Designing business processes with blockchain technology
It was a defining moment for the retail industry when Sharon Buchanan scanned the first barcode at the Marsh supermarket in Troy, Ohio at 8:01 a.m. on June 26, 1974. Barcodes re-wrote the entire landscape around tracking physical assets by encoding information in printed tags. It might visually resemble a puzzle to a human eye, though machines could accurately identify any item. Almost no one now can imagine life without barcodes. Today, five decades later, in the age of software revolution and big-data, we are revisiting a similar problem. However, it is not just the groceries at your local market under the lens. We’re looking at systems of information everywhere around us.
Tyranny of the middlemen
August-Wilhelm Scheer, who is known for developing the concept of Architecture of Integrated Information Systems, buckets business processes under three categories: management processes that govern corporate strategy, operational processes that constitute the conduct of business activities, and supporting processes that brace the core operations.
IT infrastructure cuts across all three categories, binding these processes together to enable an organization to function as a unified entity. In our hyper-connected world, our lives literally rely on invisible algorithms running on these IT systems. However, information does not tend to flow as freely as one would like to imagine. Agents operating on these networks quite often see useful information locked behind swaths of protocols and manual authorizations. Therefore, organizations must rely heavily on intermediaries to establish trust and validity of the information. Unsurprisingly, practicing such design impedes its operational efficiency, impacting the rest of the processes altogether.
Ever wondered why it takes days to process a bank payment, weeks to conduct a background check, months to renew your passport?
It is common to see complex business processes that involve a multitude of operations, transactions, agreements, and signatures take so long to process and approve. This is because truth is often difficult to obtain and even harder to establish. Traditional businesses and organizations worldwide are already plagued with crumbling digital infrastructure; out-of-date software often is a notorious bottleneck in several sectors.
Designing with puzzles
Let’s turn towards puzzles once more, and cryptography more specifically. Cryptographic mechanisms are the core backbone of blockchain technology that enables the storage of information on decentralized networks and this has profound implications. A blockchain is like secure collection of barcodes, but not just for your groceries; it’s for businesses, institutions, and governments as well. It is a decentralized and distributed digital ledger that maintains records of all transactions as immutable data.
The underlying principle is that one must computationally solve a cryptographic puzzle to obtain the truthful information. For example, I can write data to the chain and encrypt it based on the previously validated entry and my private key. Others can verify it with my public key and the previous entry in the ledger.
Traditionally, we design systems to be fastest and the most efficient as possible. By contrast, a blockchain bakes “cryptographic puzzles” into the ledger that are distributed over several operating nodes. To forge an entry in the ledger, one would have to rewrite the fingerprint of the whole blockchain, which would make it an entirely different one – a false one. In an economy, it is rather an unconventional solution to verify a source where no centralized regulatory agency dictates the transactions. Blockchains eliminate the need for middlemen to perform authentication and verification. Technically, distributed databases are designed to store data by append-only mechanism to avoid double entries. This characteristic makes it far more tamper-proof than traditional databases. As described by Pat Helland at Microsoft in 2007, like accountants don’t use erasers, distributed systems work by creating new knowledge. Hence, all activity on a blockchain is completely deterministic. There is no room for discrepancies to creep in.
Enforcing Digital Trust
Consider this example: An enterprise whose asset tracking process has dozens of intermediate steps involving asset lending, returns, brokering, sale, transfer, and so on. As one scales this process to hundreds of thousands of social relationships and beyond, the costs and effort of manual authorizations and data validation become staggeringly high. Robin Dunbar, a British anthropologist, suggested in the ’90s that there is a cognitive limitation to the number of a person’s stable social relationships, and on average it’s around 150. In a business management system that is relying on social means, going beyond this number means that the cohesion of process and knowledge transfer quickly begins to disintegrate. At that point, the process no longer remains a process, but rather a collective liability.
At any scale, trust plays a social, economic, and political role in the conduct of business operations and it is traditionally governed through digital systems in a centralized fashion, e.g. financial clearinghouses, advertisement exchanges, background check services, and so on. Every institution in such networks operates independently and individually stores, and thus owns, client data. Though no single institution has the ease of accessing and verifying information on third-party systems without going through complex hoops of approvals. Any additional components in the system increase the chance of compromising the guarantee of knowledge between two endpoints. In software engineering, this fact is well illustrated by the Byzantine General’s Problem. The Problem puts forward a hypothetical situation where a certain number of generals separated by a significant distance need to coordinate their strategy to either attack or retreat. The problem is complicated by the presence of some traitor generals and dishonest messengers. This conundrum is applicable to securely transmitting information over any distributed network. In blockchain, the consensus is achieved through distributed coordination of services and protocols, like proof-of-work, as a digital signature that is impractical to forge. Beyond software systems, the same theory can be applied to businesses built on networks of information.
Improving business processes
A 2.0 version of a business process would seek improvements having to do with:
- Operational efficiency
- Improved security
- Integration and Automation
Organizations backed by blockchain reap benefits in all three areas. First, let’s consider a bigger example: Estonia’s e-government’s multi-organization distributed database, X-Road. The database connects several key Estonian organizations, and the data is stored on the network in a decentralized manner. For every minute, X-Road saves roughly 80 working hours in Estonia while also eliminating a ton of paperwork. Secondly, by design, blockchains have high Byzantine fault tolerance. It is unfeasible to stage a computational attack on the network to compromise even a minuscule piece of information. The attacker must require processing power of more than 50% of the whole network to convince the rest of the network to accept a forgery. This brings us to the third facet of improvement: automation. Business automation on blockchain cannot be discussed without mentioning Ethereum. Ethereum is a blockchain-based cryptocurrency that really allows a user to implement business logic on blockchains through smart contracts, a key to robust transactional automation. Organizations can run purely as code on thin blockchain cloud known as DAO (Decentralized Autonomous Organizations). DAO leverage smart contracts to replace social means of carrying out transactions. Interestingly, they do not discriminate between a human and a robot.
Smart contracts are simply protocols that execute transactions on a blockchain, visible to the participants of the blockchain itself.
Nick Szabo was the first to propose the idea of Smart Contracts and digital cryptocurrency he called Bit Gold, a 1998 precursor for Bitcoin architecture. Smart Contracts condense complex social and labor-intensive means of business operations into convenient executable code, thereby eliminating the need to facilitate tedious communication threads between vendors and stakeholders. It also ensures that everything is conducted transparently and securely, eliminating any potential bureaucratic biases and threats.
Blockchain adoption has also been noted to resemble the dot-com bubble in its early days. After having witnessed the maturity of the web over last few decades, governments and big financial institutions do realize the potential in blockchain technology and they have been one of the strongest proponents of blockchain research. In fact, the government of Dubai has announced that it aims at automating its systems by 2020.
By design, blockchains operate at a global level without a central regulatory authority and anyone can verify the truth – which is a game changer from a social systems perspective.
“This makes blockchain-based applications very easy to bootstrap and greatly cuts down the barriers to entry in getting users to trust the application. Global accessibility, cutting barriers to entry, censorship resistance [are] all values that libertarians should certainly approve of.”
– Vitalik Buterin, Co-founder of Ethereum.
There is no doubt that blockchain technology is at its nascent stage. There is a lot of ongoing research in terms of scaling these distributed networks that poses a unique set of challenges, but that’s another rabbit hole to go down in another article. Currently, blockchains are well suited for provenance tracking, inter-company record keeping, and lightweight finance. Though the opportunities are endless, the path ahead is long and unwritten. Whereas startups tend to think highly of blockchain-backed business operations, it is much more challenging for complex bureaucracies to pivot away from their legacy databases. But they won’t be able to ignore it for long. Just like we saw with the internet, we can expect robust standards to emerge for blockchain-based applications. Once again, businesses will be faced with a choice: adapt or sink with the weight of legacy infrastructure. This is a puzzle into which they must be willing to invest both time and effort.