What Will Blockchain Really Mean for Business

November 2018 -

For much of the last decade, blockchain was known chiefly as a technology developed to support bitcoin, the world’s first all-digital currency. However, the technology supporting it has emerged as a way to potentially revolutionize how companies process transactions. In a 2018 global Deloitte survey, 65 percent of surveyed business executives said their companies would invest $1 million or more in blockchain technology in the coming year and 84 percent predicted that blockchain is “broadly scalable” and will become a mainstream technology.

One way blockchain may become mainstream would be through food traceability that improves food safety. For instance, the Center for Disease Control and Prevention issued a food safety alert on November 20 for romaine lettuce, one of many food scares in 2018. This has the potential to force an entire season of romaine lettuce in the U.S. to be lost, costing millions of dollars. Blockchain has the potential to help the producers, processors, retailers and consumers of certain foods – romaine in this instance – by narrowing the scope of a safety alert.

Still, as with any new technology, predictions about blockchain’s future are often marked by hyperbole. While some observers dismiss blockchain as a fad, others insist the technology will disrupt entire industries. The more likely answer is somewhere in the middle, says Cesare Fracassi, associate professor of finance and director of the Blockchain Initiative at the McCombs School of Business at The University of Texas at Austin. OUTLOOK spoke with Fracassi about how the technology started, its potential to add speed, efficiency and transparency to business transactions, the remaining technological hurdles, and why blockchain may be a gamechanger for some businesses, but not for others.

OUTLOOK: When did it become apparent that blockchain would have business potential beyond bitcoin and other cryptocurrencies?

Cesare Fracassi: Around 2015, people started realizing that blockchain could be used to create digital “smart contracts.” With a smart contract, a transaction occurs automatically once certain mutually agreed-upon conditions are met. That can potentially be a very powerful tool for companies looking to execute agreements quickly, cost-effectively and transparently.

OUTLOOK: Lots of people are talking about the potential of blockchain to change how businesses operate. Are these ideas still theoretical, or are things starting to happen?

Fracassi: Most business applications for blockchain are still in the “use case” stage – they’re still being studied. Some companies are already starting to invest heavily in the technology.

Blockchain does have the potential to add efficiencies in every part of the supply chain to include interactions between producers in agriculture, processors of those goods and exporters of those goods.

For example, Walmart has launched a test case for tracking mangoes through the supply chain from growers all the way to consumers. Before blockchain, it took as long as two weeks to trace the origin of a particular mango because of the number of intermediate steps and handlers, each with its own record-keeping system. That inefficient process posed huge problems in terms of food safety – if there’s an outbreak of E. coli tied to mangoes, you need to find the source quickly.

With blockchain, each player in the supply chain, from the farmer on, enters its transaction into the same ledger. In a matter of seconds, rather than days or weeks, Walmart and others in the blockchain network can see not only who handled the mangoes, but also when they were picked, how long it took to go from tree to distributors to store shelves, and even what temperature they were kept at along the way. All of the information is right there for all participants to see.

OUTLOOK: What is blockchain technology, and how does it change things?

Fracassi: Blockchain technology essentially rewrites the rules for how transactions are recorded and verified. For the past 3,000 years, societies have used centralized ledgers kept by a central player, whether private or government, that basically has the authority to say whether or not an event happened. Business transactions, real estate and stock and bond sales, vital statistics about births, marriages, deaths and health records – all are entered into a ledger.

A ledger establishes consensus about a fact, meaning “this transaction happened between two parties.” When I sell my house, an authority approves the transaction. Health care records are stored in private centralized servers in hospitals. The Federal Reserve manages the supply of money in the economy. When you buy something with a debit card, the information passes to your bank, which has to approve whether you have the money to buy what you want to buy.

Now, innovations in technology and cryptography have allowed us to create decentralized, or distributed, ledgers called blockchains. They consist of a distributed network of parties who basically get together and create a consensus on whether or not something happened or is allowed to happen. Without the need to rely on a centralized authority, transactions can potentially occur much faster, even instantaneously, and with much greater visibility for all interested parties.

OUTLOOK: Who came up with the idea of blockchain?

Fracassi: The technology was invented in 2008 by “Satoshi Nakamoto” – an alias for a person or persons who have chosen to remain anonymous – to support bitcoin. With a digital currency, the challenge is how to prevent “double spending.” How do you keep someone from spending money once, and then spending that same money again for something else? With traditional currency, the bank is the centralized, single point of authority that allows the transaction. With bitcoin and blockchain, the whole idea is that nobody is in charge of making that decision. Instead, it depends on a network of “miners,” located around the world, that look at your history of transactions. They can see whether you’ve received bitcoin from someone else, and whether you’ve already spent it. If you’ve received it and haven’t spent it, the transaction goes through. And although the transaction is made public, the miners don’t reveal, or even know, your personal identity.

I’m skeptical about predicting that any industries will disappear or be created based on blockchain. That said, blockchain can provide a benefit in any industry that has a long supply chain.
OUTLOOK: Where does the term “blockchain” come from?

Fracassi: All information about a transaction is contained in blocks of information connected to one another in a long chain. When a bitcoin transaction occurs, miners verify it, create a new block and then move on to the next transaction. These blocks are connected digitally, creating long “chains” of information, hence the term “blockchain.” These chains offer protection, because in order to hack any individual block, someone would first have to hack into every earlier block in the very long chain.

OUTLOOK: What industries are most likely to be affected by blockchain technology?

Fracassi: I’m skeptical about predicting that any industries will disappear or be created based on blockchain. That said, blockchain can provide a benefit in any industry that has a long supply chain. That includes agriculture, manufacturing and many others. It can also be a key part of the luxury goods market and others where provenance is important. Is that Prada bag really a Prada bag? When that bag enters the supply chain in a blockchain system, you can easily trace it back to its precise origin and pinpoint who made it.

Banking and finance is another industry likely to be affected. With blockchain, one company could make a financial smart contract with another without relying on a bank: My company agrees to borrow money from your company and promises to pay you back with interest every six months. If my company fails to make those payments, its default will be recorded in a public ledger. All of that can be written into the signed smart contract. That also eliminates the need for a credit agency score.

We’ll also see changes in accounting. Right now, each company has its own accounting system and they don’t talk to each other. Blockchain offers the potential for companies to automatically reconcile transactions. In other words, when a transaction occurs, and one company recognizes that as revenue, the other company automatically recognizes that as a cost.

OUTLOOK: You mentioned banking and finance. What are the implications for traditional banks, for instance, who provide loans and revolving lines of credit for businesses?

Fracassi: Assessing how well a company is really doing is one of the big challenges banks have when considering business loans or credit. Blockchain will likely provide greater visibility and transparency. In addition to reviewing financial statements and other documents, a loan officer could ask to be added to a blockchain in order to review the company’s transactions. This could help the bank determine how creditworthy that potential borrower is.

OUTLOOK: Will blockchain have an effect on how utilities, such as power providers, work?

Fracassi: With more power customers producing their own solar and other energy, there’s been some speculation that blockchain could enable customers to sell power directly to other customers, rather than selling it back through the utility. I’m not an energy expert, but that doesn’t sound like the best use to me. It’s hard for me to see how that’s going to provide a clear advantage for customers over just dealing with the power company.

OUTLOOK: If companies are going to use blockchain, how does that get set in motion? Who sets it up if nobody controls it?

Fracassi: There are two different types of blockchains, public and private.

Those associated with bitcoin and other cyptocurrencies are public, or permissionless – they’re open to anyone in the world, and verified by thousands of miners.

Private blockchains operate differently. They’re “permissioned” – access is restricted to a certain number of parties and each one needs permission to join. Instead of being validated by miners, transactions in a private network are validated by rules the network establishes. You’re basically creating a private consortium of all of the producers, distributors and sellers of a product or service, and everything is recorded in a blockchain that no individual party owns. Every player has a copy of digital data, and every transaction is validated immediately.

OUTLOOK: Why would a company join a private blockchain network?

Fracassi: It can be good for companies that have wanted to interact with each other but haven’t been able to because of logistics or high costs. Having a system that allows every company to access a system or records, allowing for easier sharing of information, could have significant implications.

With a traditional, centralized, non-blockchain database, the big question is who owns the information. Who has control of the data, which may be very valuable, and who ensures that it’s accurate? With blockchain, every party has permission to write and read, and no single party owns the information. Everybody who needs the data has access to it.

If you insert information that’s misleading, everybody will see what you did. ...It limits the potential for fraud, because every transaction at every stage is visible.
OUTLOOK: How do participants, such as producers of goods, benefit from the blockchain? Are they, or will they be, compensated for participating in one?

Fracassi: It’s unlikely that participants would be paid to participate in a blockchain. Some participants may benefit more than others, and in some cases a major retailer or other large company may require its suppliers to participate. Still, the underlying idea is that blockchain creates efficiencies for all of the participants.

OUTLOOK: In a blockchain network, what’s to prevent one company from putting in fraudulent data that other companies might see and be misled by?

Fracassi: If you insert information that’s misleading, everybody will see what you did. Consider agriculture. Today, if I’m a buyer, it can be very difficult to verify whether what’s claimed to be organic avocados actually are. With a blockchain, I can trace that fruit’s origin back to where it was grown and see who first made the claim that it was organic, and validate the claim if necessary. It limits the potential for fraud, because every transaction at every stage is visible.

OUTLOOK: Will law enforcement agencies and regulators respect blockchain transactions the way they would trust, say, something validated by a notary or a lawyer?

Fracassi: Lawyers will always have a presence. But now you’re going to need smart lawyers who can write smart contracts. And the beauty of smart contracts in blockchain is that everything is in the code – anyone who’s part of the network can access it. That’s also great from a regulatory standpoint, because information can be traced.

OUTLOOK: What has the blockchain growth curve been and what do you think it might be going forward?

Fracassi: With public, permissionless blockchains used for crytocurrencies, we’ve seen something similar to the early days of the internet, where initial hype and exuberance were followed by a burst of the bubble last December and January – with, possibly, a rebound coming in the future, though that has yet to happen. With private, permissioned blockchains used by businesses, we’ve seen less hype and exuberance (though there’s been some). Moving forward, we’re likely to see a slow but possibly steadier progression of solutions that provide value to companies and consumers.

OUTLOOK: Looking to the future, what are some macroeconomic changes that we could see as a result of blockchain?

Fracassi: Obviously, to the extent that we have more efficient systems, economies are going to grow faster. If you’re asking what will the impact be on the GDP, that remains to be seen.

OUTLOOK: How can individual companies weigh the risk of neglecting blockchain versus investing too much too soon?

Fracassi: Before investing in blockchain, the first step for any business is to assess its needs. Then it should ask: Does blockchain technology help me address the problems we have? There are some good, straightforward flow charts that can help give you an idea whether blockchain could apply to your business.

Early adopters will establish standards for what blockchain should look like for grocery stores or insurance companies or any other industry. If your company isn’t involved, others may design a system that doesn’t fit how your company operates.

On the other hand, should all companies invest in blockchain technology now? Probably not. Blockchain makes sense only if your company is going to see a benefit. You could hear the buzz about blockchain and invest a lot of resources in it, only to realize that it isn’t going to solve any of your problems.

Blockchain has pros and cons, just like any other technology. You have to weigh those pros and cons and see whether it makes sense for you.
OUTLOOK: Are there major technological hurdles that still need to be overcome?

Fracassi: In terms of private, permissioned blockchains for business, a couple of technological issues are very important.

One is that if you create a new supply chain system, every business in that supply chain will have its own software, and it will have to figure out how it will communicate with the blockchain. That means big changes in a lot of IT systems.

The second major challenge involves who gets to create standards. Walmart, for example, has cooperated with IBM to create its own standard for Walmart’s supply chain of lettuce and spinach. Recently, Walmart announced it will require all its lettuce, spinach and other greens suppliers to use the permissioned blockchain technology by January 2019. This means that all of those suppliers will have to join Walmart’s blockchain network in order to continue doing business with the retail giant.

OUTLOOK: Some people compare blockchain to the internet in terms of its potential impact. Is there anything to that?

Fracassi: Yes, you hear people call blockchain “the internet of value.” Or say that blockchain is going to “complete” the internet. I’m a little skeptical, but where the comparison is valid is in decentralization. The internet has allowed the decentralization of information – when I send an email, for example, it doesn’t go through a central entity like the United States Postal Service. In the same way, blockchain eliminates the middle-man in transactions.

Blockchain has pros and cons, just like any other technology. You have to weigh those pros and cons and see whether it makes sense for you.

Also in this issue:

  • Interest Rates and Economic Indicators
  • CoBank Commits $350,000 to Camp Fire Relief Efforts
  • CoBank Reports Third Quarter Financial Results

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