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Blockchain: A CEO primer

April 2, 2020

CEOs must oversee investments into disruptive technologies while avoiding the hype driven by the “fear of missing out.” One such decision they now face is whether and how to get involved with blockchain.

This is a challenging undertaking due to a lack of clarity and quality of the input CEOs are receiving to support such investments.

One main issue is that most organizations tend to confuse blockchain technology with databases. In our book, The Real Business of Blockchain: How Leaders Can Create Value in a New Digital Age we claim that, for enterprises, “traditional data architecture could have done as well as, or better than, blockchain in 85 percent of projects.” This is not to devalue the contribution of blockchain technology, but to challenge how enterprises apply it to capture value. In many instances, the wrong blockchain solutions have been and are applied to use cases which did not require blockchain, wasting company resources and capital.

As a result, before engaging with their executive team and CIO on blockchain, CEOs should grasp the core components of blockchain. They should recognize that blockchain is a technology that promotes decentralization which will impact existing governance models and incentive structures. Conversely to databases, blockchain therefore directly impacts the CEO’s roles and their organization’s decision frameworks. To support this important investment decision, executive leaders need to distinguish blockchain from databases and, most importantly, explore the domains where it will best support their mandate in creating business value.

Blockchain is Not a Database

By defining blockchain as a shared database, companies are implementing the wrong solutions for the wrong problems. Gartner defines blockchain (for business executives) based on five elements that together allow multiple participants who don’t know each other to safely interact in a digital environment. We qualify such blockchains as blockchain-complete solutions and those five core elements are as follows:

1. Distribution: Blockchain participants are located physically apart from each other and are connected on a network. Each participant operating a full node maintains a complete copy of a ledger that updates with new transactions as they occur.

2. Encryption: The participants can control their personal identity and other information and share only what they need to in a transaction. Blockchain uses technologies such as public and private keys to record the data in the blocks securely and semi-anonymously (participants have pseudonyms).

3. Immutability: Records cannot be corrupted or otherwise changed unless the participants agree on the need to do so. Completed transactions are cryptographically signed, time stamped and sequentially added to the ledger.

4. Tokenization:Transactions and other interactions on a blockchain involve the secure exchange of value. Tokens might function as digital representations of physical assets, as a reward mechanism for network participants or to create and exchange new forms of value such as data.

5. Decentralization (most importantly):Decentralization means that no single entity controls all the computers or the information or dictates the rules. Every node maintains an identical encrypted copy of the network record. A consensus mechanism operated by each full node verifies and approves transactions.

Considering our definition above, it is clear that blockchain is not a database. There are several key differences:

• First, the need for five core elements, especially decentralization, highlights that blockchain is very different than a centrally orchestrated, even if distributed, database. Also, blockchain is not a general store for information. A database is for information management; blockchain enables decentralized digital asset creation, representation, exchange and management.

• Second, blockchain records are immutable; a blockchain does not accommodate read, written, deleted and changed records as databases do. Blockchain records can only be added to, not changed.

• Third, administration occurs through consensus. While a database can be distributed to various parties, only one central administrator controls it. Central control is contradictory to the very idea of blockchain.

The use of the word “database” to describe blockchain has been mostly driven by solution providers performing blockchain washing to continue selling their existing products and maintain the status-quo. As a result, the false promise of using a new solution while re-using existing constructs leads to obvious disappointment in the execution of the use case.

The Right Business Context for Blockchain

Databases have a notary and this mechanism limits the ability of participants to create new markets by liberating data – and/or leads to monopolistic or oligopolistic commercial arrangements, for example in supply chains. The use of blockchain-complete solutions (combining the five core elements listed above) creates an ability to tokenize the data or assets in a decentralized construct, leading to new business and shared economic opportunities that a database cannot handle such as:

• reating new data assets not under the control of one given digital platform or major player in an ecosystem

• providing the owner of the data, whether a company, a consumer, or citizen with an ability to define consent and use, and the terms and conditions of the value exchange

• launching incentive and reward structures that account for the real value of the data to the customers (consumer or a company) and its economic and societal impact

In spite of strong business rationales, we recognize that enterprise-hardened blockchain-complete solutions are not mature—and not least technologically. The performance of blockchain is often compared to what could be achieved with a database. However, it is unreasonable to compare work in progress technology, which is going through iterative optimization, and the potential to reengineer radically business processes with a mature technology, such as databases, without clearly describing the business context.

Capture decentralization. Regardless of technical maturity, there are clear rationales for enterprises to benefit today from blockchain technology. A good illustration of the positive of using blockchain versus a portal and a classic data infrastructure is Banque de France. Wanting to modernize the ID issuance procedure with blockchain, Banque de France saw this goal as an opportunity to experiment with a new technology, address a known problem and engage with its commercial bank stakeholders. The blockchain it developed was basic; a secure digital portal could have achieved the same end. But the bank saw broader benefits for collaboration and the eventual decentralization of interbank processes. Officers we spoke to at Banque de France said the project created a new level of engagement between the bank and the commercial banking community it serves. The project also allowed everyone to understand how decentralization affects decision making, accountability and data privacy and permissions

Build trust momentum. In China, WeBank created a digital escrow service based on a blockchain. The service supports arbitration cases for financial disputes by reducing the ability to tamper with any evidence. A customer can use the service to challenge the claim by a financial services provider that he/she has not made a scheduled payment. This reduces the cost of managing the arbitration case, improve quality of the evidence and has been legally (in court) recognized. An important rationale is therefore to deal with the initial lack of trust facing collaboration with other industry players and competitors. And where building a joint database would not have been a feasible option in the first place.

Experience smart contracts. It’s also important to stress that smart contracts provide an ability to execute actions based on aggregate information about specific or general transactions, or can trigger some other action based on a transaction state. Regardless of the current immaturity of smart contracts, companies in the insurance industry have been quite active experimenters and have made progress with grasping the implications of using smart contracts. For example, in September 2018, the RiskBlock Alliance (renamed in May 2019 as The Institutes RiskStream Collaborative), a blockchain consortium for the insurance industry, announced its first solution: Mortality Monitor. Designed for the life insurance sector, Mortality Monitor scans social security data to verify a policyholder’s death and passes the information to the relevant life insurance company. The goal is to digitalize, streamline and validate the process so that next of kin can receive life insurance payouts faster and so that fraudulent claims can be intercepted. The solution also protects family members who may not have known that their loved one had a life insurance policy.

Combine strengths. Another option companies are exploring is to store data off-chain, in some other storage mechanism. The blockchain then records the stored data and a pointer to its location. This more readily allows data stored off-chain to be revised and revoked with simpler updates to the blockchain. This approach is now being experimented with as part of the Right to be Forgotten in European markets. When a user decides to be forgotten, under a blockchain construct, the link from the root information (the personal data) in the ledger is severed. And most importantly, that severance is auditable and creates an ability to communicate to the user and the regulator that the right to be forgotten has been respected.

Discover markets for your data assets. Rather than concentrate their digital activity on one platform, unless theirs is the dominant platform, businesses could participate across platforms and improve access to their data across ecosystems. Blockchain technology is therefore an opportunity for CEOs to create or discover new markets for their data assets. And they can learn from the health care industry to achieve that objective. The Taipei Medical University Hospital (TMUH) is using blockchain to create health passports. This gives patients control over their medical data and make such data portable across care providers. And as such solutions mature, patients will be able to rely on autonomous software agents to negotiate on their behalf and provide them with the best health care advice, combining health data (across providers) as well as fitness data or other data sets the patient is willing to share.

It is fundamental to remember that by definition, blockchain demands some level of decentralization and this is a challenge for companies depending on intermediation in their business models. As a result, a blockchain deployment risks failing to match the performance of a traditional database due to a lack of strategic commitment. If you don’t want to accept a minimum level of decentralization or you are the digital giant in the room, don’t get involved with blockchain-complete deployments. Stick with databases.

By David Furlonger and Christophe Uzureau

Source: Chief Executive

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