- Summary:
- Blockchain may not be a fit, but distributed ledger technology definitely has a role in plugging the trust gap in digital business transactions, writes Software AG's Bernd Gross
If the last 18 months have taught us anything it's 1) we can be more remote and still get things done and 2) it's more important than ever to be connected. However, being connected across a much more distributed network — whether we're talking people, geography or tech — does have its challenges. Linking teams and systems more closely is undoubtedly a positive thing for companies to be doing, but it must be done with an understanding of some of the pitfalls, in order to avoid them.
Security is the biggest risk of becoming more distributed. The increase in potential attack vectors increases risk, but there is a less obvious threat to operational processes. The risk of declining confidence in relationships and transactions working as you expect them to. How can you trust the actions, content or history of someone or something that you've had no previous dealings with? If you're looking to set up alternate supply chains or sources of production as a risk management strategy, how do you manage the risk of the unknown? How can you be sure of the credentials of the machinery, tools or produce that you're buying?
After all, our economy is based on trust. If we don't have it, how can we trade, cooperate or collaborate? Historically credible brokers sat in the middle of these deals, guaranteeing both sides of the arrangement. But times change. So many transactions need to happen quickly and across borders, where suitable brokers don't exist, are too slow or expensive. What does trust look like today?
Establishing trust in a digital relationships
The extensive documentation, verified by third party brokers, that has underpinned trading and commercial agreements in the past is at odds with digital ways of working. The same steps of these processes need to be maintained, but conducted through digital interfaces that are more open and more complex.
Distributed Ledger Technologies (DLT) can fill this gap. Distributed ledger describes the approach of creating equal decentralized copies of transactions, instead of storing them in one central place (ie a database for digital, or a document for analogue). What makes DLT so exciting and relevant is that it was conceived and developed for this decentralized digital world where trust is at a premium. Instead of being built on existing relationships, trust can be anchored in encrypted processes (the so-called consensus algorithms), which control the transactions. It's not simply a case of storing the information safely that creates trust, it's also how it's collected. DLT can determine the conditions under which nodes of the decentralized infrastructure capture and record new transactions and when they do not.
Where does distributed ledger technology fit?
Blockchain is the most well known example of DLT, which is some ways has actually hindered the adoption of some very valuable DLT solutions. Blockchain has relatively low transaction processing power (only a few transactions per second) and high transaction fees (of anywhere between $5 and $60 per transaction). And it carries high cost and energy consumption rates. It's not right for many business applications, either because the value of the transaction doesn't justify the cost of processing it on blockchain or there are thousands of devices or data sources to be integrated and blockchain simply can't process everything in a timely manner. However, with the right DLT solution, there are many businesses cases ripe for modernisation.
Trading — as more transactions are digital, so too must be the supporting documentation. However, simply digitizing documents can create questions of fraud or manipulation. Physical documents can be fully notarized and therefore carry a higher degree of security. In the same way as blockchain, other DLT tools create a single source of truth that cannot be tampered with. So if you're tracking production of goods and/or supply chains, you know the information is secure. If your suppliers need payment before shipping, but you want to pay on receipt, you can use DLT to meet in the middle and keep business moving.
Operational history — the service and maintenance of machinery, tools and vehicles requires extensive cataloguing. None more so than airplanes. Documentation tracking where the plane went, how much fuel was consumed, what maintenance was carried out, and by whom is a must have. This helps prove the readiness for flight of the aircraft and its safety rating if they are ever resold in the future. This digital log book is equally relevant for any organisation with expensive machinery that either needs to prove its credentials in order to be used, or in order to be sold.
New business models — One very feasible and broadly applicable business model that can be built on DLT is pay-per-use financing of machinery. It is a concept that exists already, but is hard to regulate and the risks of non-adherence to maintenance schedules or inaccurate reporting of use are high. Indisputable, automated collection and storage of data on machine utilization, wear indicators and output helps ensure transparency in these agreements. Not only is this a lower risk approach for the machinery owners, but the built-in trust of DLT levels the playing field for smaller/newer companies who have lower ‘trust credit' ratings.
Where to get started?
Blockchain specifically likely doesn't have a place in your business. However, the wider spectrum of DLT definitely does. There are solutions out there that already solve the so-called blockchain trilemma: guaranteeing high security, scalability/performance and decentralization. IOTA, for example, uses ‘Tangle', an acyclic structure that maintains powerful encryption while boosting speed. It also avoids classic transaction fees, which would be prohibitive for applications in the IoT area, through an alternative consensus algorithm based on the reputation of the nodes. And that's just one option.
In order to make investments in DLT successful, there are three key considerations:
- Do your research — there are dozens of options. Decide what you need to achieve and then find the solution that best fits that requirement. Pick the one that works for you
- Get your processes ready — establish how things actually work vs how they should work and fix them before you started. Committing broken processes to a distributed ledger is a short term solution
- Don't think it's a complete solution — the technology is very sophisticated and can do a lot to help a business. However, it must be part of a larger transformation initiative that aims to make the enterprise truly connected
Collaboration and cooperation are increasingly important for successful businesses. Digital transformation lays the groundwork for this, but the decentralized nature of digital business needs some decentralized processes. This is how truly connected enterprises come into being.
To find out more about becoming a truly connected enterprise, Software AG's conXion event is happening 5-7th October and will be available on demand during and after the event. Click here to register for conXion and view the sessions. Or follow diginomica's coverage by visiting the conXion event hub.
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