Blockchain for business—a gentle introduction

Contents

If all you’ve heard about blockchain technology relates to cryptocurrency and NFTs, you may be surprised to learn just how far blockchains have come in facilitating business operations. But why would business leaders want to employ blockchain solutions?

 

What is blockchain?

Before getting deep into how business can leverage blockchain technology, let’s start with some history and definitions.

First, the blockchain itself. The idea predates Bitcoin and was conceived by computer scientists who wanted to be able to timestamp digital documents and prevent tampering. Validating all of the documents (the chain) with each new one helped ensure security, but meant a lot of work for the computers of the early 90s; collecting documents into batches (blocks) reduced the amount of work required.

Bitcoin built on that idea and on the failure of two cryptocurrency predecessors. Its first block was mined in 2009. What this means is that a computer processed a hash function—a mathematical function that transforms a given set of data into a bit string of a fixed size, which is also called “hash value.” A hash function itself is pretty simple and easy to calculate. What makes it powerful is a condition set by the network that the hash value must satisfy. For example, that it has to start with four zeros. Because hash functions are designed to return seemingly random results, it is impossible to predict the value until it is calculated. Therefore, the search for hash values satisfying a given condition is a trial-and-error-based approach.

This hash function is the proof of work that earned that first miner ten bitcoins.

The purpose of mining now is to verify a block of transactions. Miners’ computers check the hash values for each transaction, add them to the block, process the hash function, and distribute the block for addition to the chain. The block is then hashed as the proof of work for the next block of transactions (more on that later). As of the end of October 2022, the blockchain is about 435GB in size.

Part of the purpose of the large amount of computer work is to make the blockchain tamperproof. You may be skeptical of employing blockchain technology in your business because of examples of theft. However, these occurred not through unauthorized changes to the blockchain but due to hackers breaking into exchanges and stealing private keys in order to move bitcoins.

Anyone with a valid private key can move their own money, which is necessary to ensure honesty on the part of a user that is sending this money. This is the concept of non-repudiation, the idea that the creator of a message, log entry, or in this case, transaction, cannot deny originating it.

 

Cryptocurrencies and NFTs

Initially, cryptocurrencies got all of the media attention—and hype. The collapse of FTX is just the latest event to hit the news. NFTs came after cryptocurrencies, garnering attention because of asking prices in the millions for files with seemingly no artistic or practical value.

An important early use case of the NFT, though, was to help artists and other creators earn money from their work for their whole lifetime. If an artist sells a work in a gallery, the artist gets a cut of the sale price and the gallery gets the rest. But if the buyer sells the work on, the artist gets nothing. An NFT allows a certain percentage of every purchase of the work to return to the artist, no matter the actual price.

 

Consensus mechanisms in blockchain networks: How everyone can be sure it’s all legit

The two largest cryptocurrencies got their start with proof of work mechanisms. As mentioned earlier, Bitcoin miners compete to be the first to compute an algorithm, using huge amounts of energy and generating huge amounts of heat and CO2 in the process.

That computation provides the proof of work that can win a miner the transaction fee, and a small amount of new bitcoin, as a reward for checking all of the transactions in a block… if that miner is the first to do so.

 

Ethereum

After the initial success of Bitcoin, Ethereum joined the cryptocurrency scene—but with a difference. Ethereum supports its own currency, the ether, as well as smart contracts and other uses. A smart contract is entirely digital: it’s a program that runs on the blockchain, watching for when the conditions of the contract are met. The program then executes itself automatically, creating a transaction. On a public blockchain, the code is accessible to all, so while the parties are nominally anonymous, the conditions can be verified by anyone with an interest to do so.

Ethereum made the news in September 2022 when, as had been planned early in its history, it further distanced itself from Bitcoin by switching from proof of work to proof of stake. Ethereum miners no longer compete to be the first to crunch enormous cryptographic puzzles. Instead, they set aside a certain amount of the currency involved, hoping to be chosen by the blockchain’s algorithm.

A chosen miner then validates the new block. If all of the transactions they validate are good, the work is rewarded; including a bad transaction incurs a penalty. The currency is removed from the stake and “burned”—taken entirely out of circulation.

 

How are enterprise solutions different?

Part of what has brought so much attention to blockchain technology is the great amount of risk, and while business is always risky, there are areas where risk is entirely unwanted. That’s why blockchain solutions come in a number of flavors, if you will, in an attempt to ameliorate the risks to varying degrees without losing the advantages that blockchain adoption might bring for real-world business outcomes.

 

Public blockchains

Naturally, the blockchains that make the news are public ones. In a public blockchain, there is just one globally distributed ledger (or distributed database) of every transaction that has ever taken place. The sometimes intense attention paid to Bitcoin, Ethereum, and other cryptocurrencies mean not only that the exchange rates for these cryptocurrencies rise but also that, as mentioned earlier, bad actors will seek to hack the system in order to steal currency.

The large size of even Ethereum is because it is so widely distributed—and if a node goes down due to a power outage or a hack, the other nodes continue to run and no data is lost. This also means that transactions are quite slow.

 

Private blockchains

A blockchain does not by nature have to be public. Early in the history of blockchain, developers envisioned a means of securely and accountably sharing documents that could not be altered. Such a private blockchain is only open to vetted users, who are given permissions according to their level in the system. The chain is small, fast, manageable, and relatively secure.

Not all users need access to all of the available actions, and strict authentication can be required for writing to the blockchain. Once something is written, it can’t be changed and the writer can’t deny having written it. Read access can also be restricted.

The idea behind a private blockchain is usually a cooperation between several parties. They can be companies, company divisions, or even individual people. What is important is that they do not need to trust each other to participate in the blockchain.

But how can you ensure that your data will not be seen by other participants that may be your competitors?

This is accomplished with private channels. There can be multiple private channels within a blockchain and they can be created between any subset of nodes—they do not have to include the central party. This means that only participants belonging to a given private channel have access to the data from it.

On the other hand, a private blockchain can consist of a single or small number of nodes hashing and ordering the blocks. Even if a ledger is stored on each node of the network, such a private blockchain is more vulnerable to faults. This creates more risk, which is undesirable from a business point of view.

 

Permissioned blockchains

As a compromise, a permissioned blockchain is run by a company delivering blockchain projects under the blockchain-as-a-service (BaaS) model. The provider vets the various connections to the blockchain network on behalf of the customer, and there are multiple nodes (located at each of the owner’s customers, for example) for security and greater consensus. There is, however, the problem of becoming stuck with one BaaS provider, because there is no easy way to transfer a process and its associated data to a different blockchain.

An example is ING. It has built a network, connected to the Ethereum blockchain, in which all of the participants are verified. This attempt at getting the best of both public and private blockchains means that the ING network’s transactions are verified publicly, but the members are all either known to each other or at least known to be trustworthy.

You may also be interested in the legal considerations of each of these.

 

Blockchain for business—practical use cases

Business processes using blockchain can be found in:

  • Healthcare, keeping track of patients and their medical records: Any member of staff at a medical service that has been vetted individually or at the organization level can more easily and completely access a customer’s entire history of care, at all of the service’s locations, if it is all kept in the distributed ledger.
  • Employee or customer identity, credentials and benefits: Once a new hire’s data and credentials are verified, they can be easier to track and distribute when an internal position is available for the person to be promoted to. HR can also more easily track perks and leave time, and payroll can be converted into smart contracts to remove the potential for human error. Similarly, Kiva has created a digital ID system, currently in operation in Sierra Leone, so that more people are able get accounts and loans.
  • Asset management: Blockchain tech can allow a business owner to track the location of assets and plan maintenance where necessary.
  • B2B trading: The speed of information transfer can likewise unlock financing and purchasing, replacing letters of guarantee and accelerating payments for services, and the records of such transactions are stored without any human effort being involved. Such trading services can include energy and Forex, among others. A fascinating example of this is D7, the Deutsche Börse’s tool for issuing and processing electronic securities.
  • Supply chain tracking, especially of food: Walmart has partnered with IBM in the US to track the entire supply chain of some of its food products. For customers, this may seem like a gimmick, with a QR code that would bring up the product’s origin on a web page. But if a food-borne illness is discovered, convenient access to supply chain information could save lives by allowing the source of the contamination to be found quickly. The disruption to producers would also be reduced.
  • Energy sector: Blockchain technology is expected to enable peer-to-peer energy trading, which could unlock new opportunities for domestic renewable energy installations. It can also make it easier to buy energy wholesale, bypassing energy retailers who own no infrastructure and are thus as powerless when things go wrong as consumers are.
  • Internet of Things (IoT): Blockchain technology adds trust to the data gathered by IoT devices, as the data stored in a tamperproof ledger is immutable. This opens up many possibilities for practical uses. Blockchain-enabled IoT devices allow you to track components that are used in aircraft, automobiles, or other products, which is critical from a safety point of view. IoT devices can be also used in freight transportation to monitor conditions of the containers as they move, or to gather data about the maintenance of different machines (engines, elevators, etc.), providing alerts when something needs to be repaired (or for preventive maintenance) and storing information about any repairs made.

 

It’s all in the details

The cases above also have benefits in terms of compliance and auditing. Just as a retailer would want to be certain of the entire supply chain of its products, and a bank would want to be able to know where all of its money is coming from and going to, so would a government want to be able to easily check the same information.

The volume of imports arriving in a country are invariably too great to check thoroughly by traditional means, and the volume of transactions in financial institutions are likely difficult to trace without a large, expensive team. And regrettably, ensuring that sanctions are observed is also a necessary part of doing business honestly.

In many cases, asset tracking doesn’t require a computer. The health care and transportation industries, as well as P2P applications and home safety, can all benefit from the blockchain in terms of helping to track the various necessary devices along supply chains. Since all data recorded to the blockchain is immutable, you have 100% traceability of any asset.

 

Hyperledger—blockchain for business use

The solution IBM’s enterprise blockchain practice brought to Walmart is Hyperledger.

Hyperledger was brought to us by the Linux Foundation, long a champion of open-source solutions to the issues surrounding the use of blockchain. The Hyperledger Foundation has since been spun off and now promotes and provides a range of solutions. IBM is just one of the industry heavy-hitters that have contributed to the Hyperledger stack, including Cisco, Intel, JP Morgan, SAP, Accenture, and many others.

 

Projects under the Hyperledger umbrella

The stack shifts from time to time as projects are contributed by members, enter an incubation phase, are merged with other projects, or are deprecated. As of November 2022, the following are available and actively supported:

  • Fabric, the central feature, is the permissioned blockchain.
  • Besu lets users link to the Ethereum blockchain for both public and permissioned uses. Poste Italiane used it to build out its loyalty program.
  • Sawtooth is a distributed ledger that uses proof of elapsed time as its consensus mechanism. It was used by BondEValue to enable investment in bond fractions in Asia.
  • Caliper is a tool that lets users measure a blockchain’s performance.
  • Firefly is a supernode, a full stack with an API for building Web3 applications, reducing the amount of coding work necessary.
  • Cello is a dashboard for users to more easily manage a supply chain, their smart contracts, and other transactions.
  • Explorer is a module for creating web apps for accessing the information stored in the blockchain.
  • Iroha is designed for use in IoT projects.
  • Cacti is a framework to allow ledgers to share information while each maintains its own privacy, security, and consensus mechanisms; otherwise, ledgers would have to merge into one larger chain.

 

Other big names entering the blockchain space are Microsoft (previously under the Azure brand), and Hewlett Packard Enterprise (without a brand name), while Google has made large investments in Blockchain.com and Dapper Labs.

 

Summary

The blockchain landscape is looking increasingly crowded. This can be a good thing as tech companies continually innovate to find the best solutions and learn how trusted blockchain networks can mitigate the technology’s disadvantages. Entirely new business models are born as business owners pursue radically disruptive applications. The industry is entering its adolescence now—business professionals have found their use cases and contributed what they’ve learned from their experiences.

Of course, some of the crowd might represent empty hype. Nonetheless, blockchain technology, and especially Hyperledger, can potentially solve many business problems across various industries. And this makes it worth staying up-to-date on the latest developments.

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