There is so much hype swirling around blockchain technology at the moment that it sometimes seems to be the solution for all their existing problems.
Across every industry, companies are rushing to implement blockchain solutions in their business models so they can say they are on the cutting edge of technology and innovation. This hype is not without reason. Proponents of blockchain technology say it can take out the middlemen in business transactions, saving companies huge amounts of money while increasing security and efficiency. But before we get carried away in the hype wave of blockchain excitement, it is worth looking at how it can be used and whether it is an appropriate solution to any existing problems.
There is a very real risk that some companies are over-eager to employ blockchain technology without exploring other options, thinking that it is the best solution to their problems. There are several costs associated with implementing blockchain and one must ensure that these costs will be offset by the potential gains. While it may not be as exciting, there are often quicker and cheaper ways to improve a business system simply by tweaking the existing established framework, rather than redesigning the whole process from the ground up with blockchain.
The first step you need to take before delving into blockchain technology is to understand what it is and how it works. You can read our previous article on blockchain technology to get a better understanding of the technical basics of blockchain. For our illustration purposes here, we can think of blockchain as essentially a database. Traditional databases are controlled by one central authority, who alone has the ability to input, alter and verify data. On the other hand, blockchain is decentralized, which means all members of the same blockchain network will hold a copy of the database, which they can add, edit and verify its data.
This multiple-user setup is a very useful feature in systems where there are several parties involved in transactions and you need to use trusted intermediaries to carry them out. However, if your company simply needs to keep track of internal transactions, then a traditional centralized database is probably still the best way to do it. Blockchain, being such a new technology, still has some issues with scalability which can make it slower than existing databases. Another downside is that blockchain users must pay a fee for every transaction they conduct on the database, which can change unpredictably over time and create unnecessary problems.
A good rule of thumb when considering implementing blockchain is “if it ain’t broke, don’t fix it”. Unless you can clearly identify examples of how blockchain will solve multiple issues with your current system, you might find the cost in time and energy to implement not worth it. Changing to an entirely new system and database is a big undertaking and it may take several years before the new system is up and running to see any advantages.
Let’s look at a particular business scenario and analyze the ways in which blockchain can be used to improve on the current system. Supply chain management has been identified as an industry that stands to benefit greatly from blockchain technology. As a product moves from its source to the consumer, it passes through many different hands, such as manufacturer, logistics company, wholesaler and retailer – or many more depending on the complexity of the product.
As an individual product goes through this supply chain, it is tracked by each operator in the chain with their own database and procedures. This means that to track and follow any item through the chain, you would have to examine all of the relevant databases for each individual step of the process in order to ensure that it is tracked correctly. Having so many different data sets to compare increases the potential points of failure in the system and makes it less reliable and more vulnerable to human error and possibly fraud.
There is also the problem of replication of work, if each operator in the supply chain manages and maintains its own database, they will collectively use more resources and people as compared to maintaining a single blockchain database that can be accessed by each operator through an online application platform. The same problem arises when you consider that each operator on the supply chain has to use a bank or financial service provider to pay the other operator that provides their stock. With blockchain, payment between operators could be settled with smart contracts and cryptocurrencies. This would take out the middleman and save each operator a considerable amount with reduced transaction fees and processing times.
Another benefit would be a huge reduction in the risk of fraud or human error distorting the database. As all operators need to reach a common consensus on every transaction, any intentional or unintentional errors can be detected easily and be trackable to a specific point in the system. As seen from this example, supply chain management is an ideal use case for blockchain technology as any costs associated with rolling out a new blockchain bases system would quickly be returned by benefits and efficiency gains.
So when it comes to the potential advantages of adopting blockchain technology, it is essential to conduct a thorough cost benefit analysis to determine if it is an effective solution to your particular problem. While blockchain sounds like a great panacea for existing inefficiencies and is a great buzzword for attracting investors and impressing shareholders, it isn’t always the right solution.
Although many companies are rushing to implement blockhain solutions in order to minimize inefficiencies and improve their margins, not all of them will do so successfully. Those that will reap the most benefit from the blockchain revolution will be the ones that carefully analyze the best uses of the technology and implement it on opportunities to solve multiple problems with one single stroke.
Blockchain technology is poised to permanently change the way payments are made – from micro-payments between just two people, to international banks transferring millions of dollars instantaneously. Using blockchain technology, the cost and time taken to complete transactions can be drastically reduced, no matter where in the world they take place.
In a blockchain-based payment system, every single party involved maintains a copy of the ledger on which all transactions are recorded. As each new block on the chain is mined by members of the network using cryptographic computer technology, the validity of all the transactions in that block are validated and every member in the network update their copy of the ledger. As all parties have an identical record of the transactions, the payment process is much more transparent, greatly reducing the possibility of a fraudulent transaction making it through the system.
Payment systems that use distributed ledger technology employ what is known as the consensus model to validate transactions. With the consensus model, everyone in the network has to agree that the ledger is correct. As a result, any incorrect or fraudulent transactions are easily identifiable and traceable – resulting in better security for the whole network.
This model is also known as the distributed trust model. Unlike current payment systems used across the world, no central authority is entrusted to validate transactions. Instead, trust is distributed between all members of the network. For a more detailed explanation of how these systems work, we recommend that you read our previous articles on blockchain and cryptocurrencies. This distribution of trust is how efficiency is increased. Payments no longer have to go through a centralized bottleneck to be validated, therefore will no longer need a trusted middle-man between the payer and the payee in a payment transaction.
Big financial institutions, such as central banks and international banking groups, are currently competing to roll out blockchain-based payment systems so they can streamline their payments processes and reap the rewards of increased efficiency. The current systems used to facilitate international payments typically involve many steps, several currencies and often several intermediaries. As a result, transactions can take several days to finalize, with almost no transparency of the transaction status. They are also more prone to error and subject to high fees. This is especially common in emerging economies where the banking system is comparatively less developed.
Many large financial institutions are experimenting with private blockchains. Unlike public blockchains, where anyone can participate simply by downloading the ledger and joining the network, these private blockchains consist of a network of the various global bank offices and other partners in their payment processes. This way, they can realise the efficiency gains made possible by blockchain without having to make their ledger public and thus protect the privacy and security of their customers.
The Bank of England provides a good example of a central bank experimenting with cryptocurrency with its recently unveiled RSCoin. RSCoin is a cryptocurrency which uses encryption for increased security, allowing for international payments to be sped up and reduces their cost at the same time. Cryptocurrencies like this could soon disrupt the international banking industry by increasing competition between banks and international payment companies, which currently use online-only platforms. This will result in reduced fees and clearance periods for international payments.
Another example of disruption in the payments industry is Ripple and its cryptocurrency XRP. XRP acts as both a cryptocurrency and a digital payment network which facilitates cross borders financial transactions. XRP is designed to streamline inter-bank transactions has become a popular alternative option for larger financial institutions.
Ripple’s blockchain is called RippleNet and it provides several ways to facilitate cross-border payments. xCurrent is a payment processing system specifically for banks. xRapid allows financial institutions to minimize liquidity cost by using XRP as a bridge between different fiat currencies. xVia allows businesses to send payments using RippleNet.
Despite being classified as cryptocurrencies, Ripple and XRP is quite different from the public ledger-based Bitcoin. Bitcoin aims to create a totally new financial system that is free of centralized control whereas Ripple seeks to assist existing financial systems and increase the efficiency of their cross-border transactions by creating a digital token to help with asset transfers.
Group Santander is another huge international banking group that is pioneering the implementation of blockchain technology. Santander has recently rolled out its One Pay FX payment system that is designed to streamline payments between countries in South America and Europe by the use of distributed ledger technology.
While there are many examples of cryptocurrencies making inroads in the payments industry, blockchain technology must first work alongside existing payment processing infrastructure in order to truly be successful. This will increase support for real-time, any-to-any payments and in turn trigger the mass adoption of these new technologies.
Another important factor to pave the way for mass adoption is the creation of global regulations and standards for cryptocurrency payments. At the moment, different countries have different approaches to cryptocurrencies which can complicate what should be a simple process. By coming to an international agreement cryptocurrency standards, trade between countries stands to reap significant benefits from faster and safer international transactions.
Once these hurdles are jumped, it seems likely that blockchain will become the dominant technology used for international payments. While many traditional payments companies may lose out in this process, we hope that the consumer masses will emerge as the winner with lower fees and shorter transaction times.