In 2008, an anonymous person hidden behind the pseudonym Satoshi Nakamoto published a white paper describing a technical solution to process peer-to-peer financial transactions in which trust was embedded by design, without the supervision of a central entity. This document was the origin of today’s best-known cryptocurrency: bitcoin.
The idea behind the system was to group all processed transactions in blocks and later link them, by means of cryptographic mechanisms, in a single chain of information that all the participants in the system could read. This is why this protocol is known as “BlockChain”.
Trust in the system is acquired by requiring a complex mathematical problem to be solved before a new transaction can be integrated into the chain. In exchange, the network will gratify the fastest node to do the calculation with new bitcoins. Due to the fact that all transactions are chained, modifying an operation would also require changing all subsequent ones, which would imply an enormous amount of electricity usage, that will exceed the value of bitcoins potentially obtainable. Thus, fraud is discouraged, and confidence is achieved without the need for a central authority.
This concept of establishing barriers to fraud by means of requiring a prior effort (known as Proof of Work) is similar to the use of Captchas on web pages.
Once we have understood the basis of how blockchains work for cryptocurrencies, we will now focus on exploring other less extended uses of these networks, that still retain a huge disruptive potential: the private blockchains. Unlike public chains such as bitcoin or Ethereum, where access is free for everyone, private chains are controlled by one or more organizations in order to execute a specific business process.
What advantages could the application of blockchains have for a business process?
Consider complex processes with a large number of participants. In this context, it is common to find the same trust issues between the parties that we saw earlier. Traditionally, these have been resolved through external mediators such as clearing houses, which are inefficient and complex.
Blockchains can offer, by design, new solutions to these problems, based on concepts such as the following:
- Disintermediation: The possibility of establishing a direct interaction between the parties, eliminates the need for intermediaries and favors a greater degree of integration between all participants.
- Immutability: Once a transaction has been validated, the system establishes barriers for changes after-the-fact to occur, which provides reliability and confidence.
- Efficiency. In networks with multiple participants, it is more efficient to establish a distributed system with predetermined consensus rules than to implement a centralized control that reconciles everyone’s activity. This translates into faster settlement processes and lower transaction costs.
- Tokenization. Translating economic activity into abstract tokens opens the door to the creation of new services based on the exchange of assets of different nature between users.
- Flexibility: “Smart Contracts” are small programs that automatically trigger transactions when certain conditions on the network are met. They were first introduced on the Ethereum network and, thanks to them, the system can be extended to reflect particular agreements between members.
The best way to illustrate the transformative potential of blockchains is to try to anticipate their effects on an existing process that we are all familiar with. Let´s take, for example, the case of a toll road.
In these systems, multiple parties take part:
- Infrastructure concession companies, responsible for its operation.
- Public administrations, in charge of supervising the contract.
- The infrastructure: road, signs and other elements.
- Vehicles that drive through the infrastructure.
- Suppliers that provide auxiliary services in the corridor, including refueling (gas stations or electric stations) or restaurants.
- Providers of means of payment including credit cards, tags or mobile phones.
Currently, there is very little integration between each of these parties and, when necessary, each of them establishes its own integration channels and reconciliation mechanisms.
These solutions have made the trick for now, but this situation is very close to changing. The adoption of new technologies applied to mobility in the coming years will enable the creation of a new breed of services that will require a higher degree of integration, which will be difficult to achieve with traditional solutions.
What would a toll road be like if it were based on a private blockchain network?
- Highly connected systems: A concession-based model inhibits geographic interoperability between infrastructures because these are managed by different public-private consortia. The ability of Blockchain to establish distributed and auditable systems by all would favor the integration of the different infrastructures (even internationally) in a single network, which would be a huge benefit for users.
- Autonomy and security. Infrastructures and vehicles will become active players within the system, making it possible for them to initiate payments or decide routes, even autonomously. This will require new mechanisms to guarantee their identity, in order to increase trust. In this sense, consortia such as MOBI, which promote the use of blockchain in the transport industry, are working on the definition of a standard to provide a secure digital identity to vehicles and generate a digital wallet for making payments. These new mechanisms would replace identification by license plate or other external devices such as tags.
- Data sharing. The creation of new services will require a greater degree of integration between all parties. Thus, car-sharing or insurance companies willing to dynamically adjust pricing according to risk level, will need to have real-time access to weather and traffic data collected by the infrastructure. The ability of blockchains to integrate all the information available in a chain that is both immutable and readable by all could be of great help in this regard.
- Creation of marketplaces. Tokenization favors cross-selling of products thanks to the establishment of a common pattern that serves as a reference to calculate the economic value of each service provided. A Blockchain network provides this capacity by design and, thanks to it, cars could sell their surplus of electrical charge to the network (which is known as “Car to Grid”) and get a credit to buy other services available in the network like a coffee or a toll.
- Customization. In order to achieve customer centricity, services must be customizable. Smart Contracts, thanks to their ability to reflect particular conditions between two or more players, seem particularly well suited for this. Application of bespoke toll rates, Automatic refunds in case of delay or the creation of loyalty systems that reward economic activity throughout the corridor are some examples of services than smart contracts can make possible.
Interesting, right? And the best is that this is not science fiction. Blockchain technology has already been used successfully in several industries such as:
- Finance and Insurance: Because the technology was born in this industry, there are many companies that have adopted it, mainly Fintechs such as Ripple for making payments or Lemonade that sells home insurance.
- Distribution: Walmart uses blockchain to achieve greater traceability and transparency in its supply chain.
- Energy: The Australian company PowerLedger makes it possible to track the origin of energy and allows to exchange energy surplus between peers.
As we can see, beyond serving as the basis for cryptocurrencies, blockchains offer a series of advantages that can be very useful in many other cases. Within business environments, this technology seems especially suitable to simplify complex business processes with a large number of participants. This is why we can affirm that there is a lot of life in blockchains beyond bitcoin.