May 6, 2016

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How to Evaluate BlockChain

BlockChain Implementation Penetration – Part 1

The general approach to evaluating the BlockChain is to examine where efficiencies can be found by BlockChain implementation – a Use Case approach.

This is normally within trade finance, global payments, settlements and clearing or other problem area where large numbers of third parties are involved in a transaction.

The usual findings are as follows:

  • BlockChain requires multiple organisations to be on the BlockChain which is difficult
  • Experiments with BlockChains should be between two parties first, possibly the same organisation but in different countries
  • A database can be used instead for less risk

Given this, one could suggest that today the outcomes of proof of concepts are predictable enough to reduce the number of these unless one is looking at the specifics of implementation within their organisation.

Why are the results all the same?

The usual findings are reached because most organisations are examining the BlockChain opportunity in the same way.

The general initial point of view is that a BlockChain is a technology solution to solve current problems. For example, in Trade Finance a BlockChain solution can be used to identify appropriate hand over of goods at different stages between different entities to reduce counterparty identity risk.

During the examination process a critique is also made and the typical argument against the BlockChain that then follows is that there are already technologies that solve the use cases in more standard, mature ways.

For example, a centralised database as a service with cryptographically signed records can easily replace a distributed ledger without the complexity. The combination of a centrally stored record of transaction (database) plus a guaranteed view of identity (certificates) would solve most problems.

Our own findings certainly agree that utilising the BlockChain as a point technology solution usually has better ways to solve the problem using more traditional technology.

Does that mean that the BlockChain is dead? Not at all. The issue in understanding this is in the approach angle rather than capabilities of a BlockChain.

This approach angle flaw is specifically in the way evaluators are considering actually what the BlockChain is. There are two ways: the typical approach being a database technology or a new way - an ecosystem.

Technology Driven Evaluation

McKinsey from their December 2015 report on the BlockChain in Capital Markets:

“A BlockChain is a cryptographic, or encoded, ledger comprising of a digital log of transactions shared across a public or private network”.

This fits the common view of the BlockChain as a database of transactions (ledger). Looking at the below table we can see easy comparisons.

 

 

When one considers what a BlockChain does at its core, it is obvious to see that it stores data. This is also what a database does. The difference between the two is that the BlockChain is described as doing this ‘distributed’ which typically means the BlockChain servers are located in multiple places. The benefit of this is speed and ease of access but in a BlockChain world it also means fraud reduction. Multiple servers can be checked that they have the same data and therefore if your data is different it may be fraudulent.

The separate term ‘distributed ledger’ means the same thing but ‘ledger’ hints at a log-style of data. This is typically a set of columns like you’d see in a spreadsheet application with rows denoting different entries and columns denoting data type. In the financial world a row may be an order line with product, quantity and who purchased it as column entries. A BlockChain stores something similar – a list of transactions which denotes who the owner of a digitally representable asset is.

If you have noticed, the way we explain a BlockChain above is through its features and in this lies the problem with a singular view. If one considers the BlockChain through its capabilities however, a different view emerges.

Ecosystem-Driven Evaluation

As mentioned, the functional-approach angle leads to the same-old answer; BlockChain is a database and there are better databases out there.

However, we think BlockChains are better described by its capabilities like this:

“BlockChains are repositories of value that enable the transmission of value between securely identified entities in an unimpeachable and irrevocable way”.

This is quite different from the usual database definition. Consider the parts of our statement:

  • A host for value
  • A way for value to move
  • A mechanism for recording value transactions
  • Management of identity of entities interacting on a system

When looked at like this, a BlockChain has a more interesting comparison – the Internet.

 

 

Such striking similarities to the Internet raises the question as to whether the BlockChain is best viewed as a use case or as a paradigm shift of how the world deals with ‘value’.

The BlockChain therefore could be viewed, and possibly should be viewed, as a way of accessing what entities have performed what transactions on what digital asset.

A BlockChain ‘certificate of identity’ is similar (both in concept and technically) as a domain certificate (such as https://www.google.com).

A BlockChain ‘digital asset’ (such as currency) is similar to an HTTP document such as an image file stored on a website. If it is accessed through a website signed with a HTTP certificate (such as the Google homepage) then you can be confident that the file is managed by Google in some way. Another user with no access to that website could not delete the image file for example.

A BlockChain ‘transaction’ is similar to an operation performed on a certificated website. For example, the REST (Representational State Transfer) operators of PUT, GET, UPDATE, DELETE makes changes to that ‘digital asset’ image file.

Entities (such as people) using the BlockChain are validated through Internet Service Providers in the same way one would have a certificate of identity issued on a BlockChain.

When viewed through a capability lens rather than a functional lens, BlockChains look a whole lot more disruptive.