Do you really need a blockchain?

Kommentar skrevet av Christoffer Hernæs, CDO i Sbanken.

Blockchain technology is set to have a profound impact on a wide variety of industries, ranging from capital markets to the music business. While some use cases may seem obvious, the technology is still surrounded by its fair share of hype and uncertainty. As a manager, how should you approach the subject, and when should you put your money where your mouth is and actively aim to implement blockchain technology?

According to Juniper Research, six of 10 large corporations are either actively considering or in the process of deploying blockchain technology. Amongst companies that have reached the Proof of Concept stage, two-thirds (66 percent) expected blockchain to be integrated into their systems by the end of 2018.  The research claimed that those companies that would benefit most from blockchain include those with the need for (1) transparency in transactions, (2) current dependence legacy storage systems and (3) a high volume of transmitted information.

Looking at the reasons for implementing blockchain, there is an inherent risk that managers eager to explore new technologies jump to conclusions without exploring alternative options. According to the research, systemic change rather than technological may provide both better and cheaper solutions to the issue at hand.

For many corporations, the go-to approach to investigate potential use cases for blockchain is to look for inefficiencies in current processes.This approach is guaranteed to provide some results, but often the solution is to truly re-design legacy processes to fit a digital world rather than exploring new and unknown technologies.

Too theoretical?

One reason why blockchain often emerges as an answer to many problems is that it is easy to imagine high-level use cases of blockchain technology. However, as we venture under the surface of such use cases, applying blockchain technology to a known problem is all too often a theoretical solution.

If we look at it, blockchain in its simplest form is an alternative to the traditional database. Blockchain differs from a database in many ways, but the most significant exception is the decentralized nature of blockchain. While a database requires a central authority to maintain and manage data, blockchain offers a decentralized approach to storage and verification of data. However, this feature comes at a cost. Blockchains in their current state (at least public ones) have some scaling issues, making them slower than traditional databases. In addition, users must pay a fee for each “transaction” on the database, which is fluctuating and unpredictable.

Diluted term

To make things a bit more confusing, the term blockchain has become a bit diluted as the hype has continued to bloom. Terms like permissioned versus permissionless and private versus public blockchains are circulating; the term has become so widespread that it may lose some of its meaning. Permissioned blockchains are operated by known entities such as stakeholders of a given industry, whereas private blockchains are operated by one entity. These approaches have become particularly popular in the financial industry, as they focus on immutability and efficiency rather than anonymity and transparency. However, if we look closely at the inherent properties of a private or permissioned blockchain, they resemble a shared database, and critics argue that the term private blockchain is just a confusing name for a shared database.

Blockchain as a marketing tactic

Estonia’s digital identity solution is an example of the use of the blockchain as a marketing tactic, as the company providing the underlying technology rebranded its offering from “hash-linked time-stamping” to “blockchain technology” just in time to ride the blockchain hype. With last year’s crypto-craze, there is no shortage of companies claiming to be a “blockchain-company” in order to boost valuations.

With this in mind, there are a couple of simple control questions to help guide one through the decision process as to whether one should explore blockchain technology or just stick with a good-old database.

First of all, if it works, don’t fix it. If you’re satisfied with your database setup today, there should be no rush to replace this. A potential switch involves rethinking everything, recoding most things and betting on a new technology that will need many years of work to become as mature as whichever database you’re currently using.

Are you depending on a third party to carry out transactions or to create trust between multiple stakeholders? If the use of a trusted third party to establish and maintain trust across stakeholders is in play, it may be the time to investigate the use of blockchain technology.

On the other hand, if performance and transaction speed is the most important factor, you should stick with a database… for now.

Don't be dazzled by the promises of new technology

Do you need to handle highly dynamic data with a clear audit trail? Blockchains offer a flexible capacity by enabling many parties to write new entries into a system of record that is also held by many custodians.

To make things somewhat easier, there are numerous flowcharts circulating on the internet for when to use a blockchain (many of these can be found here).

While there are many reasons to steer clear of blockchain technology, there are equally many potentially valuable use cases — such as royalty distribution in the music industry, cross-border payments, management of shared ownership such as timeshares, health records and many more. For instance, a decentralized Facebook might have mitigated the current array of scandals related to deliberately spreading misinformation to influence public opinion and the misuse of personal data.

For managers looking to explore blockchain, it is easy to both be dazzled by the promises of new technology as well as dismiss the unknown. In this case, it is important to stay curious and have a practical approach, while still being able to have a vision that spans beyond the daily operations.

This was originally published in Techcrunch.

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