A business operates in an ecosystem of several commercial networks. The transfer of an asset from one location to the other in a business network is known as a business transaction. When the asset moves from one place to another it gets recorded in a ledger, which is basically a system of record for a business. Whatever be the type of asset – tangible assets like real estate or intangible assets like bonds, patents etc – when its transfer takes place it gets recorded in the relevant ledgers. A transaction in the ledger is the representation of a transfer of an asset from one part of the organisation to another or into/out of the organisation.
Business transactions generally involve multiple participants — suppliers, manufacturers, buyers, intermediaries (like banks and other financial institutions). This means to keep track of asset ownership/transfer, a business will have to maintain multiple ledgers for multiple business networks in which they participate.
In addition to the enterprise, other members of the business network also keep their own set of ledgers. Each member of the business network who is affected by the transaction updates his/her ledger. For instance: If a car moves from the manufacturer to the end user, it gets entered into multiple ledgers (manufacturer, dealer, lease company, customer). This means lots of duplication of the same work — an expensive and inefficient system.
These ledgers are generated in a centralised fashion. Whenever you make a transaction with somebody else in the system you broadcast that transaction to the centralised entity, which will update the ledger for you. One of the risks of having a centralised ledger of this type is that it is vulnerable to fraud and cyber attacks.
The blockchain alternative
This is where a blockchain gains significance. As mentioned in an earlier column, the blockchain is a distributed ledger, a decentralised transaction recording/verification system. The blockchain technology has two distinct advantages: data immutability (once an entry is made in the blockchain it is there forever) and automation of trust among the participants.
Rather than having a centralised ledger held by a single entity, the blockchain duplicates that ledger across all entities in the system. So, each player has the ledger stored on its computer. Whenever anybody in the system initiates a transaction, it gets transmitted across everybody else’s ledger.
Each transaction on the blockchain is recorded in computer code showing the parties involved, transaction details and time stamp with each containing a unique math based encrypted signature. This provides an audit trail of every transaction that has ever occurred in the system.
One of the advantages of this system is that if somebody does some mischief on the ledger — like transferring an asset to one’s own account — the transaction will not match with the other copies of the ledger and this transaction will not get updated. You cannot tamper or cheat the system because everyone using the system is watching you. As everybody is checking each other’s ledger, the system is more secure than the centralised ledger system.
Public and Private blockchains
A blockchain can be both permissionless or permissioned. The Bitcoin blockchain is an example of a permissionless blockchain. The distinct feature of a permissionless blockchain is that anyone can join the network and write and read transactions. Any machine in the network can take the role of a miner and verify transactions, assemble the verified transactions into a block and add it to the blockchain. A permissionless blockchain is also known as a public blockchain.
The requirements of a business network are a little different from that of the bitcoin type of cryptocurrency networks and the block chain for business has to consider this aspect too. In business transactions, the identity of the participant is important — in the bitcoin scheme of things the transactions are completely anonymous.
Moreover, business networks may not like to expose their complete data and transaction history to the public. To circumvent these constraints a new type of blockchain called permissioned blockchain has been developed. A permissioned blockchain or private blockchain grants access only through an authentication process. The system requires pre-verification of the participating parties within the network. A private blockchain ensures that only the parties authorised can access the data. Rather than displaying the record of the transactions to the whole network, the transactions remain visible only to the parties involved. Participants can see only the data that are relevant to them. In a private blockchain only a selected set of users can endorse/verify transactions. Not everyone can verify the transactions and update the ledger.
The advantage of a private blockchain is that it lets you keep some of the control mechanisms already available within an organisation. To get a real feel of what a blockchain can do with a business network take a look at the demo, ‘The benefits of using blockchain for leasing a car’ available here:
The demo features five members of a business network: Government Regulator, Manufacturer, Dealership, a leasing company and a lessee. The demo shows the tracking of a vehicle while moving the asset around these different business network members.
When one logs in as a manufacturer, she will see the list of cars available to the manufacturer. Now, if she wants to transfer the asset to a dealer, she can query to obtain the dealership list and initiate a transaction to transfer the ownership of the asset. Next, when a dealer logs in he will see the asset just transferred also listed in the list of cars available to the dealer. In the same manner, the dealer can transfer the asset to a leasing company and from there it can go to the buyer. If one logs in as a regulator, he will see everything that has happened in the business network.
The enterprise blockchain technology is agog with action and several blockchain projects are progressing (like this and this). One such project worth mentioning is Hyperledger, hosted by the Linux Foundation. It is a group of open source projects focused to create a blockchain infrastructure for the enterprise. The collaborators of the project include industry leaders in technology, finance, banking, finance and so on.