The big questions for enterprise blockchain.
by Arzu Toren
Meet Arzu Toren, Finance Industry expert and banking academic.
Arzu Toren is a Global Banker with 20 years of experience working in international and Turkish commercial banks in the areas of asset management, trade finance, debt instruments and business development. She is currently continuing her independent research to drive value through the application of blockchain and for the blockchain ecosystem. In this blog, Arzu offers an up-to-date take on the key discussion points in the field of blockchain.
Blockchain for good.
Blockchain is a game-changing technology which is due to have fundamental impacts on enterprises as it can transform moving, storing, lending, exchanging value, funding, investing and managing risk. It is moving 3Ps – people, process and paperwork. In the digital era, data is power and blockchain is a universal bus to carry the data by ensuring its validity.
Like every radical innovation, blockchain encapsulates hurdles for adoption and diffusion. It is complicated in legal, regulatory, financial and operational aspects and its challenges need technical, behavioural, educational and business solutions. Long-term adoption is due to take time with a gradual transition. The process is not linear, you learn along the way and reducing complexity is the key. Blockchain should not be considered as a magic stick but as one of the technologies that will be a part of the next-generation infrastructure and developed according to needs. Distributed ledger based on blockchain is a form of database; it will not make decisions for enterprises, they need to learn how to use it to create value.
Blockchain is expanding and moves quickly in new businesses. Resistance, lack of education, issues of interoperability and scalability are the main reasons why it is moving slowly in some incumbent and large organizations. The ideal implementation steps of blockchain in enterprises are:
- choosing the right use case
- selecting the right platform
- starting small for testing purposes
The end-customer doesn’t need to know how blockchain works, they don’t even need to know the word ‘blockchain’. While technology-side is the enabler and business-side is the main driver, the primary focus should be on the use case and outcome.
Blockchain requires a solid legal foundation to allow for interoperability. Regulations are rules imposed by an authority representing the interests of the public while governance embodies a set of rules imposed by the participants of a system to protect their own interests. Blockchain faces major uncertainties in both fields. Internationally accepted regulations need to be developed and new principles need to be introduced in order to incorporate blockchain to the market infrastructure, comply with cross border & domestic guidelines and identify the legal ownership of documents. All these arrangements need careful engineering and take time.
Blockchain is designed to support networks and requires cooperation to flourish. If the ecosystem is not connected, blockchain is not much of a use. Enterprises, innovators and regulators need to collaborate to make blockchain work in practice. In the case of consortiums, the answers to questions like ‘Who has jurisdiction when a network is spread over a large number of regions and companies?’ need to be clear. A blockchain would also need a governing body, which can be challenging when stakeholders have divergent interests. Moreover, industry alignment is required in major issues such as design and interaction principles.
Scalability, Security & Resilience
To make full use of blockchain, high standards are required for security, robustness, and performance. Resolving challenges such as network capacity, transaction speed, verification process and data limits would be critical. Without scalability, higher energy costs could eliminate the benefits of any blockchain. If the technology does not receive sufficient market scale, the shared benefits will be muted and there will only be a marginal improvement over today’s structure.
Blockchain needs to be integrated into existing technology to be usable and affordable. Replacing legacy systems with a new technology is complex with a very low tolerance for error. Moving the existing contracts and documents to blockchain based methodology requires the execution of a significant set of migration tasks. Operational risk of transition needs to be minimized. Getting to decentralization might be easier starting from scratch compared to making the transition from central to decentralized services. Furthermore, although irreversibility is one of the features of blockchain, it might become a challenge and needs to be managed carefully.
The identity of each party to a blockchain-enabled transaction is protected by cryptography techniques but enterprises will want to ensure that information isn’t revealed to competitors through analysis of their information. In its current state, blockchain requires above-average computer literacy to use effectively, which acts as a barrier to entry for enterprises that are interested in applications but do not know where to begin. Additionally, there is no guarantee that blockchain will never be subject to any cybersecurity attacks; the system is robust but there is still risk.
Centralised vs Decentralised DLTs for Real-World Production
At the highest level, the blockchains can be categorized into three groups:
Public (Permissionless) Blockchains - A public blockchain is a platform where anyone in the world can read, write, send transactions and participate in the consensus process provided they are able to show the proof of work. Public blockchains are open-source, fully decentralized and don’t have any initial costs.
Private (Permissioned) Blockchains - A private blockchain allows only the owner to have the right to access or make any changes on the network. It is similar to existing infrastructure where the owners have the power to change the rules or participants based on needs. Private blockchains have quite high initial capital and maintenance expenses.
Hybrid Blockchains - A hybrid blockchain would be a mix of both public and private blockchains where the abilities could be extended to different nodes based on pre-set criteria. All running costs need to be met by the participating organizations.
The blockchains that would capture the most attention in the first place are private or hybrid blockchains as they are more specialized, efficient and compatible with existing systems. The most effective approach for employment of private blockchains is to treat their features like a catalog and tailor different combinations for different use-cases. However, private blockchains are very similar to distributed databases already used by enterprises and unless they integrate with public blockchains where the audit trail is more secure and control over transactions is not in the hands of trusted nodes, there is a question mark whether blockchain could have a drastic effect.
In the early applications, some enterprises test blockchain internally to manage their business units. A large group with subsidiaries around the world may benefit from an internal blockchain to synchronise data and systems across group companies, AML & KYC policies and payments. Moreover, they could learn the technology, decide if it is strategically fit and test if they can expand to their customer related products as the second phase.
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