defining an appropriate technical approach, reference stack & architecture (in this case for applications that have been determined to be suitable to be POC’d on a DLT) et al. The risk in this approach is that much of the best practices, learnings etc from other organizations, vendors, and solution providers are not leveraged.
- Participation in Industry Consortia – A consortium is a group of companies engaged in a similar business task. These kinds of initiatives are being driven by like minded enterprises banding together (within specific sectors such as financial services, insurance, and healthcare) to define common use-cases that can benefit from sector specific common standards from a DLT standpoint & the ensuing network effects. Consortiums tend to mitigate risk both from a business and a cost standpoint as several companies typically band together to explore the technology. However, these can be difficult to pull off many a time due to competitive and cultural reasons.
- In many cases, Regulators are pushing industry leaders to look into use cases (such as Risk Management, BackOffice Processes, and Fraud Detection) which can benefit from adopting distributed ledger technology (DLT).
- Partnerships with Blockchain start-ups – These arrangements enable the (slow to move) incumbent market leading enterprises to partner with the brightest entrepreneurial minds in the BC world who are building path-breaking applications which will upend business models. The focus of such efforts has been to identify a set of use-cases & technology approaches that would immensely help the organization from applying BC technology to their internal and external business challenges. The advantages of this approach are that the skills shortage when established companies tackle immature technology projects can be ameliorated by working with younger organizations.
Having noted all this, the majority of proof of concepts driven out of enterprises are failing or performing suboptimally.
I feel that this is due to various reasons some of which we will discuss below. Point to be noted is that we are assuming that there is strong buy-in around BC and DLT at the highest levels of the organization. Scepticism about this proven design pattern and overcoming it is quite another topic altogether.
The Key Considerations for a Successful Enterprise Blockchain or Distributed Ledger (DLT)…
CONSIDERATION #1 – Targeting the right business use case for the DLT…
As we saw in the above sections, the use cases identified for DLT need to reflect a few foundational themes -non-reliance on a middleman, a business process supporting a truly distributed deployment, building trust among a large number of actors/counterparties, ability to support distributed consensus, and transparency. Due to its flat, peer to peer nature – Blockchain/DLT conclusively eliminates the need for any middleman.It is important that a target use case be realistic from both a functional requirement standpoint as well as from a business process understanding. The majority of enterprise applications can do perfectly well with a centralized database and applying DLT technology to them can cause projects to fail.
CONSIDERATION #2 – The Revenge of the Non Functional requirements…
Generally speaking, the current state of DLT platforms is that they fall short in a few key areas that enterprises usually take for granted in other platforms such as Cloud Computing, Middleware, Data platforms etc. These include key areas such as data privacy, transaction throughput, high speed of performance etc. If one recalls, the community Blockchain (that Bitcoin was built on) prioritized anonymity over privacy. This can sometimes be undesirable in areas such as payments processing or healthcare where the identitiy of consumers is governed by strict KYC (Know Your Customer) mandates. Thus, from an industry standpoint most DLT platforms are 24 months or so away from coming up to par in these areas in a manner that enterprises can leverage them.
Some of the other requirements, such as performance and scalability, are sometimes not directly tied to business features but lack of support for them can stymie any ambitious intended use of the technology. For instance, a key requirement in payments processing and supplier management is the ability for the platform to process a large number of transactions per second. Most DLT’s can only process around ten transactions per second on a permissionless network. This is far far from the ideal throughput needed in use-cases such as payments processing, IoT etc.
The good news is that the DLT community are acutely aware of enhancements that need to be done to the underlying platforms (e.g reduced block size etc) to increase throughput but these changes will take time to make their way into the mass market given the rigorous engineering work that needs to happen.
CONSIDERATION #3 – Neglecting Enterprise Integration Requirements…
The Blockchain/DLT is not a data management paradigm. This is important for adopters to understand. Also, there currently exist very few standards and guidance on integrating distributed applications (Dapps) custom built for DLTs with underlying enterprise assets. These assets include enterprise middleware stacks, identity management platforms, corporate security systems, application data silos, BPM (Business Process Management) and Robotic Process Automation systems etc. For the BC to work for any business capability and as a complete business solution, necessary integration must be provided with a reasonable number of backend systems that influence the business cases- most such integration is sorely lacking. Interoperability is still in its infancy despite vendor claims.
CONSIDERATION #4 – Understand that Smart Contracts are still in their infancy…
The blockchain introduces the important notion of programmable digital instruments or contracts. An important illustration of the possibilities of blockchain is this concept of a “Smart contract”. Instead of static data objects that are inserted into the distributed ledger, a Smart Contract is a program that can perform the generation of downstream actions when appropriate conditions are met. They only become immutable once accepted into the ledger. Business rules are embedded in a contract that can automatically trigger based on certain conditions being met. E.g. a credit pre-qualification or assets transferred after a payment is made or after legal approval is provided etc.
Smart Contracts are being spoken about as the key functionality for any DLT platform based on Blockchain. While this hype is justified in some sense, it should be noted that smart contracts are again not standards based across major DLT platforms. Which means that they’re not auditable & verifiable across both local and global jurisdictions or when companies use different underlying commercial DLTs. The technology will evolve over the next few years but it is still very early days to run large scale production grade applications that leverage Smart Contracts.
CONSIDERATION #5 – SECURITY and DATA PRIVACY CONCERNS…
The promise of the original blockchain platform which ran Bitcoin was very simple. It provided a truly secure, trustable and immutable record on which any digital asset could be run. Parties using the system were all in a permissionless mode which meant that their identities were hidden from one another and from any central authority. While this may work for Bitcoin like projects, the vast majority of industry verticals will need strong legal agreements and membership management capabilities which follow them. Accordingly, these platforms will need to be permission-ed.
CONSIDERATION #6 – Blockchain Implementations need to be treated as AN INTEGRAL part of Digital Transformation…
Blockchain as a technology definitely sounds way more exotic than Digital projects which have all the idea currency at the moment. However, an important way to visualize the organizational BC is that it provides an environment of instantaneous collaboration with business partners and customers. That is a core theme of Digital Transformation as one can appreciate. Accordingly, Blockchain/DLT proof of concepts themselves should be centrally funded & governed, skills should be grown in this area from both a development, administration and project management standpoint. Projects should be tracked using fair business metrics and appropriate governance mechanisms instituted as with any other digital initiative.
Surely, Blockchain based distributed ledgers are going to usher in the next generation of distributed business processes. These will enable the easy transaction, exchange, and contraction of digital assets. However, before enterprises rush in, they need to perform an adequate degree of due diligence to avoid some of the pitfalls highlighted above.
 IDC Insights – “IBM Wants to Make 2017 the Year of Blockchain Enterprise Deployment” https://www.idc.com/getdoc.jsp?containerId=EMEA42454617
 Coindesk – “Spanish Bank BBVA Joins Hyperledger Blockchain Project” – https://www.coindesk.com/bbva-hyperledger-blockchain-project/
 “Blockchain: Supply Chain Dispute Resolution Killer Solution” – Mark Morris