Can a database technology really kill an entire industry?
That’s what I was asking myself at one of two blockchain presentations I recently attended. The first was a panel discussion in which knowledgeable blockchain evangelists predicted blockchain will indeed lead to the demise of entire industries. The second was a presentation by a blockchain expert for a Fortune 50 company. Not surprisingly, he offered a different perspective on whether blockchain will cause traditional industries to crater.
So how could a database platform, in this case blockchain, put anybody out of business?
A blockchain is sometimes defined as a shared, immutable ledger. I would add to this, “transparent”.
- Shared: A blockchain is shared across multiple participating computers, or “nodes”, each of which replicates an exact copy of the blockchain. The most famous blockchain network, bitcoin, currently uses nearly 12,000 nodes.
- Immutable: Thanks to an ingenious application of cryptography, once written, the transactions or “blocks” in a blockchain cannot be changed without breaking every node’s copy.
- Transparent: The details of each block, and the transaction that created it, are visible to each participant in the blockchain, and the rules for adding a valid block are shared by all, so not only do participating nodes own a copy of the blockchain, they can see and audit the blockchain.
Put together, these characteristics make blockchain into something very valuable and potentially very disruptive:
SHARED + IMMUTABLE + TRANSPARENT = TRUSTED
The digital history recorded in a blockchain, whether of documents, transactions, or digitized records of assets or even people, can be trusted by all participants.
Who did the panel of blockchain evangelists predict blockchain would put out of business? Trust brokers. Businesses whose value proposition is to ensure the validity and integrity of documents and transactions. Businesses selling trust that can be replaced by using a blockchain. Title insurance companies. Stock clearing houses. Gone.
Sounds revolutionary, and scary if you make your living in the trust-broker business. But this panel was presenting to an audience of hundreds, and I didn’t get a chance to follow up with questions that were bothering me: What does it mean to “broker trust”? Does that always mean the same thing? Can blockchain replace all trust brokers or just some, and why?
I was still thinking about this when I attended a second blockchain presentation two days later, this one a lively talk by an IBM “Global Blockchain Industry Leader” (that’s what they call them at IBM). The speaker didn’t mention disruption, and he didn’t even mention “trust”, but when he got to how IBM adds value to the blockchains it manages for clients, my antennae went up. IBM is a “blockchain network administrator.”
Blockchain administrator? Why does a blockchain need an administrator? I thought the whole point of blockchains like Bitcoin was that they are decentralized networks that don’t need an “administrator.” Was IBM just trying to invent a way to add value to a platform that doesn’t need it? Was IBM just another trust broker trying to remain relevant?
To answer these questions, you have to understand that there are two types of blockchains: public and private.
Public vs. Private Blockchains
Public blockchains, which anybody can join, get all the (popular) press. They include the cryptocurrency blockchains, the blockchains whose disruptive potential my panel of evangelists was very excited about.
Private blockchains, also known as permissioned blockchains, require an invitation to join. They allow a business consortium to take advantage of all of the technical features of a blockchain platform while restricting access to, well, an invitation-only consortium. In one interesting example of a private blockchain, an entire food supply chain was digitally recorded and tracked in a blockchain, reducing the time to track the origin of a mango on a retailer’s shelf from almost a week to two seconds. You may have heard of the retailer: Walmart. (The blockchain was implemented by IBM.)
Enterprise blockchains are private blockchains, and while private blockchains may not be as sexy to casual blockchain fans and soothsayers, they are seeing wide adoption in industry and are not going away. (According to a late-2016 Deloitte survey of executives across a variety of industries, 25% expected to have production blockchain deployments by the end of 2017.)
So who grants permission to join a private blockchain?
The answer is no different for blockchain than for any other private network. Permission is granted by a gatekeeper, and that gatekeeper could be the blockchain administrator. So on that basis alone, there’s a future in the (private) blockchain administrator business.
In addition to its gatekeeper function, IBM enhances its enterprise blockchains by capturing business rules in what are called smart contracts. Smart contracts are snippets of code that capture business rules applied to blockchain transactions. They define what actions should be taken when given conditions are met, such as delivering payment upon confirmation of shipment. The only thing that makes them any smarter than any other codified business rules is that they are stored on the blockchain alongside documents, so they are shared, immutable, and transparent (and therefore trustworthy).
Smart contracts, just like any other contracts or business rules, have to be written and maintained by somebody. For a private blockchain, that somebody may well be the blockchain administrator. Once again, it appears a form of trust brokerage (defining and maintaining the business rules encoded into a blockchain) is here to stay.
Who will blockchain put out of business?
While blockchain technology has the potential to be enabling and disruptive in exciting ways, clearly it won’t disintermediate all intermediaries or make all trust brokers go broke. Here’s my take on the factors that will determine blockchain winners and losers:
- In some cases, an entire business process can be built into blockchain or added via general-purpose smart contracts. If public, those blockchains could put traditional trust brokers within that business process out of business. Cryptocurrency is the prime example of a business process built into blockchain, but there will be others. The closer the business process approximates a simple ledger of transactions, the easier it will be to eliminate traditional trust brokers by implementing that process in blockchain.
- Whether you call them trust brokers or administrators, there is great opportunity for businesses that serve as gatekeepers for consortium-style enterprise blockchains.
- Specialized business rules, captured in smart contracts, will have to be created to fulfill specialized business cases, just as they always have. Third party developers and integrators will continue to play an essential role in the development and administration of enterprise blockchains, especially private ones.
- The history recorded in a blockchain is only as trustworthy as the information that is inputted into the blocks. Those inputs (assets, transactions) still have to be validated; in some cases, by a traditional trust broker. Land titles, for instance, still have to originate from government sources.
If an entire business process can be reduced to general-purpose blockchain transactions, blockchain can and will replace companies whose only business is ensuring trust in that process. I think those companies will be the exception, not the rule. Companies that serve as gatekeepers for enterprise consortia or, more generally, implement or integrate specialized business rules will not only survive but thrive.
Originally published at www.greenbarlc.com.