So what exactly is a blockchain? A Blockchain is a record or ledger of transactions that is almost impossible to change after the fact. It’s a decentralized system that’s usually open (although there can be public and private Blockchains) which means there is no central point of failure. A copy of the Blockchain is replicated over many, many servers worldwide making it robust and resistant to tampering. If a hacker were to gain access to one of the servers, it would only be able to change one copy of the Blockchain, not all of them. These qualities combined, make Blockchain an attractive new way for people to conduct business.
Since you probably been hearing a lot about Blockchain recently and perhaps how it will “solve the supply chain problem!” I thought I’d take this opportunity to talk about three things. First a high level overview of Blockchain concepts and technology, second talk about its application to the supply chain and lastly discuss why Blockchain alone is not a solution.
All the energy surrounding Blockchain harks back to the glory days of the early internet. The energy, the rush to get into the market and the hysteria around investing. But just as the original dot com bubble eventually led us to adopt widespread change in how we do business, Blockchain likely will do the same. Even if there is a crash or implosion at some point, as many are predicting, the technology and the cryptocurrency concept is here to stay.
In addition, a reliable and robust way of recording transactions make it possible for two parties to execute a deal or contract without the usual legal back and forth. Instead of having to consider all possible scenarios and write them into a lengthy legal agreement or contract, two parties can agree to a specific outcome based on a triggering event. This is called a Smart Contract.
A Smart Contract is created by writing a block of software code that describes the conditions of the agreement and the outcomes. Once it has be created, it is recorded on the Blockchain in order to make it immutable. An open implementation of Blockchain and Smart Contracts combined is called Ethereum – allowing anyone to set up an application to execute smart contracts between parties and store those transactions on a Blockchain.
A key benefit of a Smart Contract is that it’s designed to be a peer-to-peer transaction, eliminating the middle-man from the process. A Smart Contract use-case would be to replace an escrow company that charges a fee to hold money and/or assets for two different parties while a transaction is being verified. Removing the middleman – the escrow company – would make the transaction cheaper and more efficient.
So, now that I’ve explained some of what the Blockchain is, a thought may have occurred to you: “Who are these people running copies of Blockchains on servers all over the world and why on earth would they spend their hard-earned cash on electricity to run them?” Well there’s another piece to the puzzle, in order to incentivize (pay) people to keep copies of Blockchain on their servers, they are given a little piece of value from the system. This piece of value is called a token. In the case of Ethereum, the token is called, wait for it… an Ether. This piece of value can potentially be traded for other tokens, services or even other currencies. Another example of a token you might have heard of is Bitcoin..
One of the most interesting things about a Blockchain system is the way it creates a group of stakeholders that are all incentivized to move in same direction. Consider a typical company where the shareholders have equity and want the value of the company to increase. In order to raise the company’s valuation, shareholders would like to ensure the company earns more profits. To make more profits, the company would need to reduce expenses and increase prices. However, the employees want to make more money, not less. And the customers want lower prices, not higher ones. So, the parties involved aren’t all moving in the same direction, they are conflicted.
Now consider if the employees of the company weren’t paid in money, but in equity. Everyone would all be happy for the value of the equity to go up, just like the shareholders. Thus, all the parties involved are aligned in the desire for the value of the equity to increase. If any of you are tracking the value of Bitcoin at the moment, this may help to explain why it keeps going up and up.
Now that we have an understanding of what the principles of Blockchain are, in part II we’ll talk about how they can help with the challenge of supply chain compliance.
Matt Thorn, COO Source Intelligence. Learn more about Matt, here.